Business

Sri Lanka’s Sovereign Foreign Debt: to restructure or not?

Published

5 years ago

2022/01/14

By Dr Dushni Weerakoon

Sovereign debt restructuring can be pre-emptive or post-default. A default is inherently costly as it can result in a sustained loss of access to capital markets. That leaves pre-emptive restructuring when a country deems itself unable to service outstanding debt.

The complex creditor landscape of today though makes governments reluctant to entertain sovereign debt restructuring. The landscape of sovereign borrowing has evolved from a small group made up of multilateral organisations, a few commercial banks, and the ‘Paris Club’ of rich countries to something much more complicated. In recent decades, emerging markets and developing economies have borrowed proportionately more from international bond markets with their dispersed private investors, and tapped new non-Paris Club lenders like China. From the sovereign’s perspective, this makes a potential debt restructuring operation particularly complicated.

The first step in any restructuring is calculating how much a country owes and to whom. This involves sharing detailed information on all categories of sovereign debt denominated in foreign currency, including collateralised liabilities and the debts of state-owned enterprises. The adoption of an IMF programme may be conditioned as a part of a restructuring to underwrite the data, economic plan and the promise of macroeconomic and fiscal supervision.

Lenders will weigh the upfront losses of a debt standstill and restructuring against the total magnitude of

losses in the event of a default. In entering restructuring talks, though, they will also demand to do so on the principle of comparable treatment of creditors in any proposed debt reprofilings and restructurings. Lenders will be mindful that any relief offered does not give preferential treatment to other creditors, especially in the face of new geopolitical power rivalries. This would typically mean that a country in distress asks for debt relief from friendly governments to whom it owes money and then seeks a comparable deal from private lenders.

The Holdout Problem

Over the past decades, there has been progress in governance frameworks to deal with sovereign debt crises, but considerable gaps persist. In the COVID-19 era, the G-20 Common Framework for Debt Treatments apply only to low-income countries (LICs), and even then, do not compel the participation of private creditors. Emerging markets that have undergone debt restructuring most recently (e.g. Argentina and Ecuador) are categorised in academic research as countries with a track record of serial default – i.e. more than two default spells or episodes. Given research evidence that countries that have defaulted on their debt obligations in the past are more likely to default again in the future, creditors have an added incentive to enter into negotiations in such cases.

All told, with the creditor landscape transformed, debt restructuring is still very much a matter of ad hoc negotiations between a sovereign and its creditors.

The creditors are aware of their special legal protection that comes down to a question of money due but not paid. At the same time, creditors too have virtually no choice but to negotiate as there will be inadequate assets to satisfy every creditor’s claims even with a successful legal remedy. In the extreme, ‘vulture funds’ have used litigation as an investment strategy to buy the debt at a hefty discount and pursue full payment through the courts. Confronted with this reality, a negotiated resolution should appeal to both creditors and debtor country.

At the centre of such a coordinated effort will be creditor (especially bondholder) committees. The composition of such committees – inclusive of large institutional investors, hedge funds, etc. – is critical to obtain a relatively quick resolution. However, there are no guarantees of fast and efficient mechanisms, and countries still risk fighting creditor lawsuits from those who may hold out.

Such potential holdout creditors may not necessarily take the view that what is good for the many is always good for the few. A disgruntled holdout creditor has the leverage to cause disturbing headlines, especially when countries resume bond market access once again at some point. Holdout creditors can be reined in through exit consents – where a majority of holders can amend terms, or as more commonly used now, employ collective action clauses (CACs) in bond agreements to bind minority holders. In the latter case, a specified supermajority of holders (usually 75%) can bind a minority to the terms of a debt restructuring. But much depends on whether a debtor country’s outstanding stock of international sovereign bonds contains these clauses. Some countries have also adopted anti-vulture fund legislation that limits holdout creditor recovery as a deterrent.

Net Benefit Calculation

High uncertainty during a restructuring, and the risk of prolonged negotiations means debt restructuring is still the last resort, to be done only if you must. A restructuring is a costly exercise with reputational downsides, loss of market access and more expensive debt issuances, weighed down further by concerns about adverse legal implications. For policymakers, a decisive step can be taken after a careful net benefit calculation of whether a country’s economic conditions are likely to deteriorate further without a restructuring, or whether a timely restructure may reduce the total magnitude of upfront losses and return debt to a sustainable level at the lowest cost to both the country and its creditors.

Link to Talking Economics blog: https://www.ips.lk/talkingeconomics/2022/01/12/sri-lankas-sovereign-foreign-debt-to-restructure-or-not/

Dr Dushni Weerakoon is the Executive Director of the Institute of Policy Studies of Sri Lanka (IPS) and Head of its Macroeconomic Policy research. She joined IPS in 1994 after obtaining her PhD, and has written and published widely on macroeconomic policy, regional trade integration and international economics. She has extensive experience working in policy development committees and official delegations of the Government of Sri Lanka. Dushni Weerakoon holds a BSc in Economics with First Class Honours from the Queen’s University of Belfast, U.K., and an MA and PhD in Economics from the University of Manchester, U.K. (Talk with Dr Dushni – dushni@ips.lk)

All News Advertisement

Business

Successful government securities auctions anchor yield curve amid subdued trading

Published

13 hours ago

2026/07/18

Thilina Walpola

The secondary market yield curve remained broadly stable during the past week as subdued trading activity persisted around the Treasury Bond auction. Meanwhile, weighted average yields at the weekly Treasury Bill auction recorded declines across all tenors, First Capital Research stated in its latest weekly report.

According to the report, secondary market activity opened on a cautious note with selling interest emerging ahead of the T-Bond auction, causing a slight upward adjustment in yields amid moderate trading volumes. As the week progressed, investor participation remained muted, with market participants largely staying on the sidelines in anticipation of the auction, keeping the yield curve broadly unchanged.

Following the successful completion of the bond auction, the market witnessed mixed sentiment, with selling pressure concentrated at the short end and buying interest emerging in longer-dated maturities. However, activity remained subdued, and the yield curve largely held its ground through the weekend.

At the Treasury Bond auction held on July 13, 2026, the Public Debt Management Office (PDMO) successfully raised the full offered amount of LKR 150.0 billion. This comprised LKR 70.0 billion through the 2030 maturity, LKR 50.0 billion through the 2034 maturity, and LKR 30.0 billion through the 2037 maturity, at weighted average yields of 11.57%, 12.04%, and 12.58%, respectively.

Similarly, at the weekly Treasury Bill auction held on July 15, 2026, the PDMO raised the full offered amount of LKR 120.0 billion. The 3-month, 6-month, and 12-month bills raised LKR 55.0 billion, LKR 35.0 billion, and LKR 30.0 billion, respectively. Weighted average yields declined across all tenors, with the 3-month bill easing by 8 basis points (bps) to 10.13%, the 6-month bill by 3 bps to 10.27%, and the 12-month bill by 1 bp to 10.20%.

On the external front, the Sri Lankan Rupee (LKR) depreciated against the US Dollar, closing the week at LKR 336.3/USD compared to LKR 334.7/USD seen previously. Market liquidity within the banking system expanded significantly, starting the week at LKR 125.89 billion and closing higher at LKR 157.19 billion.

Thus the market data may highlight a clear divergence between short-term liquidity comfort and long-term caution, which points toward a gradual steepening of the yield curve in the near term.

The emergence of buying interest in longer-dated maturities (2034 and 2037) shows that institutional investors are eager to lock in double-digit yields while liquidity is high. This institutional support will likely place a temporary ceiling on long-term rates.

The mild depreciation of the rupee (moving to LKR 336.3/USD) acts as a cautionary counter-signal. If the currency continues to face pressure, it could limit how far short-term yields can fall, flattening the curve back out.

Business

CSE sees lack of investor participation, market turnover remains thin

Published

13 hours ago

2026/07/18

Thilina Walpola

The Colombo Stock Exchange (CSE) witnessed a quiet trading session on Friday, with the benchmark All Share Price Index (ASPI) edging marginally lower down by 42.16 points or 0.20% to close at 21,405.41.

Market turnover remained thin, coming in at Rs. 0.72 billion (approximately US$ 2.2 million), reflecting a general lack of investor participation as most sectors encountered downward pressure.

A total of 31.94 million shares changed hands across 13,397 trades, resulting in a negative market breadth where declining counters outpaced gainers 127 to 91. Blue-chip counters Sampath Bank PLC (SAMP), Lanka IOC PLC (LIOC), and John Keells Holdings PLC (JKH) anchored the day’s market turnover, while a notable off-market crossing was recorded in Chevron Lubricants Lanka PLC (LLUB). Trading volume in SAMP alone was highly concentrated, accounting for 12% of the day’s total turnover.

Sector performance remained mixed, with the Banking sector emerging as the most actively traded, posting a modest gain of 0.18%. The Health Care Equipment & Services sector secured the spot as the day’s best performer, rising by 0.55%.

Conversely, the Household & Personal Products sector faced the steepest decline, dropping 1.95% to finish as the worst-performing sector of the day. In terms of individual movements, Blue Diamonds Jewellery Worldwide PLC [Voting] (PINS.N) led the gainers, advancing by 6.11%, while Agstar PLC (AGPL.N) emerged as the top loser, shedding 9.09%.

By Hiran H. Senewiratne

Business

Going Green in Kirindiwela: Ceylinco Life begins work on 36th company-owned building

Published

13 hours ago

2026/07/18

Thilina Walpola

Ceylinco Life directors at the laying of the foundation stone for the new branch

Ceylinco Life has commenced construction of its 36th company-owned branch building with the laying of the foundation stone for a new eco-friendly edifice in Kirindiwela, reaffirming the life insurance market leader’s continued investment in sustainable infrastructure and enhanced customer service.

The ceremony was attended by Ceylinco Life Chairman Mr R. Renganathan, Managing Director/CEO Mr Thushara Ranasinghe, members of the Board of Directors and senior management of Ceylinco Life, alongside valued customers and distinguished invitees from the Kirindiwela area.

Driven by its commitment to delivering superior service in a welcoming and customer-centric environment, Ceylinco Life has consistently invested in purpose-built branch buildings that serve as flagship locations. The Kirindiwela branch will join a network of 35 such company-owned buildings currently in operation across the country, each designed to offer elevated standards of service and modern facilities.

The new building will be constructed on company-owned land and developed in line with the Company’s green building concept, incorporating environmentally responsible design principles and energy-efficient technologies.

Spanning a floor area of 3,440 square feet, the Kirindiwela branch will utilise locally developed prefabricated construction technology from the National Engineering Research and Development Centre (NERD). The building is planned to operate on a 100 per cent self-sufficient solar electricity system, eliminating reliance on the national grid.

Key sustainability features of the proposed building include natural ventilation design, a topography-friendly layout, a green patch with grass grown in between interlocking blocks, energy-efficient air conditioning and lighting systems, and a rainwater harvesting facility. A dedicated Sewerage Treatment Plant (STP) will recycle wastewater for toilet flushing and gardening, while the company will practice the green concept of ‘Reuse’ in air-conditioning and electronic equipment, further minimising environmental impact.