Thread by @ChayuDamsinghe

🧵on SL's debt, what debt restructuring is - and how we do it.

This is a complicated topic so please ask any question you have, however simple it may seem.

#SriLankaEconomicCrisis #SriLankaCrisis #IMFNow #RestructureDebt

(1/25)

First, why does Sri Lanka take on debt?

For 2 reasons. One is for direct investment (projects) - eg, loans to finance vaccines/roads.

The other is to bridge the negative balance between our dollar inflows and outflows, and essentially pays for our consumption.

(2/25)

Project debt is often multilateral (agencies like World Bank, ADB) or bilateral (direct loans from India/China/Japan).

The "bridging" debt is rarely multilateral (except IMF loans) - and has been historically bilateral and more recently, commercial.

(3/25)

When SL was a poor country, a lot of debt (both types) was very cheap or on "concessional terms" - meaning low rates, few conditions, just helping the little guy out.

But of course, this can't last. As we became a bigger economy, this dried up.

(4/25)

In about 2005, we graduated to lower-middle income, which meant that multilaterals were definitely going to reduce these loans soon.

So we had to either do more bilaterals (which could give lower rates for different concessions) or more commercial debt.

(5/25)

So that's what we did. More short-term bilateral debt, swaps and the like, and then started entering sovereign debt markets in 2007.

As the economy grew and the size of the deficit grew in absolute terms, we borrowed more.

(6/25)

Most of these sovereigns started maturing 10 years later - so to meet those and meet the bilateral short term debt, we took even more commercial debt as well.

So now, we have a lot of debt, and with our current crisis - no money to pay.

(7/25)

So we restructure. We tell our creditors, hey, we don't have money for x. y, z reasons, we won't be able to pay, can we talk and figure out a way forward?

But how do we do this? There are a few ways forward.

(8/25)

Best option is to talk to our creditors first, and tell them we want to stop paying debt so that we can talk and negotiate a new arrangement.

Talking this out could take upto a month, and after that we can officially stop paying debt.

(9/25)

Another option is to unilaterally suspend payments, but clearly communicate we're going to start talking to the creditors in order to get their okay for that. Why that might be a good option is because we have a payment on Apr 18 and better not to pay.

(10/25)

Anyway, for a country in such a terrible reserves situation as SL, it's likely we get downgraded internationally to "selective/restricted default" - which means we are not paying some of our debt.

Not too much an issue compared to now as long as we communicate clearly

(11/25)

Anyway, once we get the okay, we start officially discussing with creditors what we need to do. They have their lawyers, we have ours, and communicate through them.

(12/25)

Here we will discuss
1. Which debt will be restructured
2. What will the relief period without payments be
3. Will the value of debt be reduced

These are difficult questions

(13/25)

By involving as much debt as possible, then the total pain is shared among more people. But then, can SL really allow domestic banks etc take a lot of pain anyway?

Creditors also wouldn't want to destroy local systems, if they do, how will they get paid back later?

(14/25)

Bilateral debt is a thorny issue - since countries don't often like to have losses on their books and no set rules to restructure either. Paris club group of countries do, but we don't have much of this.

How India/China engage is a question - maybe short term support.

(15/25)

Multilateral debt is very rarely restructured because it's really messy and makes it difficult to access support later. So it's unlikely to be a big thing for Sri Lanka since we don't have so much of that anyway.

(16/25)

So back to the commercial debt.

Relief is often given, sometimes 5 years, sometimes 10 years, where the big payments don't need to be made. Interest payments likely will continue, though maybe at a different rate. So what this looks like will be discussed.

(17/25)

Then comes haircuts. Oh haircuts, thou art so annoying.

Think of it as reducing the debt that has to be paid. Instead of paying back 100, maybe we pay back 90 or 80 or 70.

Calculated against a thing called NPV, but not relevant for overall understanding

(18/25)

But why would anyone reduce what they get paid?

Because if we keep SL in a high debt situation, it reduces chances of getting paid anything. Better to be paid in part than not at all. Remember, these creditors have already earnt a lot off Sri Lanka as well.

(19/25)

So we discuss all this. It will be hard, we have no experience with this. We'll also have to see whether we need to look at domestically held rupee debt, especially ones that are guaranteed by gov - eg- SOE.

Continuing with IMF process parallely improves confidence.

(20/25)

Then at some point, hopefully just a few months, but maybe even a year (if unlucky, even more) - we agree. We resign agreements, reorganize bonds, and we move to the next stage - recovery.

(21/25)

When it looks clear we're doing this restructure path well, the IMF would be able to come on board with us as well. Then, we also have that support.

We need to stick to it and keep recovering.

(22/25)

Once we finish the restructuring, we might need more commercial debt again to meet our immediate needs. What can help reduce this is by improving our income and sustainably reducing our expenses.

That's hard - but hopefully the IMF path continues enough to get there.

(23/25)

But because this process takes time, and we have no time to waste, no money to pay in the meantime, we need to act fast.

If we don't things look very very bleak. That's when we have all these no imports due to LCs failing issues.

(24/25)

But there's broad political and economic agreement on this path, just operationally not happening yet. I feel that the urgency will lead us to starting very soon.

On that basis, I'm optimistic that we'll avoid the worst - but we must fight through afterwards.

(25/25)