Book says China could take a haircut on debt

International lenders could be forced to cut losses and take haircuts in view of the worsening debt load, a new book by a Kenyan scholar says.

It argues that due to the perceived high risk of default, the lenders and investors in Kenya’s debts are charging very high interest rates and should accept the costs of default “when it occurs.”

“Where international banks, investors and other lenders, including China, have lent money recklessly without caring how the borrowed funds are used by the borrowing governments, such debts could end up being declared as illegitimate and odious debts,” says the book titled “Capital Flows, External Debt Accumulation and Financial Crises in Africa” written by Kenyan scholar Godfrey Waweru.

“They should be prepared to take haircuts if African countries become insolvent and unable to repay the debts.”

The Treasury has maintained that Kenya’s public debt remains sustainable, even as experts pile warnings that the margin for further debt accumulation is rapidly narrowing, exposing the country to potentially difficult times.

In February this year, the Treasury said it is engaging international investors that Kenya owes money to ensure looming debt obligations are managed effectively without exposing the country’s coffers to liquidity pressures.

The revelation came as a global ratings agency Moody’s warned that the government “will continue to face liquidity pressures” due to a combination of large financing needs and an increased reliance on sources of financing with less predictable costs, in particular commercial external borrowing and short-term domestic debt.

The book says that with mounting liability, increasing global interest rates and decrease in global liquidity, it is evident the debt distress in many African countries such as Kenya is almost inevitable and the only unknown or uncertain thing is when it will strike.