Sri Lanka: Hamilton Bank blocks debt restructuring

In the context of multiple crises, Sri Lanka had to suspend its repayments to foreign creditors in spring 2022. Since then, the Southeast Asian Island state has conducted various debt restructuring negotiations. In June 2024, Sri Lanka reached an agreement with the majority of its public creditors, including the German government.

Following extensive negotiations with the external holders of Sri Lankan government bonds, Sri Lanka also put the restructuring of these bonds to a vote at the end of November 2024: 11 bond series with a total volume of USD 12.55 billion were to be exchanged for new bonds. A bond exchange ist the typical means for restructuring bonds: New bonds are issued in exchange for the old bonds. The new bonds have adjusted conditions – such as lower interest or principal payments or longer repayment periods. This can contribute to (temporary) relief for the debtor state. However, the actual effect depends heavily on the specific conditions in the new bonds.

In the case of Sri Lanka, the relief effect of the bond exchange is very small – and insufficient from erlassjahr.de’s point of view. Even after the exchange, bondholders continue to make a higher profit on their investment in Sri Lankan bonds than if they had invested their money in US or German government bonds, for example. While the majority of bondholders agreed to this advantageous offer, Hamilton Reserve Bank continued to oppose it: since June 2022, the bank has been suing Sri Lanka for full repayment of its claims, including penalty and default interest. The bank is based in the tax haven of St. Kitts and Nevis and is obviously acting in the interests of the shady investor, Benjamin Wey.

Depending on the bond series, different approval rates were required to carry out the bond exchange. The bond in question contained older clauses that made it more difficult to restructure the bond compared to the other outstanding bonds: the exchange of the entire bond could only be carried out if at least 75 percent of the bondholders agreed to the exchange. However, with an investment volume of exactly 250.19 million US dollars of the 1 billion bond, Hamilton Reserve Bank – apparently with strategic intent – holds a blocking minority. This means that Hamilton Bank could not be outvoted and can therefore continue to sue for full repayment of the old claims in court.

The trial is currently paused until January 15. A further pause is unlikely and a judgement could be made soon. 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 can lead to restructuring agreements with other creditors becoming void. If, on the other hand, the government refuses to pay, the bank could attempt to seize Sri Lankan assets abroad, which would also be a risky and costly process for the bank. In any case, it is clear that the lawsuit will continue to keep Sri Lanka busy and in uncertainty. This alone is an obstacle to the economic recovery of the ailing island state. The consequences of this will be borne by the lowest-income and most vulnerable people in Sri Lanka, whose situation has already deteriorated continuously over the last four years and who are already unable to afford three meals a day, let alone a balanced, healthy diet.

Conclusion: The case makes it clear once again that we need clear rules for dealing with indebted states, in which the right to a life in dignity is prioritized over the right to repayment: Greedy investors like Benjamin Wey must not be allowed to determine the life chances of tens of thousands through their uncooperative behavior. We need 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.

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