ECONOMYNEXT – Sri Lanka is planning a second round of talks with sovereign bond holders later this week, a media report said as the island is also expecting the announcement of a final deal by bilateral lenders.
Investors in a steering committee representing key bondholders have halted trading and are in a ‘restricted’ period, indicating a new round of direct talks, Bloomberg Newswires said.
Sri Lanka is attempting to restructure 12.5 billion dollars of sovereign bonds and about 1.7 billion dollars of past due interest following the declaration of an external default in 2022.
Private investors are seeking some so-called macro-linked bonds whose final haircut is linked to dollar GDP as well as some standard or ‘plain vanilla’ bonds with an upfront haircut.
The style of bonds have not been used in sovereign restructurings before. In the latest round of talks more plain vanilla bonds may be discussed, sources aware of the thinking of some bond investors said.
The ISB holders have proposed a 28 percent hair cut and a 1.8 percent consent fee. The macro-linked bonds would have principle re-stated up to 92 percent of the original depending on the evolution of gross domestic product.
Sri Lanka is restructuring debt using an IMF debt sustainability model applied to middle income countries with market access as opposed to debt sustainability model used in countries like Ghana applicable to low income countries requiring deeper haircuts on both domestic and foreign debt.
Hair cuts may also depend on the maturity of bonds and the coupon interest.
Ghana has higher levels of commercial debt having started to access capital markets from around 2007.
Ghana also has a bad central bank like Sri Lanka and has gone to the International Monetary Fund 18 times.
The country is also operating flexible inflation targeting (inflation targeting without a clean float), which critics say is the latest spurious monetary regime peddled to hapless unstable countries without a doctrinal foundation in sound money.
Having done broad domestic debt restructuring as well as continued currency volatility both interest rates and inflation remains above 20 percent.
Ghana’s central bank has a worse monetary anchor (8 percent inflation plus 2 percent) compared to 5 percent plus two in Sri Lanka and runs into currency trouble despite being an oil producer like Iran, Venezuela and neighboring Nigeria.
Nigeria has an inflation target of 6-9 percent but ends up with around 20 plus inflation and currency trouble.
Sri Lanka has undershot its inflation target since reaching monetary stability in September 2022 and has appreciated the currency, amid deflationary policy giving a strong foundation for economic activity to resume. (Colombo/June26/2024)