Lanka opts for ‘Most Favored Creditor’ clause in debt restructuring process

Sri Lanka has opted to go for a ‘Most Favored Creditor’ clause in its debt restructuring process. This clause will prevent a particular creditor group from being paid out more favourably than other creditor groups.

“On implementing this strategy the country’s listed international debt securities traded at historic lows reflecting the low likelihood that international creditors will be able to pressure the government into higher payment,” said The US Ambassador to Sri Lanka Julie Chung at the recently concluded Sri Lanka National Law Conference.

Local currency debt has already faced high depreciation against international currencies, a reduction in spending power through hyperinflation, and the imposition of a new tax regime.

This domestic debt stock has already faced the largest haircut of all state-issued liabilities. The inclusion of domestic debt stock in the remit of an additional debt restructuring effort will not result in higher payouts to international creditors.

Sri Lanka will likely look to limit the proportion of foreign-denominated debt stock and diversify the currency base in which it is issued. Moves to facilitate more Indian Rupees movement in Sri Lanka have already begun.

“It is likely that the US shall look to bolster relations with Sri Lanka,” she said.

Chung said, “In this, the 75th anniversary year of bilateral relations between Sri Lanka and the United States, the core values embodied in the legal profession are more important than ever. It’s about the people, partnership, and progress. Democracies are under strain across the globe and no democracy stands without the rule of law. You are the guardians of that precious rule.”

Given its economic, military, and political clout, the stance of the US government will play heavily in the ultimate shape of the debt restructuring process. Chung said, “since the beginning, the relationship between our countries has been based on shared democratic principles, including the importance of an independent judiciary. The United States’ support for the rights of everyday Sri Lankans to voice their concerns peacefully and participate in their government is unwavering.”