Connect with us


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



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:

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 –

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *


Women led LPO services firm Velox Partners enters new office space in Colombo



Velox Partners is a 90% women led Legal Process Outsourcing firm now in Sri Lanka

Velox Partners, a tech-based legal process outsourcing (LPO) firm, expanded its presence into Colombo to augment its existing law firm. Velox commenced operations in January 2020 prior to the onset of the pandemic. Today, it has expanded its services across numerous verticals Commercial law, Litigation, Conveyancing and Company Secretarial Services, with Legal Process Outsourcing (LPO) Services being the core. It is geared as a fully-fledged legal service provider servicing clients across United Kingdom, Australia, Singapore and Southeast Asia.

Velox is female-led with over 90% being women comprising versatile and experienced lawyers. Their expertise bridges multiple disciplines of law with a local and global clientele. The two powerhouses leading the firm are its founding partners Lihini Fernando and Dakshika Perera whose collective experience spans over three decades.

Velox Partners saw Covid-19 restrictions and remote working as an opportunity to position the firm as a tech-based entity and launched its LPO arm. Providing back office legal services to law firms across continents was seen as a viable business model that is both functional and lucrative. Furthermore, the partners of Velox realized the potential of positioning Sri Lanka as a LPO Hub, where the LPO sector enables foreign remittance to the island nation to rebuild its economy. This also provided an opportunity particularly as LPO services can be offered remotely, without a physical office presence.

Velox has serviced clients in over 14 jurisdictions worldwide providing solutions on the ethos, ‘Beyond Legal’. Velox believes in combining business efficiency and tech enabled processes to differentiate itself from the conventional law firms.

Lawyers at Velox are solution providers guided by industry expertise. The team comprises professionals based in Australia, the United States of America, Singapore, and Sri Lanka which enables them to draw cross country perspectives in providing services. Velox is now poised to use their multiple years of experience across continents to provide smart legal solutions.

Continue Reading


Estonian TV crew gets a taste of Sri Lanka for the first time



Meeting with SLTPB officials

Sri Lanka Tourism, under its Scandinavian market promotions hosted a Media FAM with 4 Media personnel from Kanal2 TV from Estonia. The tour started off on February 28 and ended on March 8. The purpose of hosting this tour was to receive more high-end tourist arrivals from Estonia, as well as the other Scandinavian markets including Lithuania and Latvia.

Subsequently, this tour was hosted in collaboration with the Sri Lanka embassy in Sweden which contributed to make this tour a success. The FAM Tour covered all the main tourist attractions in Sri Lanka, including wild life, Ayurveda, Boutique hotels, and also cultural attractions.

All these attractions were filmed and the destination will be promoted on air via Kanal2 TV, through the TV show ‘’ Kaugele Siit’’ (far from here). The first episode of this programme is scheduled to be telecast for 45 minutes. This travel programme has 420,000 followers as their audience. Kanal2 TV was also the official Media partner for the Winter Olympics 2018, a Sri Lanka Tourism press release said.

The release adds: ‘The visitors were quite impressed with the 8-day tour which they had, enjoying every moment of their tour. They were equally mesmerized with the warm hospitality which they received from the Sri Lankans, which they are mostly renowned for. They enjoyed the traditional Sri Lankan cuisine, and the variety of dishes which they tasted. Nevertheless, they had the opportunity of exploring every attraction of the paradise island to convey the message to their fellow Estonians, that Sri Lanka is a unique travel destination which has everything in store for the enthusiastic traveler.

‘They also had a cooking demonstration by courtesy of Siddhalepa Ayurveda Resorts & Spas Wadduwa, and also a Yoga treat at the same venue. Visiting the Turtle Hatchery at Kosgoda , the Elephant orphanage at Pinnawala, going through a safari at Eco park was also another amazing experience which they had during their stay.’


Continue Reading


The Academy of International Business signs Memorandum of Understanding with the University of the Pacific



More than 50 students graduated this year from AIB

Academy of International Business Sri Lanka (AIB) held its second graduation at the Bandaranaike Memorial International Conference Hall with over fifty graduates successfully passing out. At the recent graduation, the business academy signed its MOU with the University of the Pacific.

The signing of the MOU is a major milestone for the business academy. The courses offered are DBA, MBA, and BBA top-up programs through AIB. Prof Liam, Rector – of the University of Pacific, expressed confidence that the program delivered by AIB will be very beneficial.

The event was graced by passed graduates, teachers, and lecturers, the ceremony was hosted by the chief guest and the regional director of ABE(UK) Dr Praveen Mahendran. “The ABE(UK) is one of the long-standing professional awarding bodies from the UK and AIB is proud to be associated with ABE and approved by the awarding body.

Hard work, competency and capability are the values that produce results, through the AIB and its programs these are achievable. Every student is encouraged to show their full potential”.

The distinguished guests were the Vice President of the BNI Pioneer Chapter, Dilan Fonseka. He emphasized, the importance of students gaining experience in entrepreneurial skills and business development by enrolling at BNI. AIB is a member of BNI, which creates multiple opportunities.

About the Academy of International Business: AIB is recognized for its management programs, digital marketing, marketing, and English language programs such as IELTS, and PTE. It’s widely popular among students in search of pursuing business and management courses.The Director of AIB Sri Lanka, Chrishankar Janathanan, expressed the institute’s commitment to providing the best quality education. It’s not only a center that is simply cornered to the education sector but also has focused its efforts on recruitment services and digital agency services.

Continue Reading