Thursday, April 18, 2024

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Hedge funds holding up vital debt relief for crisis-hit Sri Lanka

Some of the world’s most powerful hedge funds and other investors are holding up vital help for crisis-hit Sri Lanka by their hardline stance in debt-relief negotiations after the Asian country’s US $51 billion default last year, according to 182 economists and development experts from around the world.

In a statement released on Sunday 08 , the group said extensive debt restructuring was needed to give the economy a chance of recovery and that Sri Lanka would be a test case of the willingness of the international community to tackle a looming global debt crisis.

The group – including the Indian economist Jayati Ghosh, Thomas Piketty, the author of the bestselling book Capital, and Greece’s former finance minister Yannis Varoufakis – said private sector creditors such as investment companies and hedge funds were preventing a deal.

Private companies who lent at high interest rates are holding up vital debt relief for Sri Lanka, a group consisting of global economists and development experts said.

Debt Justice said that these private companies, who lent to corrupt politicians, must face consequences from their risky lending by cancelling Sri Lanka’s debt.

The experts say that private companies who lent at high interest rates to corrupt politicians must face consequences from their risky lending by cancelling debt.

Debt restructuring negotiations for Sri Lanka are now at a crucial stage. Much of the focus has been on the role of China in the debt talks, but 50 percent of Sri Lanka’s external debt payments are to private lenders, whereas only 14 percent are to China.

In the statement the experts say private creditors own almost 40 percent of Sri Lanka’s external debt stock, mostly in the form of International Sovereign Bonds, but higher interest rates mean that they receive over 50percent of external debt payments.

“Such lenders charged a premium to lend to Sri Lanka to cover their risks, which accrued them massive profits and contributed to Sri Lanka’s first ever default in April 2022. Lenders who benefited from higher returns because of the “risk premium” must be willing to take the consequences of that risk.”

The statement notes that debt negotiations in Sri Lanka are now at a crucial stage and all lenders—bilateral, multilateral, and private — must share the burden of restructuring.

However, the statement notes that Sri Lanka on its own cannot ensure this and it requires much greater international support.

“The Sri Lankan case will provide an important indicator of whether the world—and the international financial system in particular—is equipped to deal with the increasingly urgent questions of sovereign debt relief and sustainability; and to ensure a modicum of justice in international debt negotiations” the statement pointed out..

“It is therefore crucial not only for the people of Sri Lanka, but to restore any faith in a multilateral system that is already under fire for its lack of legitimacy and basic viability, it added.”

Sri Lanka is one of several countries which have defaulted on external debt, or are seeking a debt restructuring, since the Covid pandemic began.

Ghana suspended many of its external debt payments in December 2022, following Lebanon, Suriname, Ukraine and Zambia.

With global interest rates increasing and widespread recessions expected in 2023, many more countries could follow.

Debt Justice research has found that, for two-thirds of lower income countries with International Sovereign Bonds, interest rates are so high that they are probably unable to take out new loans from external private lenders, increasing the chance they will need to default on their existing debts.

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