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In a recent televised interview, Nishan de Mel, the Executive Director of Verité Research, highlighted the significant concerns raised by holders of Sri Lanka’s International Sovereign Bonds (ISBs) regarding the country's debt sustainability analysis conducted alongside the IMF. Central to the disagreement are the GDP growth projections, with bondholders expressing belief in the underestimation of Sri Lanka's economic potential. This perception directly impacts negotiations, as higher GDP growth implies greater capacity for debt repayment, a point bondholders assert in seeking higher payments.
Dr. de Mel emphasized Sri Lanka's acknowledgment of the potential for higher repayments if GDP surpasses forecasts but also its stance on seeking flexibility in payments should growth fall short of IMF estimates. The discrepancy between the higher payments offered by Sri Lanka and the expectations of bondholders remains a key point of contention, revolving around differing growth projections. Despite this, Dr. de Mel urged calm, characterizing such disagreements as natural within the negotiation process, given the inherent challenges of forecasting.
Moreover, Dr. de Mel introduced an innovative approach to debt restructuring known as the Governance-Linked Bond, which Verité Research will present at an upcoming conference in Paris. This novel structure aims to link coupon reductions to specific governance milestones, making the bond "index eligible" and potentially more appealing to bondholders. This contrasts with other proposed instruments like the GDP-Linked Bond, underscoring the importance of criteria such as improving sustainable recovery probabilities, observability, and public support in designing effective governance-linked instruments for debt restructuring.
