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Sri Lanka Begins to Suffer from a Series of Defaults

Sri Lanka Begins to Suffer from a Series of Defaults
Source: BBC

According to a top credit rating agency, Sri Lanka is on the verge of “a series of defaults” after announcing the suspension of foreign debt interest payments.

The news comes after Moody’s cut Sri Lanka’s credit rating.

The country’s finance minister acknowledged on Monday that it will miss $78 million (£60 million) in debt interest payments.

Sri Lankan authorities began negotiations with the International Monetary Fund (IMF) this week, as the country faces its worst economic crisis in almost 70 years.

Negotiations with the organization in Washington have started well, according to Shamir Zavahir, a spokesman for Finance Minister Ali Sabry.

Mr Zavahir stated that the IMF’s initial assessment was that a request for an RFI, or emergency finance, “doesn’t fulfill their requirements.”

“However, India afterwards made submissions on an RFI for SL [Sri Lanka], and the IMF may take this request into consideration owing to the specific circumstances,” he said.

Mr Zavahir stated, “In any case, the IMF looks to be in favor of giving an Extended Fund Facility.” “Ideally, if this can be hastened, it will aid in the short-term stabilization of things until long-term remedies kick in.”

A RFI is normally given to member countries who have “urgent” financing requirements due to rapid commodity price increases, natural catastrophes, or wars. It is not necessary for countries to have a strategy in place to improve their situation.

A nation applying for an Extended Fund Facility must make promises that include “a substantial focus on structural changes to overcome institutional or economic deficiencies.”

The Sri Lankan government said last week that it would temporarily default on $35.5 billion in international debt due to the epidemic and the war in Ukraine, which rendered payments to foreign creditors “difficult.”

If the outstanding interest rate payments are not completed within the 30-day grace period, Sri Lanka would default on its foreign debt for the first time since gaining independence from the United Kingdom in 1948.

Food shortages, increasing gasoline costs, and huge power outages have erupted in recent weeks in the South Asian nation, which is running low on foreign currency reserves.

Sri Lanka was also on the verge of defaulting on its obligations, according to two other major credit rating agencies last week.

Sri Lanka’s offshore debts are “possibly in, or very close to default,” according to the latest Moody’s assessment.

The country’s decision to halt some payments, according to the rating agency, “will result in a sequence of defaults,” with the first coupon payments for the government’s foreign bonds due today, April 18, 2022. A bond’s interest payment is called a coupon.

The non-payment was “unlikely to be rectified during the grace period,” according to Moody’s, because a debt restructuring scheme with the IMF “would take time.”

Credit ratings are designed to assist investors understand the degree of risk they are taking on when purchasing a financial instrument, in this case a sovereign bond.

Sri Lanka’s finance ministry acknowledged on Monday that it will miss interest rate payments on international sovereign bonds totaling $78 million.

This was “in keeping with the government policy decision” to halt foreign payouts, according to a spokeswoman.

“A decision in this respect will be issued in due course,” the spokesman replied when asked if payment will be made during the 30-day grace period.

Sri Lanka’s foreign debt is mostly made up of international sovereign bonds.

Countries including China, Japan, and India, as well as large financial corporations like BlackRock, UBS, and Allianz, own them.

Meanwhile, owing to the “current circumstances in the country,” the Colombo Stock Exchange would be closed for the whole week.