10. April 2024


After Sri Lanka defaulted in spring 2022, the country entered into debt restructuring negotiations with its creditors. The majority of Sri Lanka’s private creditors then joined together in a creditors’ committee and submitted a restructuring proposal to Sri Lanka in October 2023. In the legal dispute with Hamilton Reserve Bank, Sri Lanka is now arguing in court that it was unable to accept this proposal as it was not compatible with the agreements with its public creditors. Furthermore, Sri Lanka has serious concerns about the structure of the so-called “macro linked bonds” demanded by the private creditors. At the same time, however, Sri Lanka emphasizes that it is open to the inclusion of such clauses, provided they are appropriately structured. In February 2024, Sri Lanka submitted a proposal to the private creditors’ committee in this regard, the details of which are not publicly known.

Dealing with uncertainty

Macro-linked bonds are clauses that automatically require countries to make more repayments to creditors if certain economic triggers occur, for example if the debtor country’s economy performs better than initially assumed at the time of negotiation. The amount of the repayment is therefore made dependent on the future economic development of a country, which is naturally difficult to estimate in advance. erlassjahr.de and others are also explicitly in favor of making interest and principal payments in debt restructuring negotiations dependent on the future real development of the debtor country (see also “Enable sufficiently comprehensive debt relief for a sustainable economic recovery!” as part of our campaign “Mit Schulden Fair Verfahren“). However, our concern is quite different: we demand that repayments must be automatically adjusted downwards if a country’s economy performs less well than assumed. After all, this scenario is unfortunately also the norm: in the past, economic development was systematically over-optimistic in the context of restructurings and the repayment capacity of debtor countries was thus inflated in the interests of creditors.

New pattern in debt restructuring negotiations

However, such an automatic downward adjustment of debt service obligations has not yet been included in any restructuring. However, the inclusion of clauses in favor of creditors is emerging as a new pattern to create an incentive for private creditors to participate in debt restructurings. Private creditors are already benefiting in two ways: firstly through high interest rates on the loans themselves and secondly through preferential servicing in the event of restructuring negotiations. The slogan “The Winner Takes All – Twice” aptly sums this up. With a view to the inclusion of the new macro-linked clauses, it is now even “The Winner Takes All – Thrice!”

It is time to put a stop to this behavior of private creditors through legal regulations!