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With short term U.S. treasury paper paying zero percent, where in the world can you get 14.7%? Cote d’Ivoire. The yield on Ivorian Eurobonds spiked on fears of a resumption of civil war and prospects of a default on a payment due December 31st. Bondholders are right to worry. The Gbagbo junta, cut off from both the World Bank and its own central bank, is reportedly running out of cash and the cabal is likely to use any remaining money to pay the military rather than foreigner creditors.
But Gbagbo & Co, assuming they can scrape the cash together, may have an incentive to pay if they think they might be able to borrow more. A desperate regime might offer anything—ridiculously high interest rates, land sales, other state assets—in exchange for new cash now. And given international law and precedent, once President Ouattara finally takes over, his government—and the Ivorian people—would be liable for any obligations made by Gbagbo. That’s not just unfair, it undermines the international community’s own pressure for him to step down and cede the presidency to the winner, Alassane Ouattara.
Here’s where a new idea of contract sanctions (or, in wonkspeak, a “declaration of non-transferability”) from CGD’s Prevention of Odious Debt Working Group might be especially useful to squeeze Gbagbo now and protect Ivorians from being held responsible later. A declaration by the African Union (and publicly supported by the US, UK, and France) that any new loans would be considered illegitimate and invalid might stop cynical investors from giving Gbagbo a lifeline and prevent vulture funds from pursuing Ivorian assets in the future. It also should make that 14.7% yield look a lot less attractive.
When the world’s finance ministers and central bank governors assemble in Washington later this month. they would do well to focus on another looming debt crisis that could hit some of the poorest countries in the world, many of whom are also struggling with problems of conflict and fragility and none of which has the institutional capacity to cope with a major debt crisis without lasting damage to their already-challenged development prospects.