Sri Lanka Declared Bankrupt? – Free PDF Download

What has happened?

• After weeks of economic turmoil, the island nation of Sri Lanka announced on Tuesday,
• That it would be defaulting on all of its external debt – $51 billion – after running out of foreign exchange for imports.
• Colombo called the move a “last resort.”
• It added that the immediate debt default was to ensure “fair and equitable treatment of all creditors“, Ahead of an International Monetary Fund assisted recovery programme for the South Asian nation.

Why default?

• The extraordinary step taken to preserve its dwindling dollar stockpile for essential food and fuel imports. 
• All outstanding payments to bond holders, bilateral creditors and institutional lenders will be suspended until a debt restructure, the finance ministry said in a statement Tuesday.
• The newly appointed central bank governor, Nandalal Weerasinghe, said in a briefing that authorities are seeking to negotiate with creditors and warning of a possible default.
• The measures are “a last resort in order to prevent a further deterioration of the Republic’s financial position,” the finance ministry said.
• “It is now apparent that any further delay risks inflicting permanent damage on Sri Lanka’s economy and causing potentially irreversible prejudice to the holders of the country’s external public debts.”

Bonds & Currency

• Sri Lanka’s dollar bonds due July 2022 fell 3 cents on the dollar on Tuesday to a fresh record low 45.73 cents.
• The rupee also slipped.
• The nation’s stock market is shut this week for public holidays after trading for shortened hours due to the daily power cuts.

Calls for resignation

• The announcement follows mounting calls for President Gotabaya Rajapaksa and his brother, PM Mahinda Rajapaksa, to resign.
• They have been defiant so far — Gotabaya called for “unity and better understanding” on Tuesday while greeting citizens for the Sinhala and Tamil New Year festival – Despite protests against inflation that’s running at 20% and daily electricity cuts of as long as 13 hours.
• His party has lost its majority in parliament and bailout talks with the International Monetary Fund are set to be further delayed.

bailout

• The government will expedite talks with the IMF, the finance ministry said Tuesday, adding that it wants to avoid a hard default.
• Rajapaksa’s administration is also seeking aid from nations including India and China, which is one of its biggest creditors.
• “China has been doing its utmost to provide assistance to the socioeconomic development of Sri Lanka, and will continue to do so going forward,” a Foreign Ministry representative said at a briefing Tuesday.
• Sri Lanka’s foreign-exchange reserves slumped 16% to $1.94 billion last month.
• Nomura Holdings Inc. expects an “Ecuador-style debt restructuring” where the existing stock of bonds are exchanged into three longer-dated bonds, With a reduction in coupon rates and some principal haircut, said Nicholas Yap, head of Asia credit desk analysts in Hong Kong.

What happens when a country defaults?

• The assets are repossessed by creditors in the case of an individual or corporate bankruptcy.
• However, a country’s assets cannot be confiscated by its creditor, and the government cannot be made to pay with money it does not have during a default.
• However, there is no certainty that this applies to the country’s assets located outside of the country.
• When Argentina defaulted in 2012, its navy training ship, which was based in Ghana at the time, was seized.
• The delinquent country’s creditor’s only option is to renegotiate the conditions of the loan.
• Government bonds will be rescheduled for postponed payment or ‘haircut,’ which means the value of the bonds will be reduced.
• After defaulting on a $81 billion loan in 2011, Argentina promised to pay a third of its debt to creditors.

Impact on the country

• Government defaults result in soaring inflation, unemployment, and political pressure on the defaulting government.
• Because domestic banks hold the majority of domestic debt, bank runs occur as a result of a lack of faith in the financial system.
• Bank runs occur when a large amount of money is taken out of a bank as a result of public panic and lack of faith.
• Capital controls are in place to prevent this, with the government attempting to limit the amount of money that each depositor can withdraw.
• As aggregate demand diminishes and the foreign market loses faith in the country’s currency, a sovereign debt crisis might lead to economic and currency crises.

Q) Which among the following was the first developed country to default on IMF loan?

1. Greece
2. Brazil
3. Spain
4. Italy

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