Nigeria denies bond default after delay scare – but what if it happens?

The Nigerian government caused a scare after surprisingly delaying coupon payments on two savings bonds for the second time in two months.

As investors voiced alarm this week, authorities attributed the delay to “system and processing issues” and dismissed any claims of financial difficulties affecting its ability to make payments.

The payments, which were due on September 12 for two- and three-year bonds sold in June. The government had raised N4.2 billion from the bond sales.

The bonds, which were sold at yields of 17.4% for two-year notes and 18.4% for three-year notes, are meant to pay coupons quarterly on the 12th of September, December, March, and June, according to the Debt Management Office (DMO).

The director-general Patience Oniha acknowledged the delays, telling Bloomberg that the issues were “being addressed.”

The delay followed a similar incident in August, when subscribers to other savings bonds experienced a week-long wait for coupon payments. It was unprecedented since the bonds were introduced seven years ago.

The repeated delays have sparked concerns over the government’s rising debt burden and its ability to pay lenders. In the first quarter of 2024, Nigeria’s debt-service payments reached N2.3 trillion, nearly double the revenue of N1.4 trillion.

“Coupons for FGN bonds for last month delayed for up to two weeks before payments,” one investor posted on an investment forum.

“Now this month September, all the coupons for savings bonds that are due since September 12 have not been paid. Even T-bills matured have not been paid. This is strange.”

But the government denied any financial issues were behind the delayed payments. “As of Sept. 19, the Central Bank of Nigeria has successfully processed all due payments,” the presidency said in a statement. “The payment scheduled for today, Sept. 20, is also being processed on time.”

It said, “The country owes no outstanding payments. Nigeria has sufficient liquidity to meet all its financial obligations, and there is no default or delay in servicing our debts.”

What If It Happens?

But what if the government defaults? A government defaulting on bond coupons (the interest payments on its debt) is a serious financial event with significant implications. Here’s an overview of how serious it can be and its potential consequences:

1. A default severely damages the government’s credibility in global financial markets. It signals that the country is unable or unwilling to meet its debt obligations. This could lead to downgrades in the country’s credit rating by agencies like Moody’s or S&P, making it harder and more expensive to borrow in the future.

2. Investors will demand higher yields (interest rates) to compensate for the increased risk, leading to higher borrowing costs for future government debt. International lenders and investors may pull back from lending or demand much higher returns, making it difficult for the government to finance its activities or roll over existing debt.

3. Domestic and foreign investors are likely to withdraw funds from the country, fearing further defaults or instability. This can trigger a capital flight, worsening the country’s economic situation. A default can lead to a sharp depreciation in the naira as investors sell off local assets, pushing inflation higher and worsening the government’s fiscal position.

4. If banks hold significant amounts of government bonds, a default could lead to losses for the banking sector, possibly requiring bailouts or leading to a financial crisis. Banks may stop lending due to instability or fear of further losses, reducing credit availability for businesses and households, which can stifle economic growth.

5. The shock from a bond default can reduce investor confidence across the economy, leading to reduced investment and consumption. Governments often implement austerity measures (spending cuts and tax increases) to stabilize finances post-default, which can further drag the economy into recession or prolong existing economic hardship.

6. Governments often face pressure from international creditors, including multilateral institutions like the IMF, to resolve the situation. Negotiating a bailout or restructuring can lead to conditionalities that may impose austerity or reforms.

7. Economic downturns caused by government defaults often lead to rising unemployment, inflation, and reduced public services, triggering social unrest, protests, and political instability.

The government may face severe backlash, and defaults can lead to changes in leadership, political upheaval, or loss of public trust. Countries like Argentina, Greece, and Venezuela have experienced sovereign defaults, leading to years of economic turmoil, reduced access to international markets, hyperinflation (Venezuela), and severe public discontent.