African governments are increasingly turning to complex derivatives to manage soaring debt costs, with Nigeria announcing a $5 billion total return swap that will finance a tenth of this year's budget. This marks Africa's largest use yet of this arcane financial instrument, which Angola and Senegal have also tapped in the past year.

These swaps allow governments to borrow cash quickly at lower interest rates than international bond markets by using sovereign bonds as collateral. However, the complex structure creates risks if borrowers run into trouble, potentially complicating debt workouts and pushing conventional bondholders down the pecking order. Nigeria will provide naira-denominated government bonds as collateral for its loan, while Angola expanded its deal with JPMorgan from $1 billion to $1.5 billion, backed by $2 billion in international bonds plus $300 million in US Treasury bills.

Critics warn these instruments create opaque contingent liabilities that could dramatically increase official debt figures in a default scenario. While Nigeria and Angola classify the borrowed amounts as external debt, they exclude the collateral from their debt calculations as long as lenders don't need to tap into it. This arrangement makes lenders senior to other creditors, raising concerns about preferential treatment and the potential exclusion of domestic debt from restructuring talks.