 "5 things about Sri Lanka's debt swap deal to end first-ever external loan default")
Sri Lanka has launched a $12.5 billion debt swap initiative to resolve its first-ever external default and stabilise its economy after a two-year financial crisis.
The deal, which offers new bonds with reduced payments tied to economic performance, is seen as a critical step toward securing long-term debt sustainability and economic recovery.
Here are five key points about the debt swap deal:
Ending a two-year default crisis: Sri Lanka stopped servicing its dollar-denominated debt in May 2022 as a foreign currency crisis drained reserves.
The suspension marked the beginning of a lengthy negotiation with creditors, including China, over restructuring $40 billion in external debt. The proposed swap deal offers bondholders a chance to exchange defaulted bonds for new ones, potentially ending the default saga.
STORY CONTINUES BELOW THIS ADNew bond options: The deal introduces two innovative bond types. Macro-linked bonds are payments are tied to Sri Lanka’s GDP performance, adjusting the debt burden based on the country’s economic growth, according to Financial Times.
Meanwhile, governance-linked bonds will reduce payouts for investors in exchange for government reforms, such as tax changes.
Such mechanisms aim to balance debt sustainability with economic incentives.
Support from key creditors: A creditor committee comprising major institutional investors such as Amundi, BlackRock, and GMO, which collectively hold 40 per cent of the debt, has voiced support for the deal.
Local bondholders, owning over 10 per cent of the debt, have also agreed to participate, including an option to swap into bonds denominated in Sri Lankan rupees.
Backdrop of IMF endorsement: The restructuring deal will reduce the outstanding debt from $12.5 billion to $9.1 billion, assuming Sri Lanka’s GDP remains under $90 billion in the coming years, Financial Times reported.
If GDP exceeds $100 billion, the debt could rise above $10 billion. This flexibility has drawn praise for bridging disputes over economic projections.
The International Monetary Fund recently approved a $330 million tranche of its $3 billion bailout package contingent on debt restructuring.
Risks and rewards of macro-linked bonds: While macro-linked bonds offer upside potential for investors if Sri Lanka’s economy performs well, they also raise concerns about increased debt burdens in periods of high growth.
The innovative structure is designed to resolve disagreements on growth forecasts, following similar approaches in Ukraine and Zambia.
Sri Lanka’s Finance Ministry has called the deal a “milestone” in rebuilding its economy, while President Anura Dissanayake, who took office in September, stressed the importance of this agreement for future stability.
The deal is expected to be finalised after creditors vote by December 12.
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