Domestic Debt Restructuring (DDR): A stitch in time saves nine.
Excerpts of an interview with Dr. @NCdeMel by
@MarianneDavid24
Details why DDR should be done sooner, rather than later.
Links to full interview + paper is on the last tweet.
@CSE_Media #EconomicCrisisLK
1/10
Excerpts of an interview with Dr. @NCdeMel by
@MarianneDavid24
Details why DDR should be done sooner, rather than later.
Links to full interview + paper is on the last tweet.
@CSE_Media #EconomicCrisisLK
1/10
How to tackle a DDR?
So far #SriLanka has talked about restructuring ext debt & not domestic debt.
Our paper shows that current IMF targets for DR are unlikely to deliver a sustainable pathway for econ recovery & debt management, unless rates are brought down by over 10%.
2/10
So far #SriLanka has talked about restructuring ext debt & not domestic debt.
Our paper shows that current IMF targets for DR are unlikely to deliver a sustainable pathway for econ recovery & debt management, unless rates are brought down by over 10%.
2/10
We don’t see a path for reducing int rates adequately, given high risk in the economy & lack of confidence on financial management.
Int rates are also high because Govt has a huge borrowing appetite simply to repay what has already been borrowed.
That is a vicious cycle.
3/10
Int rates are also high because Govt has a huge borrowing appetite simply to repay what has already been borrowed.
That is a vicious cycle.
3/10
Estimated total int payment by Govt in 2023 is 7.2% of GDP. That’s unprecedented!
Only way to get back on a lower int rate path is for Govt to reduce its borrowing.
The way to do that is by reprofiling domestic debt - postponing capital repayments on maturing Govt Bonds.
4/10
Only way to get back on a lower int rate path is for Govt to reduce its borrowing.
The way to do that is by reprofiling domestic debt - postponing capital repayments on maturing Govt Bonds.
4/10
How will that happen?
That pathway is to reduce risk & reduce demand on local debt with a quick mild reprofiling.
When you reduce demand, you reduce price (= int rate), and bring a lower int cost.
That makes the debt path sustainable and less risky.
5/10
That pathway is to reduce risk & reduce demand on local debt with a quick mild reprofiling.
When you reduce demand, you reduce price (= int rate), and bring a lower int cost.
That makes the debt path sustainable and less risky.
5/10
Analytical view in the paper shows that without a pathway to substantially reduce int rates to ~2019 levels, regaining debt sustainability doesn’t play out.
IMF debt sustainability analysis is unpublished at the moment, so we are unable to compare their assumptions.
6/10
IMF debt sustainability analysis is unpublished at the moment, so we are unable to compare their assumptions.
6/10
Based on what @CBSL says in public, seems DDR is currently not on the cards.
But when you read credit assurance letters, you also understand is that it’s NOT off the cards either.
That it could be on the cards if SL doesn't manage a pathway of economic recovery.
7/10
But when you read credit assurance letters, you also understand is that it’s NOT off the cards either.
That it could be on the cards if SL doesn't manage a pathway of economic recovery.
7/10
In the case of DDR, the old adage holds:
"a stitch in time saves nine".
This paper shows that if you wait until it becomes inevitable for a DDR, it'll be harder and painful.
Then you may not be able to just reprofile - you may have to cut coupons, as well as capital.
8/10
"a stitch in time saves nine".
This paper shows that if you wait until it becomes inevitable for a DDR, it'll be harder and painful.
Then you may not be able to just reprofile - you may have to cut coupons, as well as capital.
8/10
Our view currently (based on the paper), is that DDR should be treated early, and in such a way that the treatment can be relatively mild and more easily managed.
But if you allow it to fester and wait till it is inevitable, then it may be a lot more damaging.
9/10
But if you allow it to fester and wait till it is inevitable, then it may be a lot more damaging.
9/10
This is only a summary.
Full interview:
Themorning.lk/articles/9uf0C…
@VeriteResearch paper on DDR:
Veriteresearch.org/2022/10/24/des…
If you enjoyed this:
• follow me @TheGayan for more insights on #investing
• retweet the top tweet below to share with others
10/10
Full interview:
Themorning.lk/articles/9uf0C…
@VeriteResearch paper on DDR:
Veriteresearch.org/2022/10/24/des…
If you enjoyed this:
• follow me @TheGayan for more insights on #investing
• retweet the top tweet below to share with others
https://Twitter.com/theGayan/status/1627236370669506560
10/10
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