Coordinating Fragmented Creditors to Restructure Sovereign Debt: the Case of Sri Lanka

2025-06-26T00:00:00+02:00

On 12 April 2022, with an already precarious debt situation exacerbated by the COVID-19 pandemic, Sri Lanka announced that it was defaulting on its external debt. The deterioration in the country’s economic situation led Sri Lanka to negotiate an agreement with the IMF for a $2.9-billion Extended Fund Facility for the 2023-2027 period to support a reform programme.

In the wake of the COVID-19 pandemic, the G20 and the Paris Club adopted a Common Framework to coordinate debt restructuring for low-income countries, but Sri Lanka – a middle-income country when it defaulted – did not qualify. Nevertheless, the Common Framework’s coordination channels served to set up an ad-hoc Official Creditor Committee (OCC) co-chaired by France, India and Japan and including Paris Club creditors, India and Hungary, which accounted for 16% of the external debt stock. At the same time, a “flexible” coordination arrangement was put in place with China, which held 11% of Sri Lanka’s external debt stock.

The bondholders, accounting for 32% of the foreign creditors, restructured their securities by introducing an innovative financial instrument indexed to Sri Lanka’s GDP growth called macro-linked bonds. This contingent debt treatment complicated the official creditors’ assessment of effective terms of treatment from the private creditors at least equal to those of the official creditors (“comparability of treatment”).

Sri Lanka’s experience demonstrates the possibility of coordination with China outside of the Common Framework in order to proceed in parallel with debt treatment and prevent delays with the IMF-supported programme. Timely and regular discussions with bondholders also served to rapidly reach an agreement on debt treatments compliant with both IMF programme targets and the principle of comparability of treatment.

The Market for Safe Assets

2023-08-29T00:00:00+02:00

The holding of so-called “safe” assets, and the market for these securities more broadly, play a key role in maintaining financial stability. Yet there is no consensus as to how these assets are defined because the “safety” of a security depends on a number of different characteristics such as its stability, counter-cyclicality and liquidity, how transparently it is valued, and how solid its fundamentals are. The relative importance of these aspects varies according to investor preferences and financial-market conditions.

By examining how different asset classes perform against different safety criteria, it is possible to identify a universe of assets that can be considered “safe”, and to analyse developments in the market for these assets over the past two decades.

The supply of safe assets grew sharply in the 2010s, owing in part to sovereign bond issues. However, these assets became less readily available as central banks, especially in Europe, embarked on bond-buying programmes as part of a broader package of unconventional monetary policy measures. Despite increased supply, safe assets remained hard to come by throughout this period, as demand surged in both Europe and the United States, owing largely to the introduction of tighter prudential requirements in the wake of the 2008 financial crisis.

Globally, the market imbalance caused by these opposing forces has been partly redressed since the COVID-19 crisis of 2020, owing in large part to sovereign debt issues intended to fund pandemic support packages, which have had the effect of bringing the supply of safe assets into closer alignment with demand.

Looking ahead, the market could be affected by a number of major structural trends. Factors that could impact supply include the reshaping of the safe assets landscape amid the green transition, debt sustainability issues, rating downgrades and reform of the international monetary system. Meanwhile, demand could be influenced by developments such as the roll-back of unconventional monetary policy measures and changes to regulatory standards, especially those relating to non-bank financial institutions (NBFIs).

Trésor-Info - Publications de la direction générale du Trésor - Sovereign-Debt

Coordinating Fragmented Creditors to Restructure Sovereign Debt: the Case of Sri Lanka

The Market for Safe Assets