Seychelles President Shuns Atheism for God in Lehman Bankruptcy
By Serena Saitto
Dec. 23: When Lehman Brothers Holdings Inc. filed for bankruptcy in New York, the leader of an Indian Ocean archipelago 8,500 miles away took it as divine retribution.
“I’m an atheist, but now I know that God exists,” Republic of Seychelles President James Michel wrote in an e-mail to a Lehman banker in London, said a person who saw the Sept. 15 message. Michel blamed Lehman for helping his nation of 82,000 borrow more than it could repay, leading to the first government default in two years, a $26 million International Monetary Fund bailout, and talks that may lead to a loan from the African Development Bank as soon as January.
Lehman loaned the Seychelles a total of $308 million at annual rates as high as 24 percent in the two years before its collapse, said people briefed on the matter. The deals resemble those made in Asia and Russia a decade ago, when too many bankers offered too many deals to too many governments, said Nobel laureate Joseph Stiglitz.
“There are many cases all over the world where Wall Street banks have made loans that were beyond countries’ ability to pay,” Stiglitz, a Columbia University economist, said in an interview. “The bankers are to blame because they enabled reckless lending at high interest rates,” and so is the government, which needed money because of its flawed fiscal policies, he said.
Michel, 64, declined to comment through Jean Paul Adam, principal secretary in the president’s office, who said by e- mail that the government wouldn’t comment because it could affect the negotiations. Lehman bankers involved in the Seychelles deals declined to comment. Emma Thorogood, a spokeswoman at PricewaterhouseCoopers PLC, which is administering the bankruptcy of Lehman’s European division, also wouldn’t comment.
Former Pirate Haven
The Seychelles, home two centuries ago to retired pirate Jean Hodoul, was a colonial outpost of France and then the U.K. until 1976. The nation’s only sources of foreign currency are fishing and spending by the mostly European tourists who flock to its 115 beach-studded islands.
Lehman was involved in three deals: The purchase of a tuna- processor in 2006, a dollar-denominated government bond sale that same year, and a private placement of euro-denominated notes in 2007. It was the latter two that undid the Seychelles’s finances.
The tuna-processor was MW Brands, owned by H.J. Heinz, the world’s largest ketchup producer. Heinz agreed in February 2006 to sell the company to Lehman’s London-based merchant-banking arm for 425 million euros, or $506 million at the time.
Pegged Currency
The second deal came four months later, when the government hired Lehman to sell $230 million of bonds, the first time the nation had ever sold dollar-denominated debt. The government agreed to pay 9.125 percent a year, or $21 million, until the bonds came due in 2011, according to Bloomberg calculations.
Proceeds were earmarked for “certain arrears” and to fund a welfare system and public sector that had swollen under the socialist economic policies of former President Albert Rene, who had seized power in a bloodless 1977 coup. The money also helped shore up the nation’s shaky foreign-currency reserves. For years, the government kept the local currency, the rupee, pegged artificially high.
“They had an unsustainable fiscal deficit, compounded by an overvalued exchange rate,” said Paul Mathieu, the Washington-based IMF mission chief for the Seychelles. “The overvalued exchange rate also contributed to an unsustainable external deficit.”
24% Interest Rate
Lehman’s third deal in August 2007 also centered on the exchange rate. Cable & Wireless PLC, the U.K.’s second-biggest phone company, and Diageo PLC, the world’s largest liquor company, needed to repatriate dividends from their local businesses. Cable & Wireless Seychelles Ltd., which traces its history in the islands to 1893, and Diageo, owner of 54.4 percent of the nation’s largest beer-maker, couldn’t simply swap rupees for euros because the government’s foreign-exchange reserves had dried up as tourism and fishing slowed.
The solution: Lehman would pay 36 million euros for 54.8 million euros of zero-coupon government notes due in 2011, said people close to the situation, speaking on condition of anonymity because details of the private placement aren’t public. That’s equivalent to an interest rate of 11 percent a year, slightly higher than the rate on the dollar-denominated bonds, Bloomberg calculations show.
Lehman inserted additional protection. If the Seychelles didn’t meet terms, such as listing the notes internationally by a certain deadline, the government would be on the hook to repay 85 million euros, equivalent to interest of 24 percent a year. Unlike typical zero-coupon notes, the conditions included an agreement by the government to make monthly payments, starting in 2008.
Foreign Debt Balloons
Lehman and the Seychelles government couldn’t have picked a worse time to tap global debt markets. As global economies slowed and oil and food prices rose, the nation’s foreign- exchange reserves dwindled.
By the time the first payment on the euro debt came due, on June 1, the rupee had lost 24 percent. As foreign debt ballooned because of the plunging currency, the Central Bank was forced to ration foreign exchange to both public and private industry.
On July 1, the government defaulted on its second payment on the euro notes. Two months later, the Seychelles defaulted again, this time on an Oct. 3 interest payment due on the $230 million in global bonds. “We have had to acknowledge that our country is no longer able to service its debts on existing terms,” Finance Minister Danny Faure said in a Sept. 30 statement.
Rupee Tumbles
On Nov. 1, the Seychelles dropped its currency peg as a key part of a reform package that the IMF supported with a $26 million loan. The rupee lost almost half its value, tumbling to 16.51 per U.S. dollar by Dec. 22 from 8.90 on Nov. 3.
The Seychelles’ arrears on its external debt now amount to $263 million. As of Sept. 30, public debt stood at $1.3 billion, or 153 percent of the Seychelles economy. Only Lebanon has a higher debt ratio among B-rated emerging-market nations, at 163 percent of estimated 2008 gross domestic product.
The Seychelles has hired Houlihan Lokey, a U.S. investment bank, to seek the support of the Paris Club, a forum of creditor governments, and private creditors. The nation is also in talks with the World Bank and African Development Bank on possible additions to the $26 million IMF loan. The AFDB expects to complete its strategy to the Seychelles in January, and a request for financial support is likely to be “positively considered,” AFDB spokesman Peter Andrew Sinon said by e-mail last week.
Short Memories
Stiglitz, who has opposed IMF bailouts in the past, concedes that the Seychelles is taking the best steps to right itself from economic calamity. That doesn’t mean the same thing won’t happen again.
“The pattern of IMF bailouts that has occurred may have provided Lehman with a sense of assurance that in the end, no matter how outrageous were the terms, they would have been bailed out,” Stiglitz said. “We can expect this to happen again, because markets have a short memory, and what is going on in the U.S., with the massive Wall Street bailout, is providing further encouragement for moral hazard.”
Source: Bloomberg.net