Eurobond: If you thought things are bad they are about to worsen

About a month ago, I was sitting in our study which I share with my wife, contemplating the implications of the documents and data that I was looking at.

Whichever way I looked it, it said a lot of Eurobond money was missing.

Why would anybody steal that kind of money, it’s not like you could buy a private jet without giving the game away?

I pointed out that we are not talking about private jet money, we are talking 10 Boeing 787 Dreamliners.

She pondered that for a while. “It does not make sense”, she muttered shaking her head, and went back to her work.

A good friend, fellow economist and Minister in President Kibaki’s government called me some time ago while scrutinising documents posted on the Treasury website to confirm what he was seeing started by quipping that “either I am smoking something, or these guys are”.

The idea that a conspiracy of this magnitude can take place in a country that is supposed to have functioning institutions is one that most Kenyans are having great difficulty contemplating.

Perhaps we shouldn’t. In Nigeria, former President Goodluck Jonathan’s National Security Adviser Sambo Dasuki is under arrest for allegedly stealing US$2 billion meant for buying weapons to fight Boko Haram.

From what is emerging, a lot of the money went into financing Jonathan’s re-election campaign.

Are we that different from Nigeria? Good people, it’s time to smell the coffee.

There will be many consequences, some that we cannot foresee.

The country’s international creditworthiness will take a battering.

The Jubilee administration is alive to this, and that is why it is calling those calling it to account economic saboteurs.

FINANCIAL GAP

Once a country goes into international market it is similar to a company going public, that is, listing on the stock exchange.

The company sells shares and people buy them with expectations that they will appreciate in value.

If the contrary happens, the investors cut their losses and run, making it costly and even difficult for that company to raise capital.

The import of this is that if the Government goes back to the market, it will be charged a big risk premium.

But in addition to the credit risk premium the scandal has introduced another risk, namely reputation risk for transaction advisers, and it may find that the more reputable ones may find the risk not worth taking.

And the Government does need to go back to the market.

The US$ 750 million dollar loan that the Government took out recently to plug the cash crunch falls due in October next year.

We cannot raise that much money in one go, the only way to pay it off is to refinance it.

This means that the Government will be wanting to go back to the market in the run-up to the election.

If this Eurobond mess is not cleared up by then, there is a likelihood of the Government not being able to raise the money, leaving it the options of borrowing very aggressively in the domestic market or negotiating a refinancing with the banks for which they will demand a very big premium.

I should point out that the syndicated loan is itself a consequence of the theft of the Eurobond money.

If we had managed to spend the Eurobond properly, it would have been enough to plug our financing gap for three years.

MONEY LAUNDERING
The other financial consequence is that we are paying for money that we have not spent.

To date we have paid interest to the tune of Sh25 billion on the Eurobond, of which Sh15 billion is interest on the Sh150 billion that the government cannot account for.

In effect, our loss is already Sh175 billion and counting, and as I’ve pointed out, we’re plugging the hole by more borrowing, such as the syndicated loan and we are going to see more distress borrowing in the coming months.

I wrote some time ago of the NYS scandal shaping up to be Jubilee’s Waterloo, in the vein of Moi and Goldenberg and Kibaki and Anglo Leasing.

Clearly I was wrong — the Eurobond is, or rather it had better be, as we could not possibly survive a bigger scandal.

In the international arena in particular, the administration has fought hard to normalise relations with the Western powers.

This scandal will set these relations back a mile.

Indeed, one of the key elements of the pact signed during President Obama’s visit is on combating money laundering.

Unless the Eurobond money is still sitting in Government bank accounts, it has to have been laundered somehow.

The prospect of the Government laundering money on a grand scale is not going to sit well with the US, not to mention the egg all over President Obama’s face.

Obama is not the only one to end with egg on face.

The Government has an IMF programme, which means that the IMF is privy to all that is going on with Government finances.

NO EXCUSES

It has on occasion come out in praise of the Jubilee administration’s economic management.

Questions will be asked as to how the IMF could have missed such a glaring anomaly in the Government’s finances, and whether the IMF staff could have trusted the Government because the Treasury is run by their former colleagues.

In the domestic political arena, the elephant in the room is the “Watergate” question — what did the President know, and when did he know it?

It’s a no-win situation whatever the answer is.

The very thought of the President being complicit in corruption, let alone theft on an unprecedented scale, is one that his support base is having great difficulty contemplating.

The political and psychological damage to the Kikuyu political establishment and moneyed elite is likely to take a long time to recover from, if ever.

The opposite finding, that is, that he did not know, is no consolation, for it raises the following question: If such a racket can be run behind his back, and seeing as he has yet to lift a finger, is the President really running the country?

It cannot be the President is not alive to the damage the scandal is doing to the Government and the country?

This being the case, we have to conclude that he is either complicit, or helpless.

Either way, the ranks of those who believe that he is not up to the task of the country will swell.

One of the many memorable dramas around the Goldenberg affair was a day when Kamlesh Pattni turned up in court with a pick-up load of documents.

Experts have attributed the devastation of Kenya’s judiciary in the 90s to Goldenberg.

It clogged and corrupted the courts. It is said that Pattni had a full legal department writing rulings and judgments for the judges on his payroll.

FREEDOM OF SPEECH

A decade later, Pattni and his accomplices walked.

The music is already in the air — the assault on the Office of Auditor General, politicians caught walking out of the big house with “certificates” (in brown A5 envelopes), Deputy President’s visitors gorging themselves in Eldoret.

The stakes are extremely high, and the amount of money we are talking about is more than enough to raze all our governance institutions to the ground.

As unlikely as it might sound, there may be a silver lining to this cloud.

We owe the discovery and prosecution of this scam in the court of public opinion to the Constitution, specifically, to the freedom of speech and information, and the information disclosure obligations it imposes on the Government.

Were it not for these, the Treasury mandarins would not have released all the documents that have exposed the fraud.

And had the Jubilee administration succeeded to muzzle the media with the draconian security laws, we would be living in a different country.

As American anti-slavery activist Wendel Phillips said almost two centuries ago: “Eternal vigilance is the price of liberty; power is ever stealing from the many to the few (and) only by continued oversight can the democrat in office be prevented from hardening into a despot.”