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The re-elected U.S. President Donald Trump views the war in Ukraine differently from his predecessor. He does not care about the support of a country that has been unlawfully invaded, just as he is does not care about the defense of a parliamentary democracy against an autocrat. Whether it is war or peace, he is solely interested in business opportunities for the U.S. and his billionaire friends. This shifts the focus back to Ukraine’s economic viability and, specifically, how to handle the sovereign external debt accumulated before and during the war.

Current debt situation

Ukraine receives financial support from both Western and non-Western countries in its defense against Russian aggression, part of it in the form of loans. Unfortunately, it is a common phenomen in international debt management that different firgures regarding external debt levels circulate. Ukraine is no exception. Taking the figures of the Ukrainian government: by the end of 2024, the country owed approximately $115 billion to external creditors. About $15 billion of the $115 billion was held by bondholders who had purchased high-interest Ukrainian government bonds before the war and had negotiated a debt restructuring deal with Ukraine in 2024. Private banks accounted for another $1.5 billion in debt.

Western governments have loaned Ukraine more than $7 billion, with Canada alone providing over $5 billion last year. The latest $18.3 billion loan commitment from the Biden administration is not yet included in the figures above. The largest share of Ukraine’s external debt, approximately $86 billion, is owed to multilateral creditors, including $41.6 billion to EU institutions (according to the Ukraine Support Tracker of the Kiel Institute for the World Economy), with the rest owed to various multilateral donors such as the World Bank and the International Monetary Fund (IMF).

With an estimated GDP of around $180 billion, these figures put Ukraine’s external debt-to-GDP ratio at approximately 60% by the end of 2024. Adding the latest U.S. loan commitment raises this figure to around 70%. By IMF debt sustainability standards, this is not yet alarming; some highly indebted countries in the Global South and some nations in the Global North have higher external debt ratios. However, Ukraine faces two unique challenges: (1) its continued GDP growth despite the war is primarily dependent on a steady influx of foreign funds, and (2) the massive reconstruction costs it will need after the war. If a potential ceasefire does not eliminate the risk of renewed Russian aggression, uncertainties for potential lenders and investors will remain high, meaning that reconstruction funds will have to come almost exclusively from public (external) sources.

How to handle this situation? U.S. President Trump recently put forward his own unique ideas.

Loans vs. Grants

In a conversation with French President Macron that spread through the media, Trump argued that the U.S. had contributed significantly more than European nations and that European aid was mostly provided as loans rather than grants. This is technically true: by mid-2024, nearly €42 billion of the EU’s €46 billion in financial aid to Ukraine had been provided as loans. By contrast, the $28 billion in financial support from the U.S. until 2024 had been given entirely as grants. However, this distinction has primarily little to do with the Ukraine.

Until Trump’s return to the White House, the USA generally provided support to allied countries in the form of grants. This has been a long-standing tradition in U.S. policy: foreign aid is fundamentally seen as a geostrategic investment to gain influence. Israel and Egypt, for example, have received military and economic aid from the USA exclusively as grants for decades. In return, they are highly dependent on the continued flow of U.S. support. In late 2024, the USA deviated from this tradition for the first time regarding Ukraine: $18.34 billion in financial support was provided in the form of loans—although the repayment is to be financed through profits from frozen Russian assets in Europe.

Such a grant-based practice has not been common among EU institutions (so far). The EU budget would not have been able to finance outflows that do not remain as claims in the books without restricting core tasks. However, Brussels is presumably well aware of Ukraine’s limited medium-term repayment capacity. Therefore, in the second half of 2024, the G7 countries agreed to guarantee or settle payment obligations arising from new commitments using profits from frozen assets of the Russian central bank held in the European banking system. This applies both to the approximately $18 billion already disbursed by the USA and to future funds provided by the European Commission. As Macron rightly pointed out, debt service on these European claims is not expected anytime soon, meaning they do not pose a threat to the repayment of the most recent US loans.

Mineral Deal

Unlike past U.S. policies regarding allied nations, Trump insists that the U.S. must “get something back” in return for its support—not just political loyalty and economic cooperation but tangible assets. He is particularly interested in Ukraine’s strategic minerals, such as rare earth metals, titanium, lithium, and uranium, which are believed to exist in significant quantities in Ukraine. His main goal is to counter China’s dominance in the sector.

However, knowledge about these Ukrainian reserves is still limited, and many of these rare earth deposits lie in Russian-occupied territories in the Donbas.

The exploitation of all resource deposits was to be carried out comprehensively and exclusively by an American-Ukrainian “fund”, according to the draft agreement presented by the U.S. government. Various media outlets described the proposal, submitted on February 7, as economic colonization of Ukraine by the United States.

However, in some parts of Ukraine, the proposal initially met with cautious approval. This was mainly due to two reasons. First, at least one significant deposit is located in the Donbas region, and such an arrangement could provide the U.S. with a strong incentive to push back Russian aggression. Second, Ukraine has so far barely exploited its own deposits, leading some to argue that “half of something is better than all of nothing.”

Nevertheless, both arguments have limited validity. Strategic raw materials will only become more important and valuable in the future. Instead of handing over control, it might be economically wiser for Ukraine to keep these resources in the ground and extract them later on its own terms, particularly with a view toward a self-determined post-war reconstruction. Additionally, given Trump’s close relationship with Russian President Vladimir Putin, it is possible that he could strike a deal with Russia over the Donbas deposits, bypassing Ukraine entirely.

The Ukrainian government was understandably cautious about the draft agreement and would have only considered any kind of deal in exchange for U.S. security guarantees. The reaction of the self-proclaimed “dealmaker” Trump to the failure of a lucrative business opportunity was soon witnessed by the world, when the Ukrainian president was publicly berated at the White House.

However, such a form of “compensation” for previous U.S. support is not entirely off the table. President Zelensky’s recent efforts to rebuild relations following the White House incident could bring this deal back onto the agenda—especially if it promises Ukraine greater security in return.

Reparations

Equally bizarre is another narrative promoted by the White House, which claims that the United States should receive compensation for the aid it has provided since 2022 and that military assistance should therefore be tied to unprecedented conditions. This narrative was picked up by the media as a demand for reparations, similar to those imposed after wars on defeated opponents who have caused damage in the territory of the victorial or neutral states. For example, the plan has been compared to the reparations payments imposed on Germany under the Treaty of Versailles after World War I. (Germany, however, only paid a small portion of these reparations before the Hoover Moratorium of 1932 suspended all payments, which were never resumed.)

Regardless of its economic and political rationale, such a discussion is completely irrelevant to the situation in Ukraine and its relationship with the United States. Trump is calling for “reparations” for assistance that the U.S. provided voluntarily—not out of selfless solidarity, but out of clear and self-interested political motives. The U.S. itself has suffered absolutely no damage that would require “reparation.” Moreover, Ukraine is not a defeated wartime adversary—at least until last week, it remained an undefeated ally.

What’s Next?

As it has become publicly known, a new „peace plan“ for the Ukraine is now also being discussed in Europe. It remains unclear what exactly will be proposed. Hopefully, the urgency for addressing Ukraine’s external debt situation will be taken into account. Given the contradictions among various creditors – not least the huge amount of “unrestructurable” debt by multilateral institutions -, looking at successful, extraordinary debt relief solutions from the past could be an option—such as the successful debt restructuring of Germany at the London Debt Conference in 1952/53.

Sri Lanka has voted – but the new left-wing president, Anura Kumara Dissanayake, has limited room for political maneuver. He took office promising to renegotiate the loan program with the IMF and the ongoing debt restructuring negotiations. However, just two weeks after taking office, he backed down and accepted a debt deal that heavily favors the creditors.

In Part I of the blog series, I discussed the importance of renegotiation and the social and political consequences of Dissanayake’s turnaround. In Part II, I now look at how the ongoing lawsuit between the Hamilton Reserve Bank and Sri Lanka provides insight into the complex mechanisms through which pressure was exerted on the new president.

Prehistory: Crises, Litigation and Austerity Measures

Despite multiple crises and high debt service burdens, Sri Lanka tried for a long time to pay its creditors on time and avoided debt restructuring negotiations. This changed in spring 2022, when the oil- and wheat-importing island state was once again heavily impacted by skyrocketing global prices. In April 2022, the country had no other option but to stop repayments and enter into debt restructuring negotiations.

Public creditors – including the German government – and the majority of private creditors agreed to negotiate a debt restructuring with Sri Lanka. As usual, the adoption of an IMF loan program was made a condition by the public creditors. As part of this program, Sri Lanka was obliged to meet tough austerity conditions, while debt cancellation was completely insufficient.  

However, one of the private creditors, the Hamilton Reserve Bank, refused to negotiate from the outset: In June 2022, the investment bank which is based in the tax haven of St. Kitts and Nevis filed a lawsuit at the New York court demanding full and immediate repayment of its claims.

April 2022 – July 2024: Close Cooperation Between Interim Government and International Actors

The interim government under Mont Pèlerin Society member Wickremesinghe swiftly moved forward with debt restructuring, pushing through reforms and legislative changes in parliament at record speed – all in line with the international creditors and their economic policy ideology. The Hamilton Bank’s lawsuit was therefore initially dismissed by Western states, as it risked to jeopardize the smooth progress of the debt restructuring process. The bank initially acted too boldly to fully exploit the political pressure potential inherent in such lawsuits.

Both the US government and the Paris Club Secretariat supported Sri Lanka by filing amicus curiae statements in court when the country requested a suspension of the lawsuit in July 2023 and February 2024. They argued that a judgement in favor of the bank would jeopardize the restructuring process. The US government also emphasized that a successful debt restructuring process as part of the IMF program was in its geopolitical interest. Most recently, the process was paused until August 1, 2024 by order of the court, following that argumentation.

When the suspension ended on August 1, the restructuring with the private creditors had not yet been completed. Therefore, Sri Lanka applied for a new suspension at the end of July 2024.

While the Paris Club immediately submitted a statement in February 2024 and the US government responded two weeks later, this time it took around three weeks for the Paris Club to submit a statement. For the first time, the US government did not submit a statement in support of Sri Lanka. This could be related to the fact that the change of government in the presidential elections in September was already clearly visible at that time. The left-wing candidate Dissanayake, who advocated a renegotiation of the IMF program, was clearly ahead in the polls.

August 2024: Final Act of the interim government: Making Political Change More Difficult

In August 2024, the private creditors of the bondholders’ committee, which according to their own statements “includes some of the world’s largest financial institutions”, also approached the court for the first time. In their intervention of August 28, which explicitly referred to Sri Lanka’s request for a further pause, the private creditors stated:

„Given the uncertainties relating to the upcoming presidential elections in Sri Lanka (scheduled for September 21, 2024), … the Steering Committee is concerned that delay could threaten the significant progress that has been made by Sri Lanka… The Steering Committee does not take a position on the relief sought by Sri Lanka in the Stay Motion, but the Steering Committee believes it is critical that the bond restructuring contemplated by the Joint Working Framework is launched by the middle of September 2024.”

(own emphasis)

Even if the specific aim of the intervention in relation with the Hamilton case remains unclear, it becomes obvious that the investors used all possible channels to force the completion of the restructuring before the change of government.

On September 19, 2024, two days before the presidential election, the Sri Lankan interim government reacted publicly and announced that it had reached a provisional agreement with the committee of bondholders. This was not yet a legally binding restructuring. However, by publicly announcing the provisional deal, the government of the interim president attempted to make renegotiation more difficult after the presidential election.

September 2024: A “Marxist Outsider” Wins the Election

On September 21, Dissanayake was elected with a clear majority. Shortly after the election, the IMF and the public creditors announced that they accepted the provisional agreement with the bondholders’ committee – even though private creditors would grant an estimated 21 percent less relief than public actors. This actually contradicts the principle of comparable treatment that public creditors demand in debt restructurings so that publicly granted relief does not finance private profits. The approval was a decisive step in bringing the debt rescheduling negotiations with the bondholders to a conclusion as they had been initiated before the election. This made it more difficult to restart the negotiations, as Dissanayake was still aiming to do at the time.

On October 1, the Hamilton Reserve Bank approached the court again and warned against granting the request for a further pause of debt repayments:

„For context, since Sri Lanka’s 2022 default, President Ranil Wickremesinghe’s administration had presided over restructuring negotiations with creditors and the IMF. But on September 21, 2024 … a Marxist political outsider, Anura Kumara Dissanayake, defeated President Wickremesinghe in a run-off election… Thus, while Sri Lanka has repeatedly speculated that this litigation could ‘pose severe risks to the success’ of its restructuring, after it agreed to the restructuring and an IMF program, Sri Lanka’s new leadership itself appears to present the most significant risk to these objectives… no further stay is warranted.”

(own emphasis)

Hamilton thus took up the argument previously put forward by the Sri Lankan interim government, the USA and the Paris Club and adopted by the court not for the rejection but for the granting of the previous moratoria: that the legal dispute jeopardized the debt restructuring, based on the current IMF program, and that the moratoria were necessary in order not to interrupt this – otherwise well-running – process.

October 2024: The President Caves In

On October 4, the Sri Lankan authorities then assured the court that they were still committed to the IMF program and the agreement with the bondholders’ committee and were not seeking any renegotiations:

„Hamilton Reserve Bank (HRB) speculates that Sri Lanka’s restructuring efforts have been undermined by the recent Presidential elections… HRB is misinformed… Sri Lanka remains committed to the restructuring process… the Sri Lankan authorities have confirmed their endorsement of the International Monetary Fund (“IMF”)-supported program debt targets and the September 19, 2024 agreement in principle with representatives of Sri Lanka’s international and local holders of international sovereign bonds”

(own emphasis)

The newly elected president thus buried one of his most important plans after less than two weeks.

How To Understand The President’s Reversal?

The president’s turnaround cannot only be understood in the context of the lawsuit. Shortly after the presidential elections, there have been also meetings between IMF employees and the new president. What was discussed there and in other bilateral meetings is likely to have had a significant influence on the president’s rapid change of course. Although it is not known publicly how the talks went, it is clear that the IMF and presumably also the Western and Eastern creditor states did not signal any willingness to engage in constructive re-negotiations.

In this context, the lawsuit is of interest as it shows that the support in court from Western countries was closely linked to Sri Lanka’s compliance with the IMF’s measures. If the new president had stuck to his plan and renegotiated with the IMF and the creditors or conducted the negiotiations in a more conflictual manner, Sri Lanka would probably have lacked this support in court. In addition, other private creditors might have taken legal action.

The lawsuit also threatened to send out an unpleasant signal immediately. At the time Dissanayake took office, the decision on whether to grant a further moratorium had yet to be made – which could also be linked to the fact that the US government did not submit a supporting statement this time and other states only did so with delay. A rejection by the court would not only have entailed further negative repercussions from a corresponding court dispute, but would presumably also have been a perfect opportunity for the media to portray the “Marxist” Dissanayake as incompetent in terms of economic policy and diplomacy.

What Happens Next With The Lawsuit?

The court agreed to Sri Lanka’s application on November 15, i.e. well after the president’s change of course, and paused the process until November 30, by which time the bond exchange will in all likelihood not have been finalized. It can therefore be assumed that Sri Lanka will submit another application for a moratorium at the end of November, but that the bond exchange will probably already have been carried out before the court decides on the application for a new pause.

However, it is not yet clear whether the Hamilton Reserve Bank will participate in the bond exchange. The deal is fundamentally advantageous for creditors: they do not incur any real losses and continue to achieve comparatively high returns. This is particularly true for Hamilton Bank, which bought up its bonds on the secondary market at greatly reduced prices between August 2021 and June 2022, when Sri Lanka was already deep in crisis. It is therefore quite possible that the bank will agree to the deal and drop its lawsuit. On the other hand, it took a high risk from the outset and may have already invested considerable legal costs.

However, it is uncertain whether a bond exchange is possible without the voluntary participation of the Hamilton Bank. In order to overrule the bank, a majority of 75 percent is required. According to its own information, the bank holds principal claims amounting to 250.19 million US dollars and thus exactly the necessary blocking minority of the 1 billion bond. If this information is correct and the Hamilton Bank does not voluntarily agree to a restructuring, it still has the right to enforce the full amount of its claim in court. If the bank is successful in court, the question remains as to whether the Sri Lankan government will follow the ruling – and what impact this would have on the agreement with the other creditors. An advantageous payment to individual creditors could render restructuring agreements with other creditors null and void. If, on the other hand, the government refuses to pay, the bank could attempt to seize Sri Lankan assets abroad, which would however be a risky and costly process for the bank.

Conclusion: The Right To Debt Cancellation

Once again, this process reveals the weaknesses of the current structure of the international debt architecture: in any other debt transaction, there are clear guidelines as to when claims can no longer be enforced in full and the creditor’s right to repayment must be restricted – for example, if this conflicts with the debtor’s right to a live in dignity. This does not apply to government debt, and any relief is seen as a concession by the creditor.

Binding regulations are therefore needed: An established and institutionally enforceable right to cancel unsustainable and illegitimate debts as well as laws that oblige private creditors to participate in these cancellations.

Sri Lanka has voted. However, high debt service payments and strict IMF conditions severely restrict the newly elected president’s scope for political action – with serious social consequences and the risk of undermining the population’s trust in democracy.

Elections After Two Years Of Interim Government

More than two years after the major protests of spring 2022, Sri Lanka finally held its first elections on September 21, 2024.

Despite then-President Gotabaya Rajapaksa‘s flight in response to the protests, no elections had been held until that point. Instead, an interim government was formed in 2022 under Ranil Wickremesinghe, a member of the Mont Pèlerin Society. The interim government was seen by many Sri Lankans as lacking legitimacy. Wickremesinghe suspended local elections on dubious grounds and suppressed civil protests harshly.

Wickremesinghe also sought to delay the presidential elections further, which was however prevented by the intervention of the Sri Lankan Constitutional Court.

Unsurprisingly, Wickremesinghe was voted out of office in the election at the end of September 2024. The left-wing candidate Anura Kumara Dissanayake won with over 40 percent of the first-preference votes. Dissanayake, leader of the Marxist-communist party Janatha Vimukthi Peramuna (JVP), ran as the haed of a broad alliance that included 20 other organizations, such as other political parties, youth and women’s groups, and trade unions.

Capital wins

Dissanayakes’ electoral alliance had campaigned on the basis of implementing an economic policy in the interests of low-income earners and renegotiating Sri Lanka’s loan program with the IMF and its debt restructuring process. However, less than two weeks into office, Dissanayakes’ government backtracked on these promises and announced that it would respect the deal with the IMF and would not seek to renegotiate the debt restructuring. Rather, the government wants to conclude the unfinished negotiations with the bondholders in the same way as the interim government did shortly before it resigned. A clear victory for international bondholders, who will make profits of an estimated 3.6 billion US dollars even after the restructuring.

Limited Scope For Political Action

However, achieving a noticeable improvement in the day-to-day living situation is now likely to be very difficult for Dissanayake, as the country’s high debt service severely restricts the scope for political action. Interestingly, this view is also shared by the Friedrich Naumann Foundation:

“Even though Dissanayake comes from a left-wing background, he has to face economic reality as well. (…) Fiscal reality will immediately set limits to AKD’s [= Anura Kumara Dissanayake] agenda. Sri Lanka remains under the watchful eye of international creditors and any deviation from agreed economic policies could have serious consequences.”

(own translation and emphasis)

However, it is of course not inevitable economic and fiscal “realities” that restrict Sri Lanka’s ability to act. Rather, the circumstances are based on political decisions that were clearly made in favor of the creditors in the context of debt restructuring.

If the debt restructuring is concluded as it has been initiated by the interim government as part of the IMF program, Sri Lanka will still have to spend around 26% of its government revenue on foreign debt service in the next few years. Even after the restructuring, Sri Lanka will remain among the 20 percent of countries in its income category that spend the most of their national income on debt service payments to foreign creditors. In comparison: under the debt relief initiatives of the 1990s (HIPC), repayments were limited to a maximum of 15 percent of government revenue, as anything above that was considered unsustainable. Even more conservative actors close to the IMF agree that in the case of Sri Lanka, the debt relief envisaged in the IMF program is too low and that the debt service payments jeopardize a sustainable economic recovery (see here and here, among others).

In addition, the IMF program further restricts fiscal leeway by requiring the government to achieve a primary surplus of 2.3 percent of gross domestic product. This target is by no means based on a solid empirical foundation. On the contrary, everything indicates that this requirement is counterproductive from an economic perspective.

These austerity conditions and downplaying of the need for debt cancellation in the program – rather than inherent “realities” – limit Dissanayake’s ability to invest in education, social services and health. Given these obvious weaknesses in the IMF program and the devastating social situation in Sri Lanka – the poverty rate has just worsened for the fourth year in a row – Dissanayake’s call to renegotiate the program was a reasonable one that the German government and its partner countries should have supported.

Moderate Positions

This is not least because Dissanayake – contrary to what is sometimes communicated in the international media and to what the party history of the JVP might suggest – does not represent any particularly radical, Marxist positions. In his election campaign speeches, Dissanayake affirmed that he would ensure the repayment of IMF funds in any case and emphasized that he was keen to maintain good relations with his Western and Eastern partners. There was no talk of canceling the IMF program, but merely of its renegotiation. Dissanayake was therefore committed to the “rules of the game” – primarily set by the West – and was merely trying to negotiate a fairer outcome within these conditions. Western governments and international financial institutions should have taken up this offer.

Democracy at risk

Government officials in Washington and Berlin – as well as in Beijing and New Delhi – thus bear some of the responsibility for Dissanayake’s limited fiscal leeway. If the democratically elected president is unable to fulfill his election promises as a result, his approval rating is likely to fall.

It is hardly surprising that it is in the interest of Western governments to reduce the popularity of a “Marxist” president. However, trust in democratic structures themselves threatens to erode if citizens once again experience that it makes no difference who they vote for. A worsening social situation also fuels anti-Western sentiment, as this is – justifiably – blamed on the Western-dominated international financial institutions, particularly the IMF. In Part II of the blog series, we take a closer look at the role the ongoing lawsuit with the Hamilton Reserve Bank may have played in this context.