Home » Japan imposes preconditions to support Sri Lanka’s debt restructure

Japan imposes preconditions to support Sri Lanka’s debt restructure

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Japan has placed preconditions in order to support Sri Lanka’s debt issue. Finance Minister Shunichi Suzuki said that Japan is prepared to “do its part” over Sri Lanka’s debt issue.

Japan holds around US $3.5 billion of Sri Lanka’s total bilateral debt of about $10 billion, amounting to 4.4% of the island’s GDP, according to government and IMF data. Japan is also a major trading partner.

However, he said that other creditors, such as China and India, should also be involved in efforts to resolve it.Suzuki made the remarks after meeting with President Ranil Wickremesinghe, the Kyodo news service reported.

The Japanese Finance Minister said that he urged Sri Lanka to provide the necessary information, make its own efforts to get China, India and other creditors involved and boost transparency.

“Japan will do its part if such preconditions are met,” Suzuki told reporters without elaborating in the Philippine capital Manila, where he attended a meeting of the Asian Development Bank.

Japan, one of Sri Lanka’s main creditors, will back the South Asian nation after fulfill ment of some preconditions as it seeks to restructure about $30 billion of its foreign debt and find a way out of a crippling economic crisis,

During his visit to Japan, the Sri Lankan President met Wednesday with Japanese Prime Minister Fumio Kishida and discussed the debt issue. The leaders recognized the importance of “fair and transparent” debt restructuring that involves all creditor nations, according to the Japanese Foreign Ministry.

Sri Lanka defaulted on its debt earlier this year. The COVID-19 pandemic added to the woes of the Asian nation, already struggling financially after taking out loans from countries such as China to develop its infrastructure.

In a speech at the annual meeting of the ADB’s board of governors, Suzuki said the COVID-19 pandemic and surging energy prices caused by Russia’s war in Ukraine have “heightened the risk of debt vulnerabilities.”

“All creditors should cooperate in providing support in a coordinated manner, while debtor countries undertake reform efforts towards achieving a sound level of debt,” Suzuki said, in an apparent reference to Sri Lanka.

Bond restructuring has become inevitable for Sri Lanka as IMF’s EFF arrangement is contingent on “making a good faith effort to reach a collaborative agreement with private creditors.”

As mentioned, commercial borrowing in the form of ISBs accounts for the most significant component of Sri Lanka’s diversified debt profile. It accounts  US$ 11.5 million  predominantly owed to Western sovereign bondholders who largely include US and European institutional investors.

In addition, Sri Lanka’s bondholders may consist of retail investors (or individual creditors). Compared to the former category, it would be challenging for Sri Lanka to recognise and organise such retail investors, leaving creditor coordination difficult.

Although there are different types of bond holder representations aimed at ensuring “better results” for themselves, one possible way for Sri Lanka to overcome this creditor coordination problem is relying on collective action clauses (CACs), included in sovereign-bond contracts, albeit those clauses are not an ideal solution.

CACs afford bondholders an “ex-post coordination  mechanism   allowing the majority of creditors to modify the monetary terms of bonds, such as maturity dates or interest rates.

Therefore, CACs are significant in providing the issuing government with the flexibility to modify the original terms of sovereign-bond contracts, thereby easing the handling of an economic crisis.

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