Sri Lanka’s Lenders Should Cancel Debt, Academics Say in Letter

(Bloomberg) — Sri Lanka’s bondholders aren’t living up to their obligations and should cancel debt to allow the country to get out of its economic crisis, a group of international academics said in a letter.

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Private creditors own almost 40% of the country’s external debt, mostly in the form of International Sovereign Bonds, but higher interest rates mean they receive more than half of debt payments, the group said in the letter, which was signed by more than 180 professors from around the world.

“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,” said the group, which includes University of Massachusetts professor Jayati Ghosh as well as Thomas Piketty of the Paris School of Economics. “Lenders who benefited from higher returns because of the ‘risk premium’ must be willing to take the consequences of that risk.”

The island nation fell into default in May, the first sovereign debt default by the country since it gained independence from Britain in 1948. The government last month held a third round of talks with creditors as it seeks a deal that’s key to unlocking a $2.9 billion International Monetary Fund bailout and other financing to bolster reserves that have been languishing below $2 billion.

The nation’s commercial creditors favor recasting both foreign- and local-currency liabilities to achieve debt sustainability and foster economic growth. The talks are at a crucial stage, the academics said, and all lenders “should share in the burden of restructuring” with the assurance of additional near-term financing.

“Sri Lanka on its own cannot ensure this; it requires much greater international support,” the group said. “Instead of geopolitical manoeuvring, all of Sri Lanka’s creditors must ensure debt cancellation sufficient to provide a way out of the current crisis.”

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