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Sri Lanka’s bonds tumble as default worries mount

10 February 2021 06:26 am - 4     - {{hitsCtrl.values.hits}}

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REUTERS: Sri Lanka's government bonds tumbled on Tuesday as warnings that the country was at increasing risk of default continued to mount after a turbulent couple of weeks for Colombo.

Sri Lanka's bonds due for repayment between 2022 and 2028 fell around 2 cents on the dollar, leaving those maturing beyond 2025 US85227SAQ93=TE at roughly 60 cents or 40% below their face value and a level that signifies rising default fears.

The government's failure to extend a $400 billion currency swap line with India last week and an apparent lack of appetite for a new deal with the International Monetary Fund has renewed worries its finances may not cover its upcoming debt bills.

Sri Lanka's FX reserves excluding gold stood at just $5.2 billion at the end of December. Analysts at Morgan Stanley calculate it faces $4.6 billion worth of bond redemptions this year alone plus another $500 million payment in January 2022.

"Based on where current Sri Lankan bonds are trading, it would appear that markets are clearly factoring in the probability of maturity extension as well as the possibility of lowering of coupon rates," Morgan Stanley said.

Sri Lanka's central bank has repeatedly said it will make all it bond payments. Any delay or changes are usually classed as a default in the eyes of credit rating agencies.

Though investors didn't seem to pricing in an actual writedown of the original bond loan, something known as a 'haircut' in banker speak, that could still need to happen too Morgan Stanley added.

"We still don't think that a large principal haircut would be needed – in fact just enough to offset the rise in leverage on the back of FX depreciation".

All the tell-tale crisis signs have been building over the last year: a tumbling currency, credit rating downgrades, debt-to-GDP levels nearing 100% and almost 70% of government revenues being spent on interest payments alone. couple of things that could help Colombo are a touted $1.5 billion currency swap line with China to offset the loss of the India one.

It could also gain breathing space if the IMF gets the green light later this month to increase its Special Drawing Rights (SDR) that govern how much of its money governments can tap.

An overall $500 billion SDR increase is being discussed for the IMF which could result in a $609 million allocation for Sri Lanka, Morgan Stanley estimated.

"Concerns have increased following the settlement of the swap line given the level of foreign exchange reserves," said Raza Agha, head of emerging markets credit strategy at Legal & General Investment Management

"Sri Lanka can probably muddle through for the time being but they need external support."

  Comments - 4

  • brainmaster Wednesday, 10 February 2021 06:09 PM

    very bad black clouds over SL China as a helper could be a dangerous option, at what costs ??

    Chula Rajapakse Friday, 12 February 2021 02:19 AM

    Having inherited the economy that they did from Yahapalana on the back of an Easter Sunday attack on the tourist industry thanks to the contemptible mismanagement of the same Y’s and then having been hit by COVID-19 , “having to muddle through their bond obligations”, could still be an achievement . My biggest concern is that misguided sections of the governments own supporters don’t recognize the difference between “selling off assets to foreign interests” and “ receiving foreign investments”, cleverly exploited by the political opposition,as seen during the agitation against Indian investment in the construction of theEaster terminal of the Colombo Harbour, drives off the much needed latter.

    Ranjith Friday, 12 February 2021 05:25 AM

    External support : Of course China. Burmese military was supported in UN by China recently. Srilanka can expect nothing less than that in UNHRC. China can give a long term loan too.

    Seb Sunday, 14 February 2021 06:29 AM

    I only invest in crypto


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