Thread by @ChayuDamsinghe

Right let's explain this and why this "default" isn't bad news, why "default" isn't a straightforward term, and what this will look like

#SriLankaEconomicCrisis #SriLanka (also tagging #GoHomeGota2022 #GoHomeGota for the reach)

(1/14)

https://twitter.com/ChayuDamsinghe/status/1513747014944665602

We've decided to suspend all USD and foreign law debt payments according to this.

That means we won't pay them, we'll collect the arrears, and we'll include all of that in an official restructuring once that begins.

(2/14)

Is this bad?

Well, it's better if we could pay everything, but we can't. So this is far better than running out of money.

But could we have gotten agreement from creditors first?

(3/14)

We could have tried but 2 issues.

1. Evidence from other countries doesn't suggest a big difference in outcomes.
2. We would have had to pay in the meantime, and no dollars to do so. Trying for agreement first could have easily gotten us to crash and burn.

(4/14)

That is what we really needed to avoid, crashing. That's where we run out of money, don't pay, and then still don't have proper process or plan.

That is terrible because we're basically flying blind, and everyone knows it.

(5/14)

But even an agreed suspension isn't very different. It would still lead to a downgrade, it would still lead to a technical default, it would still lead to the same impacts on confidence.

Why run the risk of chaos to try and get minimal gain?

(6/14)

But what happens now?

Yes, this is default, but what that means is very context specific. Now we restructure our debt and get out of the mess.

Explained this is detail before, so linking here.

https://twitter.com/ChayuDamsinghe/status/1512360478215118850

(7/14)

So wait, we're in default? Doesn't that mean everything is terrible?

We are technically in default, and will likely get downgraded to a selective/restricted default setting.

But "default" has become a dirty word, and its not all that bad.

(8/14)

Like explained earlier, what's bad is actually the terrible chaotic no plan default. THAT is really bad and hard to get out of without insane pain.

This is not that. This is in fact, a step towards a recovery and likely be seen positively instead.

(9/14)

Reason is simply, that compared to just running blind and tumbling towards a crash, now we've stopped, and given a clear plan on how to negotiate out of it.

Clearly, that's a GOOD development.

So yes, technically a default. But context matters a lot.

(10/14)

This is also unlikely to affect imports directly - because LCs are excluded from this exercise AND there's no evidence of LCs failing just because of this SORT of default in other countries

However, the underlying dollar issue is still a problem that can affect imports.

(11/14)

Rupee related loans, deposits, etc should not be affected, especially for consumers. There might be SOME impact for how the CPC/CEB/SLA etc debt is handled, but outside of that, things shouldn't affect the rupee side.

(12/14)

However, this step, however welcome, comes as part of an overall difficult process. There will be more pain from other factors in the upcoming periods, and those will still affect Sri Lanka.

But the crucial short term benefit - we have a few more dollars for imports.

(13/14)

This is not the only step that's needed, it's not going to save us all, it's not going to prevent the toughness of the future.

But it is one step that brings us out of this mess. For that I'm thankful.

(14/14)

Addendum: Please ask questions, since this is very much a key thing to understand and not panic about!