In a pivotal moment for Sri Lanka’s ongoing sovereign debt restructuring, the U.S. District Court for the Southern District of New York is considering a 45-day stay request filed by the Democratic Socialist Republic of Sri Lanka.
The stay, sought by the Government, is critical to finalizing a complex debt exchange necessary to stabilize the nation’s economy and meet the requirements of an International Monetary Fund (IMF)-supported recovery program.
The dispute revolves around Hamilton Reserve Bank Ltd.’s (HRB) claim for $250 million in Sri Lankan International Sovereign Bonds (ISBs) that matured in 2022.
Sri Lanka defaulted on these bonds amid a severe economic and humanitarian crisis. While HRB has pursued legal action, Sri Lanka argues that an additional stay would facilitate the debt restructuring process and prevent disruption to its recovery efforts.
Judge Denise L. Cote has ordered HRB to file its opposition by 11 December 2024, with Sri Lanka’s reply due by 16 December 2024.
Sri Lanka’s debt restructuring is at a critical juncture. The country has achieved key milestones, including agreements with bilateral creditors in mid-2024 and private bondholder groups later in the year.
These agreements addressed contentious issues such as aligning creditor terms with IMF program requirements and ensuring equitable treatment for all stakeholders. Most recently, on 25 November 2024, Sri Lanka initiated a debt exchange program that allows bondholders to swap their existing securities for restructured bonds.
This exchange has garnered substantial support from major creditors and international financial institutions, reinforcing its potential to stabilize the economy.
However, HRB’s refusal to participate in restructuring negotiations poses a significant challenge. The bank has opted to pursue litigation, a move critics argue undermines collaborative efforts and prioritizes individual claims over collective recovery.
HRB has also been accused of threatening to obstruct IMF funding, which could jeopardize Sri Lanka’s fragile recovery framework.
If the Court denies the stay and rules in HRB’s favor, it could prompt other creditors to file lawsuits, leading to legal chaos and derailing the restructuring process.
Sri Lanka’s legal team emphasizes that granting the stay aligns with international principles and U.S. policy, which traditionally support sovereign nations’ good-faith negotiations in debt disputes.
The Government contends that delaying HRB’s claim would not harm the bank, as accrued interest would compensate any postponement. Moreover, a stay would uphold the comparability of treatment principle, ensuring all creditors are treated equitably under the IMF-supported program.
While the Government’s restructuring efforts have earned support internationally, domestically, President Anura Kumara Dissanayake’s administration faces criticism. Allegations of corruption and inefficiency in State institutions have fueled doubts about the Government’s ability to deliver on its promises.
