The Tuna Bonds Scandal and the fishy business of hidden debt

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0:11This is The Indicator from Planet Money. I'm Waylon Wong. And I'm Darian Woods. Back in 2013, the government of Mozambique said it was going fishing for tuna. Mozambique is in Southeast Africa and borders the Indian Ocean, which has a lot of tuna. The Mozambique government set up a new fishing company. This company borrowed$850 million from international investors, and it spent some of that money on a fleet of 24 new fishing boats. But those boats never really got used. It turns out that the government wasn't all that interested in building up its tuna fishing industry. What some state officials were actually interested in was taking out loans and not telling anyone about it.

0:54Yeah, around the same time, the government secretly borrowed over a billion dollars through the same investment banks. When this debt was uncovered a few years later, it caused a huge scandal involving bribery and kickbacks, and the economy tipped into crisis. It's a financial scandal that crashed Mozambique's economy. Here's news outlet Al Jazeera reporting on the fallout in 2022. It's become known as the hidden debt scandal. That is one of the biggest corruption cases on the African continent this century. It was also known as the tuna bond scandal. And it's a high profile example of a government surreptitiously borrowing money.

1:34But new research shows that hidden debt is a widespread problem. Today on the show, the economists behind this research shine a light on this practice. They tell us where the money comes from and how secret borrowing can make life worse for ordinary people.

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2:38We started to see very big discrepancies between, for example, what media reported on big deals, big infrastructure projects financed by debt. And then at the same time, statistics that didn't really seem to move all that much. By statistics, Sebastian means the official numbers on borrowing that the government's put out. And then at some point you realize, well, something's not entirely right here. Something doesn't really add up. Now, this would be the point in a detective story where the hardened private investigator stakes out an abandoned warehouse or something. But this is an economic mystery.

3:16So Sebastian and several other researchers went skulking around a database of numbers from the World Bank. OK, so not so Hollywood, but still important work. Fewer spiders, probably. Fewer spiders, more lines of code, furiously tapped keyboards. And as you know, the World Bank is an international organization that lends money to low-income countries. And any country that owes money to the World Bank is required to regularly report how much public debt it has. And this debt can be in the form of government bonds or loans made from one country to another. The World Bank has been collecting this data since the 70s.

3:52Sebastian and his colleagues tracked how countries revised their debt figures from year to year. They figured if the numbers went up, that would suggest that the governments were chronically under-reporting their debt. And here's what the researchers found. They detected$1 trillion of hidden debt. It averaged out to 1 % of each country's GDP. Cesar Sosa-Pedizia is an economist at the University of Notre Dame in Indiana. He says these numbers show that hidden debt is a large and common problem for the nearly 150 countries that the researchers studied. These countries span the globe from Egypt to Pakistan to Thailand.

4:30I never suspected that this was so pervasive because this happens across all geographies and also through time. So it's not that it's just a new phenomenon. So, yes, it was surprising to me. Now, when it comes to government statistics, revisions happen regularly. Like in the U.S., there are always updates to the monthly job numbers or the quarterly figures for, say, gross domestic product. Cesar refers to these kinds of tweaks as revisions without drama. And he says most of the underreporting on debt falls in this category. It's not funny business at the finance ministry, but rather more mundane issues, like a government just doesn't have the resources to track what every agency is doing.

5:12All right, but what about the revisions with drama? I want theatrics. Well, get out your popcorn, Darian. There are cases where governments are borrowing money on the down low. The researchers found that money borrowed directly from other countries tends to be the most hidden kind of debt. It's not traded in financial markets the same way that, for example, government bonds are. So Sebastian says it's more easily concealed. There's a diplomatic visit and you sign a couple of contracts and each of the parties treats it as a state secret. Well, it may well be possible to shield that from public scrutiny for a long time.

5:48One example of this kind of debt leading to big trouble is in the African country of Zambia. A few years ago, the government went into default. It turned out that Zambia had borrowed almost twice as much money from lenders in China than what was previously disclosed. When a new president took office, he said that the treasury was literally empty. The researchers found that countries tend to rack up their secret debt in good economic times. And then the proverbial skeletons tumble out of the closet when there are economic downturns. This is because governments can get into trouble trying to pay the money back.

6:23And while Sebastian and César focused on lower-income countries for their study, they said higher-income countries aren't above reproach. Remember the Greek economic crisis of 2009? Now to Greece, a country on the brink of collapse. Banks shuttered, ATMs running out of cash. That came about after revelations of hidden debt there. Its crisis was part of a larger wave of economic instability in the region. A bunch of other countries in the Eurozone got sucked into the crisis. One advantage that a higher income country does have is that it can better absorb the shock from a large amount of hidden debt.

6:59A country like Mozambique is more vulnerable. In the wake of the Tuna Bond scandal, the government went into default. Economic growth was cut in half, inflation surged, and by one estimate, nearly 2 million people were pushed into poverty. And this brings us to how hidden debt can hurt everyday people living in a country. When the borrowing comes to light, it can force a government to rebalance its books. And that could mean slashing social welfare programs, freezing wages for government employees or raising taxes. These kinds of policies are called austerity measures, and the government in Mozambique rolled them out after the scandal.

7:38The head of a nonprofit there told Al Jazeera about how these measures were playing out. Cuts were made to the health, education, water and sanitation sectors. and that had the direct impact in how people access medication, you know, how they access medicine, how they access health services. And above all, I think the impact has been in the pocket of the citizens. There were also some consequences for the officials behind the tuna bond scandal, including court cases in Mozambique, New York and London. Credit Suisse, the investment bank that helped arrange the secret loans, paid about$500 million in penalties and fines.

8:20This summer, a federal jury in the U.S. convicted Mozambique's former finance minister on fraud and money laundering charges. As for those 24 tuna boats, you know, the ones that were supposed to create jobs for fishers in Mozambique, last week there was an auction to sell off the fleet, and not a single bid came in. Those boats are still rusting in the harbor.

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9:31This episode was produced by Angel Correras with engineering by Gilly Moon. It was fact-checked by Sierra Juarez and edited by Kate Kincannon. The Indicator is a production of NPR. You