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Hopeful of Sri Lanka ISB restructuring deal despite ‘some setbacks’: IMF Official

Krishna Srinivasan, Director of the Asia and Pacific Department at the International Monetary Fund, has expressed optimism regarding the prospect of a deal with Sri Lanka’s sovereign bond holders, despite encountering "some setbacks." Following the first round of direct discussions in London, where a finalized agreement was not reached, the government has indicated a willingness to explore bonds tied to economic performance. Srinivasan emphasized that while there have been challenges in the private sector restructuring process, both parties remain engaged in dialogue. He conveyed hopefulness for eventual resolutions to emerge in the future. Additionally, bondholders have put forth a proposal for governance-linked bonds as an alternative for defaulted bonds, signaling a proactive approach towards finding mutually beneficial solutions.

Bondholders are advocating for an innovative restructuring model for defaulted International Sovereign Bonds (ISBs), emphasizing the introduction of an underlying bond linked to economic performance rather than separate warrants, potentially setting a precedent for future debt workouts. Krishna Srinivasan of the IMF noted the organization's involvement in providing guidance on the macro framework and upcoming challenges to the negotiating partners. While a March proposal was deemed inconsistent with the IMF's debt trajectory, a revised April proposal is awaiting assessment by the IMF, according to a statement from the Sri Lankan government. Investors have put forth a proposal featuring a 28 percent haircut with a 1.8 percent upfront fee, aligned with the IMF baseline, with adjustments based on economic performance. The proposed bonds, including a standard bond, would commence maturing from 2029, with varying coupon rates. However, concerns arise regarding the significant rise in interest rates on the late maturing bonds post-program, potentially posing a hurdle to agreement. Haircuts would decrease steeply from 2028, up to 7.3 percent, if GDP surpasses IMF projections, with further adjustments tied to output fluctuations. Bondholders express confidence in the proposal, asserting that IMF baseline projections underestimate Sri Lanka's resilience to shocks, citing the country's history, including periods of civil conflict.

Sri Lanka defaulted in 2022 following a decade of aggressive macroeconomic policies reliant on monetary stimulus despite possessing a central bank with substantial reserves. The country experienced currency crises amidst an environment of US quantitative easing, leading to a surge in foreign borrowing. The current US 10-year yield exceeds the proposed initial coupon rate for Sri Lanka's default-exchange bonds. Analysts highlight a pattern of steep growth in foreign debt following crises, exacerbated by tax cuts introduced in December 2019.

Hopeful of Sri Lanka ISB restructuring deal despite ‘some setbacks’: IMF Official | Economy Next

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