Debt restructuring could trigger further rating downgrades: S&P

Despite a growing chorus for a restructuring of Sri Lanka’s outstanding debt, such a move could entail further rating downgrades, as it implies that investors would receive less value than what they were promised when the bonds were issued originally, according to S&P Global Ratings, which downgraded Sri Lanka’s sovereign rating to ‘CCC’ or deeper into the junk territory, last week.  

Leading economists, analysts, business leaders, different professional bodies and civil society collectives have requested the government to seek a durable and sustainable solution to the persistent foreign exchange crunch, which now appears to be going out of control.

The latest of such calls came from the Bar Association of Sri Lanka (BASL) during the weekend, as it put out a detailed statement of the economic crisis that has been in the making for decades but only came to a head during the pandemic, due to the loss of foreign currency receipts. 

“We believe that the present crisis is the crescendo of the crisis emanating from the systematic undermining of the rule of law and governance based on executive convenience and expediency rather than on institutional independence and autonomy over a long period of time by successive governments,” the statement said.

“In these circumstances, the BASL calls upon the government to seek the assistance of acknowledged independent and non-partisan experts, both domestically and internationally and also of multilateral institutions that have a proven record of providing resources financially as well as in the form of technical expertise that will enable sustainable solutions to this crisis,” it added.However, S&P Global Ratings said debt restructuring could further trim the country’s sovereign credit rating. 

“We could also lower the ratings, if the government signals its intention to restructure its outstanding commercial debt, implying that the investors would receive less value than that promised on the original securities,” the rating agency noted. 

However, in the same manner, when Sri Lanka successfully negotiates and begins the debt restructuring process, the rating agencies tend to upgrade the country’s rating based on the positive path it has taken. 

The government on Tuesday overcame its first debt hurdle of the year by settling a half-billion dollar sovereign bond, averting a major financial and economic crisis, if it had failed to honour the payment. However, it may have deepened the foreign exchange shortage in the country. Sri Lanka is running out of fuel to generate electricity, risking immediate blackouts. Power cuts will affect the smooth flow of economic activities and the daily lives of people.  However, the extension of a roughly US $ 2.4 billion worth of rescue package by the Indian government could provide some respite. 

Yet, the country’s external sector issues and the broader economic challenges run deeper, leaving the authorities with little choice but to engage with the creditors and investors of the country’s bonds, preferable with the International Monetary Fund on its side, which might unlock foreign fund flows and restore investor confidence.
When a country’s rating is already in deep junk, further downgrades wouldn’t make much of a difference. Hence, economists are urging the authorities to use the breathing space given by the Indian credit line to restructure debt, which will lessen the pain on the masses.