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Moody's downgrades Mozambique

Moody's on July 8 downgraded Mozambique's issuer and senior unsecureddebt ratings to Caa3 from Caa1, concluding the initiated May 20.

The outlook is negative.

The downgrade reflects Moody's assessment of the government's weakerwillingness to honor its debt-related obligations in the face of liquiditypressures, after state-owned firm Mozambique Asset Management in May missed aninterest payment of approximately $40 million on a loan that reportedly amountsto $500 million. Since then, the missed payment has not been resolved andnegotiations over the loan's restructuring have been ongoing.

Moody's expects the government to consider other options to avoid havingto pay the loan should the negotiations result in a deadlock, thereby stillresulting in a default on the government debt guarantee. Moody's said itbelieves that if the restructuring is agreed, it will lead to a loss for thelender compared to the original promise.

The ratings action also reflects the agency's expectations that liquiditypressures will remain strong, with the restructuring modestly alleviating thegovernment's liquidity pressures.

The negative outlook reflects increasing litigation risks that could leadto government defaults beyond debt guarantees to other classes of debt, withpotentially huge losses for creditors.