There has been much fanfare and excitement that the Kenyan government is considering issuing its first sovereign bond soon. An advertisement in the Economist dated December 6, 2007 seeking a lead manager for the bond issue reveals the Government has slated the first quarter of 2008 to execute this plan.

That Kenya's debt rating by Standard & Poor's - a respected world provider of independent credit ratings and investment research - is much better now is a good thing. The fact that the government has commissioned an independent firm to confirm to investors that it has an investment grade rating can only lower the pricing margin and the interest rates payable. All therefore seems well as the Government prepares to raise several billion shillings for large scale infrastructural development.

But there is much caution needed going forward with the proposed sovereign bond. Kenya's goal must not be to make history by becoming the second sub-Saharan African country to issue a sovereign bond after Ghana.

There are a number of factors that have made Kenya and Ghana attractive destinations for bond investors. First, bond investors are widening their markets as the US economy continues to experience difficulties. For this reason, we should not really be surprised that attention is turning to Kenya and Ghana.

Second, though the fundamentals of our economy have gained strength, bond investors, particularly those the International Monetary Fund refers to as vulture funds, are seeing rich harvests down the line. This is why it is important to discuss several distinct dangers that must be factored into the country's decision to issue sovereign bonds.

First, the country must assess the very real possibility that when our economy experiences a downturn like any economy certainly does, the bond holders, particularly the vulture funds, will rush to the courts and will most certainly go home with even richer harvests than if we paid them when we have no difficulties. This is because sovereign bond contracts have acquired near uniformity with regard to the rights of bond holders.

These rights include hair trigger provisions for enforcing debt for simple default that give absolutely no justifiable excuse at all even for the most legitimate default.

Let us picture a scenario. We know that in the recent past the swing rate of the Kenya shilling to the dollar has been as wide as eight per cent. That means if the shilling loses the strength it has gained, more of our Kenyan currency will be required to pay off the bond holders. This will in turn increase demand for the Kenya shilling with the consequence that the domestic credit market will experience a shilling crunch.

Domestic interest rates are likely to rise as a result. This means the Government has to consider a broad range of hedging options from simple currency hedging to credit default and interest swaps.

Second, any event of default will result in at least two classes of bond holders. Those mostly large bond holders who are very likely to restructure the debt and move on, and most importantly those vulture funds or speculators who will go straight to court to enforce their contractual rights.

Now, you would be mistaken to think that the bond holders will rush to our Milimani Commercial Courts. It is most likely these bond holders will secure contractual clauses making New York law the applicable law and New York State the forum where those disputes would be litigated.

To put it simply, it will cost Kenya an arm and a leg to try defending those suits in the Southern District Court of New York. Bond holders have over the last 100 years litigated and re-litigated their claims in these courts with the consequence that any simple default by Kenya would almost guarantee that they would win any sovereign bond default case.

Defending such a case means the government is most likely going to hire a top-notch American or European law firms to defend itself further exacerbating our indebtedness.

Third, as much as Kenya needs capital to continue propelling its economic growth, experience shows that events such as currency collapses and political instability spur spontaneous capital flight leaving an economy in trouble far much worse off. This is certainly not a case against getting more investors to invest in Kenya or in our bonds.

However, it is much better when these investors engage in foreign direct investments here. That way if we have capital flight, we would be left with productive investment in the country.

Importantly of course, there ought to be a balance about how to design our foreign direct investment regime so that we do not kill off domestic investors who could produce those things we allow foreign investors to come produce here at a lower cost than otherwise competitive domestic producers.

Hopefully, our Treasury has studied the payoffs for investing in infrastructure from the sovereign bonds.

Clearly this is a better way to spend borrowed funds than using them for recurrent expenditure. But the question is what kind of infrastructural development makes the most economic sense?

It ought of course to be the kind of expenditure that will either raise the revenues required to pay off the debt or have a significant enough multiplier effect that it will lead to incremental tax revenue for the government. In that sense, infrastructural development is merely a starting point.

More specificity is certainly needed on the kind of investments that will produce the biggest bang for the borrowed funds. I hate to put a damper on the excitement surrounding the issuance of a sovereign bond soon. It will do very well to boost our ego as a country to issue a sovereign bond, but if there is inappropriate planning if things go awry, those at the helm should well be prepared for the consequences.

It is my hope that there is some sound advice being given to the government on both the up and downsides and that there are strategies being devised to deal with all types of scenarios now and into the future.

This is how best to plan to issue a sovereign bond without being too overtly excited at the prospect of raising billions today and losing them tomorrow.

If experience is any guide, Argentina and Brazil, which have undergone massive defaults at huge economic costs, should teach us a lesson.

For those who care about our much smaller economy than these countries, now is the time to discuss all the stakes - good or bad - involved in issuing a sovereign bond. We ought not to wait to witness the clicking of champagne glasses at the signing ceremony with no further information about how best the interests of the country were safeguarded in the issuance of the sovereign bonds.

Prof Gathii is the Governor George E. Pataki Professor of International Commercial Law at Albany Law School in New York.