A backlash against governments using derivatives to borrow against their debt
is gathering strength, after the International Monetary Fund (IMF) cracked
down on a multibillion-dollar loan to Nigeria as risky and opaque.
The $5bn credit line, arranged through a “total return swap” between Nigeria
and First Abu Dhabi Bank, has raised concerns at the fund and among rating
agencies and investors about developing countries using these opaque
mechanisms to take on new forms of debt.
They say the deals leave borrowers exposed to risks that are hidden from other
lenders and conceal the true extent of their debt obligations. The Nigerian deal
has become a lightning rod for such warnings after years of effort to make
emerging market sovereign borrowing more transparent.
The IMF’s actions may be seen as a necessary step to mitigate risks associated
with rising debt levels and to foster a more stable investment environment in
Nigeria and similar economies.