Mozambican Illegal Debts: Testing the Odious Debt Doctrine.

AuthorMegliani, Mauro

TABLE OF CONTENTS I. INTRODUCTION 1638 II. LEGAL PROBLEMS 1641 A. The Internal Validity of the Transactions 1642 1. Ostensible Authority 1643 2. Overriding Mandatory Rules 1645 3. Novation 1647 B. Corruption and Enforceability of Contracts 1648 1. Restitutionary Remedies 1649 2. Unclean Hands 1652 III. THE ODIOUS DEBT DOCTRINE 1653 A. The Emergence of the Doctrine 1653 B. The Doctrine and its Qualification 1658 1. The Doctrine as International Law 1658 2. The Doctrine as a Doctrine 1660 3. The Doctrine as Soft Law 1663 4. The Doctrine as a Matter of Politics 1665 5. The Doctrine as Domestic Law 1668 6. The Doctrine as Public Policy 1670 IV. TRANSNATIONAL PUBLIC POLICY 1671 A. The Notion of Public Policy 1671 B. The Emergence of Transnational Public Policy 1673 1. Early Cases 1675 C. Arbitral Awards 1677 D. International Contracts in Domestic Fora 1679 E. Odious Debt and Transnational Public Policy 1683 V. CONCLUSION 1685 I. INTRODUCTION

In June 2019, the Constitutional Council of Mozambique declared a financial transaction made in contravention of constitutional norms related to the national budget invalid. (1) The transaction concerned a loan of $850 million contracted by Ematum, a Mozambican state-owned fishing company, with Credit Suisse and guaranteed by the Mozambican government.

The judgment of the Mozambican Constitutional Council was just the tip of the iceberg of a complicated financial scheme articulated in three separate transactions to state-owned enterprises arranged by two banks: the Russian VTB Capital PLC and the Swiss Credit Suisse. (2) In addition to the Ematum loan, there were two other loans to state-owned enterprises: a $622 million loan to Prolndicus to perform coastal surveillance (from Credit Suisse) and a $535 million loan to the Mozambique Asset Management company (MAM) to build and maintain shipyards (from VTB). (3) All these loans were backed by guarantees from the Mozambican government. Of the three loans, only the one made to Ematum was publicly disclosed and subsequently converted into loan participation notes (LPNs). These LPNs were, in turn, legally extinguished in April 2016 through an exchange for $727 million of eurobonds issued by the Mozambican government. (4)

Following the disclosure by the Mozambican government of the existence of these debts, the International Monetary Fund (IMF) and bilateral donors suspended their financial support to Mozambique. As a result, the local currency depreciated by about 65 percent within six months and economic growth plummeted to 3.8 percent in 2016 from 6.6 percent the previous year. (5) In this context, the Mozambican government announced its intention to restructure all its external commercial debt. (6) Since then, no payment on this debt has been made, causing the country's credit profile to be downgraded and the cost of financing to rise. (7)

Making matters even more complicated, in 2016 and in 2017 the country's administrative court (Tribunal Administrativo) declared the state guarantees of the Ematum, ProIndicus, and MAM loans illegal for violating the Constitution and budgetary laws. (8) A special commission within Parliament arrived at a similar conclusion, and an independent audit report was subsequently published highlighting numerous irregularities in borrowing and using funds. (9) In December 2018, several charges for indictment were brought before the District Court for the Eastern District of New York against multiple individuals, including a former Mozambican minister, for having allegedly conspired to defraud investors through numerous material misrepresentations and omissions. (10) Further, Mozambique brought a lawsuit against Credit Suisse and VTB in the English High Court alleging the invalidity of the secret loans. (11)

The judgment rendered by the Constitutional Council in June 2019 must be seen in this framework. It was based on a claim filed by the Budget Monitoring Forum, the Platform of Civil Society Organizations, and another two thousand citizens to declare the Ematum transaction unconstitutional. This request was based on Article 179(2)(p) of the Mozambican Constitution, (12) under which Parliament has the exclusive competence to authorize the contraction of loans and other financial transactions and fix the upper limits of state guarantees. The Ematum transaction, instead, was arranged by the government and merely approved by the Mozambican Parliament by means of an ex post resolution.

The Mozambican Parliament opposed the claim of the applicants, arguing that the resolution was a political act and, thereby, was not justiciable before the Constitutional Council. The Constitutional Council, however, rejected this argument emphasizing that the government had acted in violation of the constitutional competence of Parliament in budgetary matters (Article 179) and had not inscribed the transaction in the state budget in violation of Law Number 9/2002. (13) In this way, the Constitutional Council put the violation not so much on the side of Parliament, but rather on the side of the government. On these bases, the Constitutional Council declared null the assumption of the loans and the provision of the guarantees, relying not only on constitutional norms, but also on some articles of the Codigo Civil. (14) To complete the picture, in May 2020 the same Constitutional Council declared the nullity of the MAM and Prolndicus loans and the related guarantees. (15) The impact of these declarations of nullity by the Constitutional Council on the financial transactions is still to be appreciated in full.

Against this background, the purpose of this work is to ascertain whether and to what an extent the much invoked, but scarcely applied, odious debt doctrine may play a role in the lawsuits related to the Mozambican loan transactions. Part I analyzes the national norms coming into play before domestic courts, with particular reference to two issues: the effects on the loan and guarantee agreements of the declarations of invalidity rendered by the Mozambican Constitutional Council; and the availability of the restitutionary remedies in relation to the enforceability of contracts tainted with corruption. As the application of national laws may result in piecemeal decisions, a solution can be to have recourse to a uniform benchmark like the odious debt doctrine. Part II effectuates a reconstruction of the odious debt doctrine to understand what legal status it possesses and concludes that it would be reasonable to qualify the doctrine under transnational public policy. Part III explores the notion of transnational public policy and its applicability in relation to international contracts before domestic fora. In this context, the Mozambican transactions may become a benchmark to test the scope of the odious debt doctrine beyond the traditional arena of state succession.


    The three Mozambican financial transactions present certain specificities. The Prolndicus and MAM loans were arranged under a cloak of secrecy as their proceeds were used to acquire military equipment for the security services and the Ministry of Defense. By contrast, contracting the Ematum financing was not hidden: the existence of the Ematum LPNs was discussed in various IMF country reports, had been included in the country's public debt statistics, and these notes were publicly traded and included in JPMorgan's emerging market bond index. (16) When the LPNs were extinguished and replaced with sovereign eurobonds, they were fully disclosed and approved by the Mozambican Parliament. Nevertheless, for various reasons, all these loans and guarantees may be challenged in court.

    1. The Internal Validity of the Transactions

      Both the judgments of the Mozambican Constitutional Council and the decision of the Mozambican administrative court cast doubt on the authority of the Mozambican government to provide guarantees. Broadly speaking, the question of the capacity of a government to enter into financial transactions does not depend on the law governing the transaction, but on the internal law of the state. In the last century, the act of borrowing was viewed as an expression of sovereignty on the same footing as the printing of currency. (17) Currently, Parliamentary authorization has lost its sovereign characterization and can be considered a step in the borrowing process. (18) The capacity of a government to bind the state must be appreciated in two regards: the authority of the government to enter into a financial transaction and the formal requirement to do so. (19)

      Under the financial practice, when the borrower or the guarantor is a sovereign state or a state-controlled entity, the loan or guarantee agreement is completed by a condition precedent under which the transaction cannot become operative until the government has provided documentary evidence that the transaction is valid and enforceable and that it has the power and the authority to enter into the agreement. (20) Generally, the declaration on the validity of the transaction is encapsulated in the representations and warranties made by the borrower. (21) Its inclusion in the conditions precedent also emphasizes that the transaction cannot be carried out until the borrower gives evidence of what it has represented and warranted. Normally, the documentation of the borrower is completed by a legal opinion made by a lawyer belonging to the jurisdiction of the borrower that the transaction at hand is valid and binding. (22)

      This practice is now reinforced by the United Nations Conference on Trade and Development (UNCTAD) Principles on Promoting Responsible Sovereign Lending and Borrowing. (23) Pursuant to Principle Number 3, lenders have a specific responsibility to determine whether the financial transaction has been duly authorized and is valid and enforceable under the relevant jurisdictions. If these conditions are not met, the lenders should refrain from concluding the...

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