* Mozambique admits to $1.35 billion in hidden loans
* IMF, donors furious over breach of trust
* Donors demand reforms, accountability for mistakes
* Security forces warn against public demonstrations (Adds VTB comment)
By Joe Brock
MAPUTO, May 6 (Reuters) - The 24 fishing boats rusting in the harbour of Mozambique's capital were meant to be a modern tuna fleet that would rake in hard currency, create jobs and provide a cheap source of protein for one of the world's poorest countries.
Instead, they have become monuments to government mismanagement and heavy lending by Western banks that have buried a promising African economy in a deep debt crisis.
The boats, moored in the harbour of Maputo, were paid for out of an $850-million loan arranged in 2013 by Credit Suisse and Russia's VTB to finance "fishing infrastructure". The cash came in the form of a government-backed bond to state tuna-fishing company Ematum.
Nearly three years later, the fishing project, initially touted as self-sustaining, is defunct and has contributed to a sovereign foreign debt mountain equal to 80 percent of GDP that could bankrupt the southeast African nation's government.
Not only did Ematum fall short of its targets but $500 million of the "tuna bond" was found to be for maritime security and had to reallocated to the defence budget.
"Sorry sir, we don't have tuna on the menu," said Raul, a waiter at a restaurant overlooking the dormant fleet. "The boats never go out. They are resting."
Even when they did sail, in Ematum's early days, the fleet never caught the amount of fish that would have been needed over a long period to pay off the debt.
Ematum's results published last year pointed to the fleet catching just $450,000 of tuna a year, compared with sales of $18 million forecast at that stage of its life in a 2013 feasibility study circulated by the government.
Ematum officials did not respond to requests for comment.
DEFAULT
Mozambique, a former Portuguese colony, emerged from 16 years of civil war in 1992 to become one of Africa's best-performing economies, with annual growth averaging around 8 percent between 1996 and 2008.
Foreign investment flowed into infrastructure, mining and services, while a huge offshore gas find -- enough to supply Germany, Britain, France and Italy for nearly two decades -- offered the chance to create a middle-income country.
But Mozambique has been hit by the fall in global commodity prices, and vast gas projects planned by U.S. firm Anadarko and Italy's Eni have stalled.
Growth is still robust but the metical currency lost a third of its value in 2015 and another concern for investors is fighting between government forces and guerrillas in some parts of Mozambique.
The fate of the "tuna bond" is emblematic of the difficulties facing the country of 26 million, and particularly of the debt problem.
The overall loan was restructured last month in what ratings agency Standard & Poor's described as "selective default" after the government struggled to make repayments.
Deepening the mire, a further $1.35 billion of debt then emerged. Most of it was also from Credit Suisse and VTB, according to an International Monetary Fund source.
This provoked a furious response from multilateral lenders and donors who suspended aid because of concerns their cash will be diverted to pay off private creditors.
Anti-debt activists are demanding the banks take a hit in any future restructuring for what they described as uncritical lending after the 2008-09 global financial crisis, when interest rates in the developed world were ultra-low and banks sitting on billions of dollars were looking elsewhere for high yields.
"Both lenders and borrowers are responsible for ensuring loans are given and used responsibly," said Tim Jones, a policy officer at the British-based Jubilee Debt Campaign.
"Credit Suisse and VTB should pay the price for these illegitimate loans, and should not be bailed out indirectly by the IMF or anyone else."
Credit Suisse, whose Ivorian chief executive was quoted by the Wall Street Journal as saying in October that it was "madness" for poor countries to finance infrastructure through dollar borrowing, declined to comment.
VTB said it had completed a "number of financing transactions" with Mozambique but insisted they were all above board and there had been no failure to disclose any loans.
"The transactions were completed in full compliance with national and international law and allowed Mozambique to expand access to capital markets," VTB said in a statement.
BREACH OF TRUST
Without the support of the International Monetary Fund and foreign donors, whose aid accounts for a third of government revenues, Mozambique is likely to struggle to pay for basic services.
The metical is likely to continue its decline, inflation -- already running at an annual rate of more than 13 percent -- will soar, and foreign and public investment will drop, with a knock-on impact on economic growth, analysts say.
"The debt that we just found out about is a huge burden on the economy. What's worse is it has a multiplying effect, multiplying problems," said economist Ragendra de Souza, criticising the habitual secrecy of the dominant Frelimo party.
"To hide debt is an 'ostrich policy' -- hide the head but everything else is exposed. A monopoly behaves like this."
A comprehensive aid package is the most likely way out but the IMF and donors would demand stringent conditions, including full transparency on state finances, measures to ensure no repeat of the mistakes and consequences for those responsible, two Western diplomats said.
The last demand will be particularly tough for President Filipe Nyusi, who was defence minister under former President Armando Guebuza when the loans were agreed.
A Frelimo spokesman did not respond to requests for comment.
"This was a fundamental breach of trust. There's no way it's back to business as usual," one diplomat said. "We are supposed to be doing anti-poverty work, not paying for undisclosed loans taken out with no transparency to unsustainable businesses."
Prices of basics such as bread and fuel are rising along with public anger at the scale of the problem. Armed soldiers and police took to the streets of Maputo last week after rumours of demonstrations.
"We see the government lied to us and things will get harder for ordinary Mozambicans now," 37-year-old singer Tinoka Zimba said. "We used to think that we are all in together, trying to make things better. This crisis is really sad."
MISSED OPPORTUNITY
Although experts believe gas revenues could begin flowing in eight years, that is too late to repay over $2 billion in loans due in 2021 and 2023.
Anadarko has halved its in-country staff in the last year and cancelled a building planned in Maputo, two oil industry sources said. Anadarko did not respond to a request for comment.
Investors are also alarmed by rising tensions between Frelimo and its former civil war enemy Renamo.
Fighting between the two sides in remote central regions has pushed more than 11,000 refugees into neighbouring Malawi since December. Renamo says attacks are occurring every day but Frelimo says the violence is not as serious.
Local media reported last week that a mass grave containing 120 bodies was found in the central province of Sofala. Frelimo denied the reports.
The violence also risks warding off tourists from Mozambique's miles of untouched white-sand Indian Ocean beaches.
"The saddest thing is this country has everything needed to be a huge success story," a diplomat said.
(Additional reporting by Grant Neuenburg, Ed Cropley and Manuel Mucari, Editing by Ed Cropley and Timothy Heritage)
