7 Lessons Africa Can Learn from the Greek Debt Crisis

7 Lessons Africa Can Learn from the Greek Debt Crisis

For most of the 2000s, Greece experienced the fastest GDP growth of any Eurozone economy averaging 4.2 per cent. Rapid growth resulted in significant amounts of lending, which together with economic mismanagement and misfortune has given rise to the crises that has befallen Greece today.

Notwithstanding the fall in commodity prices, most economies in Africa will experience growth of more than 5 per cent in 2015; the most sustained growth since independence in the 1960s. Capital Investment in 2014 increased by 65 per cent to approximately $US 87 million1.

Global investor need for yield has permitted many African countries to tap into the bond markets for the first time. Some African debt is trading at levels close to Southern Europe, indicating a relatively low default risk. Overall debt levels in Africa are below 50 per cent of GDP (Greece has more than 200 per cent).

Other than the 14 economies that make up the West Africa and East African CFA zone (currencies which are pegged to the Euro and guaranteed by France), African states are not in any form of economic monetary union. Nevertheless, many in Africa are looking at the Greek crises with more than a casual interest. Some states have been there before and in all probability will be there again. So, what can Africa and those who invest and do business in the region learn from the ongoing crises in Greece.

  1. Learn from Joseph and the Egyptian Famine: Implement Counter Cyclical Measures.

This may seem obvious, but countries vulnerable to serious downturns seldom reign in spending during times of rapid economic growth and put in place a buffer to soften if not mitigate the impact of an economic down turn. Few countries in Africa can rely on significant tax revenues that normally accompany growth. It is therefore essential that austerity should not be a factor of saving during a downturn but cautiously implemented during periods of economic boom. Ghana which borrowed and enjoyed significant investment arising from the high price of oil, gold and cocoa is now experiencing power cuts, IMF led austerity measures and wondering where did all the money go.

  1. Capital Controls and State Intervention Can Be Useful Tools

Prior to the economic crises of 2008, state intervention was looked upon as anachronistic. Many African countries were encouraged to privatise state enterprises and to float their currencies to prevent over valuation and thereby promote exports.

The economic crises post 2008 has changed the economic narrative completely. Economic liberal economies from London, Amsterdam, Brussels to Washington rushed to nationalise companies from banking to the automotive industry to protect their economies.

Recently, Greece imposed capital controls by way of deposit withdrawal restrictions and the introduction of a prolonged bank holiday to keep banks closed and limit the number of banking transactions. It also closed the Athens stock exchange. These measures were justified on the basis of the need to protect the Greek financial system and the Greek economy in general from liquidity shortages.

Capital controls and state intervention to manage the currency is nothing new in Africa. Most countries in Africa have exchange controls in one form or another, Rwanda and Senegal being noticeable exceptions. For example Kenya has just recently restricted the amount banks can trade in foreign exchange to 10% of their core capital to support the Kenyan Shilling. South Africa’s exchange control restrictions have been eased considerably but bureaucratic controls still remain. Nigeria has reduced the amount of money Nigerians can withdraw from their local currency account when abroad.

The fall in commodity prices and the Greek debt crises indicate that these controls are likely to remain for the near future. In fact the crises has shown that capital controls proved to be an effective short-term economic lever to manage liquidity.

As many African economies come to terms with a low commodity price environment, it is likely that capital controls are likely to be more common in Africa. However, for private investors this growing trend and acceptability for capital controls should raise concerns. Capital controls restrict the ability for borrowers to make timely payments. Borrowers and lenders should ensure that this is taken into account in their loan agreements and in particular in the material adverse change and illegality provisions. A significant consequence of an increase in financial controls will be the effect on the purchasing power of the growing middle class for imported consumer goods.

Finally, it is important that investors closely monitor currency related information communicated by the central bank of economies to which they have a significant exposure.

  1. Choose Your Applicable Law Carefully

One of the questions posed to many lawyers regarding a Grexit was what would be the rights and obligations on the borrower or lender in the event of a Greek exit from the Euro or the EU. The answer often depended on the applicable law.

Local law is best for the borrower whereas New York or English law was better for enforcing the rights of any lender.

If a country applies a moratorium on foreign currency denominated payments, local law is unlikely to support a contractual obligation to pay in that currency. New York and English law would enforce the obligation subject to the provision on illegality.

Many local borrowers are reluctant to cede to the point of applicable law. This has been usually for sentimental reasons but as the Greek example shows, it is crucial consideration when structuring any deal.

  1. Understand Foreign Court Enforcement Can Be Difficult

Enforcing a judgement in Greece in the event of a Grexit and a moratorium on Euro currency repayments would be impossible against a borrower with no or insufficient assets outside of Greece.

It has been the custom for many state owned companies in Africa, municipalities and state governments to issue bonds to assist in budget gaps and take advantage of the interest for Africa debt. Some are often without sovereign guarantees. Nigerian states and municipalities are cases in point. The debt although at attractive rates is therefore unsecured. In similar circumstances where a moratorium on FX payments is in force, enforcing a foreign dollar denominated debt judgment against a local borrower or municipality would be difficult indeed.

  1. If You Don’t Have Systematic Significance – You Are At A Disadvantage

A general lack of regional and international economic integration means that a default by an African economy will not cause significant systematic risk to the others. This would be the case even in the event of a default by countries whose currency is the West African CFA Franc or Central African CFA Franc. The lenders may feel a few ripples and that would be all.

Germany did not agree to measures to stave off a further Greek default out of the goodness of its heart. The reason was the potential damaging impact to the Euro and the likely cost to many countries in the Eurozone arising from a Grexit. This coupled with the complexity of disentangling Greece from the Euro led Eurozone creditors to negotiate with a recalcitrant Greek financial team.

The Greek approach to negotiation is unlikely to be tolerated when dealing with African economies. African economies should be cognisant of this when dealing with the IMF or Western European lenders.

In addition, progress by the Economic Community of West African States and the East African Community to have a common currency may be slowed by mounting concerns of a lack of financial independence and financial contagion.

  1. Be Frank About The Economy: No Smoke and Mirrors

Concerned about falling outside of the Eurozone agreed debt/GDP parameters, Greece accepted cash up front from banks, entered into cross currency swaps and securitized cash flows from state assets. The effect was to characterise the money received up front as proceeds of a cash sale rather than debt. Thus granting a false impression of its economy to outsiders. Amazingly those responsible for managing the economy also believed these figures and based a budget on them.

Africa is improving in making available reliable financial information. Nevertheless, concerns have been raised over a number of statistics announced by governments. Doctoring economic statistics is an age old programme across the world. Nevertheless, Greece has shown that it is preferable to admit the truth and implement appropriate measures with the support of the international community than create an economy better suited to Alice in Wonderland.

  1. Give To Caesar What Belongs to Caesar: Collect Tax Revenues

This is probably one of the most important lessons to be learnt from the Greece debacle. Tax evasion and a lack of tax collection was rife in Greece. The government relying on debt attracted by a growing economy to square the budget circle.

In Africa, across the board, the percentage of taxpayers relative to the population is extremely low. Tax collection is expensive and corrupt. The tax rules are often opaque, contradictory and multi layered. More importantly many large tax registered companies operating in the region, use sophisticated techniques involving off shore service companies to avoid paying tax.

A lack of capacity within tax authorities in Africa is of significant concern. An efficient tax system is essential to create the buffer mentioned above. Africa needs to invest in capacity; the implementation of a streamlined tax system, more understandable tax rules and more accountability from tax havens and territories where multinationals have their head offices is required. On the other hand municipalities in Africa have to respond more pro actively to service delivery demands so at least residents feel they are receiving something for their taxes.

But obviously, all the efficient tax collection techniques in the world are of little use, if an economy is effected by the twin ills of corruption and waste. A challenge that all economies in the region have yet to overcome.

1Financial Times March 2015