Russia, Sri Lanka And Lebanon’s Defaults Could Be The First Of Many (#GotBitcoin)

Soaring commodity prices and higher interest rates imperil the finances of many poor countries. Russia, Sri Lanka And Lebanon’s Defaults Could Be The First Of Many (#GotBitcoin)

The Economic fallout from Russia’s invasion of Ukraine now includes a sovereign default. On April 12th Sri Lanka said that it would suspend payments on the $35bn its government owes foreign creditors.

Rising inflation and higher interest rates are painful everywhere, but the stakes are particularly high in poor and middle-income countries. Food prices, which are up by nearly 20% this year, make up a greater share of consumer spending.

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Inflation is more likely to spiral out of control. And policymakers must also worry about capital flight and falling exchange-rates when the Federal Reserve raises interest rates—as it will over the next year.

As investors have priced in such tightening, the yields on ten-year Treasuries have risen by 1.2 percentage points in the past six months. That is roughly the same increase as during the “taper tantrum” of 2013, when emerging markets suffered capital flight because of a hawkish Fed.

There is no sign of a repeat retrenchment on that scale, in part because many middle-income countries now have stronger balance-sheets, and also because many emerging-market central banks have been raising interest rates to get ahead of the inflation problem.

(Brazil’s central bank has increased rates by nearly ten percentage points in little more than a year.) But investors have pulled some money out of emerging markets, and the Fed may yet have to raise rates further still.

Often higher rates in the rich world are associated with a stronger world economy, which boosts exports for emerging markets.

This time, however, America is overheating, and may face a recession as it slams the monetary brakes. Europe is being squeezed by expensive energy.

Though countries that pump oil or grow soyabeans will benefit from higher commodity prices, they must still fight inflation and cope with tighter financial conditions. Commodity importers like Sri Lanka face the sort of pressure that can unseat governments as well as disrupt the economy. Food and energy prices are fueling unrest in Tunisia and Pakistan.

Several middle-income countries face idiosyncratic crises: China is locking down to battle a coronavirus outbreak, and Argentina continues to stagger under the weight of unsustainable debts.

But the greatest vulnerability is found among the poorest economies, nearly 60% of which are in debt distress or at high risk of it, according to the World Bank. One worry is that almost a third of their total debt now carries a floating rate of interest, up from 15% in 2005, making them more exposed to monetary tightening.

It does not help that it is harder than ever to provide emergency support to struggling poor countries. In aggregate they owe more to China than to the “Paris Club” of rich governments who have typically co-operated to restructure debts. So far attempts to include China and other new lenders like Saudi Arabia and India in debt-restructuring efforts have flopped.

The IMF only lends to countries with sustainable debts, and the West does not want to see its aid being siphoned off by other creditors. Geopolitical conflict is making the poor world’s economic problems worse, and harder to resolve.

Both Sri Lanka And Lebanon Teeter On The Edge Of Default. Bitcoiners Ask, “Who’s Next?”

On 4 March 2020, just three days before Lebanon’s worst financial crisis in its history, its Government said it was “lurching from one extreme solution to another” in a bid to escape sovereign default by repaying $ 1.2 billion loan maturing in five days.

On 7 March 2020, Lebanon declared that it could not meet its debt obligations and halted the 9 March bond payment of $ 1.2 billion, setting the heavily-indebted state on course for an unprecedented sovereign default as it grappled with a major financial crisis.

Before 7 March last year, there were a number of signs of a possible sovereign default in the Middle Eastern nation, but its Government never told the public there was a possible default. Instead, it never admitted that the debt was unsustainable and it often rhetorically said it had options in hand to face it.

And that’s the nature of sovereign default if governments conceal the truth from the public. Common people will never have any idea until their government actually defaults a sovereign debt.

It was just before the sovereign default that Lebanese Prime Minister said foreign currency reserves were at a “critical and dangerous level,” adding that basic imports would soon be affected.

Before the sovereign default, Lebanon was struggling with a deep economic crisis after successive governments piled up debt following a 1975-1990 civil war with little to show for their spending spree.

Its financial collapse since 2019 is a story of how a vision for rebuilding a nation once known as the Switzerland of the Middle East was derailed by corruption and mismanagement as a sectarian elite borrowed with few restraints.

High Rise Building After War

Capital Beirut, which was levelled in the civil war between 1975-1990, rose up with skyscrapers built by international architects and swanky shopping malls filled with designer boutiques that took payment in dollars.

But Lebanon had little else to show for a debt mountain equivalent to 150% of national output, one of the world’s highest burdens. Lebanon had to borrow new money to pay existing creditors, a practice which some economists described as a “nationally regulated Ponzi scheme”.

A reduction in the dollar inflow after the start of a war in neighbouring Syria dented the country’s economic prospects, which pushed to country to seek more dollar loans. But the central bank, Banque du Liban, introduced ‘financial engineering,’ a range of mechanisms that amounted to offering banks lavish returns for new dollars.

Improved dollar flows showed up in climbing foreign reserves. What was less obvious – and is now a point of contention – was a rise in liabilities. Meanwhile, the cost of servicing Lebanon’s debt surged to about a third or more of budget spending.

The budget deficit rocketed and the balance of payments sank deeper into the red, as transfers failed to match imports of everything from staple foods to flashy cars. Lebanon imports are much higher than exports, while its economy is choked by one of the world’s largest debt burdens as a result of years of inefficiency, waste and corruption.

Ten years ago, GDP growth was ticking along at 8-9% a year in Lebanon. But that fell sharply for several reasons including the impact of war in Syria, wider regional turmoil and diminished capital flows from abroad.

No To IMF

With few sources of foreign exchange, Lebanon depended on its diaspora to remit cash to the banking system, which is then recycled to finance imports and the state deficit.

But despite increasingly high interest rates, the foreign remittance inflows slowed. This has led to a scarcity of dollars and pressure on the Lebanese local currency pound which has weakened on a black market. And the weaker pound started to push up prices and this cost of living before the default.

The Lebanese pound currency which was pegged against the US dollar at around 1,500 pounds started to depreciate since August 2019 and its black market price hit a record low of around 2,400 pounds just before the default with more than 50% depreciation. Now the currency is hovering above 17,000 pound per US dollar.

The bulk of the Government’s spending is absorbed by debt servicing and paying a bloated civil service stacked with political appointees.

Despite years of warnings about the need to reform and rein in the deficit, governments failed to act.

There were wide calls for Lebanon to seek the International Monetary Fund (IMF) financial support.

But Hezbollah, a powerful group backed by Iran, is opposed to a deal with the IMF, because it would likely seek to impose stiff fiscal conditions that could cause a popular revolt. So the Government opposed to that idea.

Unlike many Arab countries, Lebanon is not dominated by one strong ruler but has a number of leaders and parties with sway over the country’s various sectarian groups.

Critics say the political system kept the ruling caste in power indefinitely and allowed politicians to put their own interests above those of the state. Before the default, there were massive protests countrywide against Government regulations that stopped the people from withdrawing their funds from banks.

The protests are part of a broader movement that started in October 2019 in response to proposed taxes on WhatsApp, a messaging service.

The movement quickly snowballed into an anti-Government protest that forced then-Prime Minister Saad Hariri to resign. But that did not stop the protests.

Fractured Politics

The protesters accused the political elite of exploiting State resources for their own benefit through networks of patronage and clientelism that mesh business and politics. The protesters’ demands included not only removing the elite, but also overhauling the system.

Lebanon’s fractured politics was also vulnerable to foreign interference that has long fuelled domestic crises. The Government lost the public trust and that resulted in continued protests on the road. Further economic deterioration, including the risk of a sharp currency devaluation also exacerbated social tensions.

IMF officials, however, were called in later after the default to help find a solution to manage Lebanon’s overwhelming debt amid the worst financial crisis since the Mediterranean country’s brutal 1975-’90 civil war.

However, now without a new government after the last year Beirut’s port blast, Lebanon cannot secure an IMF program or international donor support, and it cannot restructure its $ 90 billion sovereign debt pile.

In summary, the sequence of what happened in Lebanon was its post-war reconstruction was derailed by a corrupt elite amid slowed remittances which were vital to balance Lebanon’s BOP.

The central bank ‘financial engineering’ kept inflows going and the Gulf halted support as the Iran’s influence in Lebanon grew. Then unfettered spending finally brought nation to its knees

Similar To Sri Lanka?

Many of the tell-tale signs in Lebanon just before the sovereign defaults are happening now in Sri Lanka.

The Government vehemently rejects claims of possible sovereign default. Despite all three international rating agencies having said the island nation’s external debt is unsustainable, the Central Bank and Finance Ministry have rejected such claims.

Central Bank Governor W.D. Lakshman last month in a lengthy statement said the Government could manage its sovereign debts and some media were just speculating.

The Government has to repay $ 1 billion principle payment on 27 July that Sri Lanka borrowed via sovereign bonds when the current Prime Minister Mahinda Rajapaksa was the president in 2011 at 6.25% yield. The Government will pay this from its dwindling foreign exchange reserves as it is unable to tap the international capital market because of higher risk premium owing to its lower credit ratings.

Sri Lanka, like Lebanon, is also struggling with a deep economic crisis after successive governments piled up debt amid a 26-year civil war. Some of its infrastructure projects, financed by foreign loans, are yet to give any substantial return on investments.

Corruption, mismanagement, wastage, and misappropriation of funds by ruling politicians have been amply reported in local media.

The debt mountain is equivalent to 101% of national output last year. The $ 81 billion economy is now borrowing new money to repay its existing creditors. The COVID-19 pandemic has wiped off its nearly 5% revenue of the GDP from tourism. The Government has announced incentives to send more remittances, put brakes on imports, and encourage the domestic economy.

The budget deficit in 2020 has risen to 11.1% of the GDP, its worst since 1988. The balance of payment (BOP) turned to a deficit last year. The country’s GDP growth has fallen to very low numbers. It contracted to its worst level last year mainly due to lockdown owing to pandemic.

The key difference is Sri Lanka’s economy has worsened in the last 16 months mainly due to the pandemic and the things would have been completely different if not for COVID-19 whereas Lebanon’s economic crisis could not be managed by its Government.

“We Have Alternatives”

Sri Lanka’s current Government is also maintaining a policy stance of not seeking IMF help because of past experience despite some Opposition members urging it to start early talks with the IMF.

“Some people wish to push us for the IMF and they know what will happen if you go for IMF. That happened to them. They went to IMF, they had to face various economic hardships,” Ajith Nivard Cabraal, State Minister in charge of money and capital markets told media last week.

“We have alternatives. Already the Government and the Central Bank are in the process of discussing these alternative and we will face and win this challenge as in the past.”

He also said the question of a possible economic collapse was coming from 2006 and it was not something new. “This has been repeatedly said and this is said with a political angle. But there are some issues though these critics will never come up with any solutions.”

With the shortage of dollar inflows, similar to Lebanon, Sri Lanka’s rupee currency has plunged in black market. It was trading around 225 rupees per dollar at the latter part of last week, though the Central Bank’s official data show the inter-bank transactions were done at around 200 rupees.

The large amount of the Government’s revenue is used for debt servicing and for the salaries of a bloated civil service stacked with political appointees. Successive governments have neglected repeated calls for reforms and to rein in the deficit.

Like Lebanon, Sri Lankans also wanted to change the political system and culture which was the reason most of them overwhelmingly voted for President Gotabaya Rajapaksa, a non-career politician.

That move came after people witnessed the plundering of State resources by politicians for decades. People still have some grim hopes that the President can do something to revive this country though their hopes are eroding fast with the Government rapidly losing public trust, mainly because of economic hardships especially in the face of COVID-19.

IMF Help For Confidence

Though there is speculation that Sri Lanka is also on the path for a sovereign default probably in 2022, some optimists say the island nation’s economic condition has not worsened to a level where Lebanon was just before declaring sovereign debt default.

The Central Bank last month was unable to raise $ 100 million to rollover Sri Lanka Development Bonds (SLDBs) and got only around 36% of what it wanted.

“It is a sad state of affairs, but it is the truth. However much the Government is trying to show the world and the people here that they have enough and more dollars with them and there is no need to panic, the reality is they were scared even to go to the market and raise the amount required to repay this debt,” Harsha De Silva, an Opposition MP and economist told media last week.

“Immediately we have to go for a debt restructuring programme. There is no doubt about that. In order to do that we have to go to the IMF to create that platform to bring everyone together.”

De Silva was a State Minister in the previous Government which went for a $ 1.5 billion IMF loan in 2016. It raised tax revenue and curbed Government expenditure with an aim of fiscal prudence under the IMF loan which instilled global investor confidence.

However, that Government became unpopular for its economic management, partly due to misinformation and fake news campaigns carried out by its main Opposition members, who are now in Government.

The current Government’s stubborn stance of not seeking IMF assistance was reflected in global investor calls held last year.

After presenting the 2021 Budget in November, a State Minister of the Government took part in two global calls with investors to explain the Budget. However, investors and analysts on the call said the Minister was unable to “convincingly respond” to the questions raised over plans for foreign debt repayment.

Rating Alarm

Just before the sovereign default, Lebanon was hit with a double downgrade by two of the world’s largest ratings agencies, Moody’s and S&P Global Ratings, dragging its sovereign credit rating further into junk territory. Sri Lanka’s credit rating has been already downgraded two notches by three global rating agencies last year and the rating is already in the junk territory.

After the rating cuts, both Sri Lanka’s Central Bank and Finance Ministry criticised all the rating agencies, charging that the decision had been based on incorrect facts.

Unlike the ousted ‘Good Governance’ administration, the current Government has yet to come up with a comprehensive plan to face the heavy external debt repayment. The Government, however, has said the upcoming Chinese-built Port City could be a game-changer once it commences operations.

Besides this, the ruling Sri Lanka Podujana Party (SLPP) is seriously looking for options to avoid any defaults and the measures include SWAP arrangements with the central banks of China, India, and Bangladesh, leasing out some prime lands in Colombo on a long-term lease, and cultivation of cannabis to export as a medicine.

Fitch Ratings in a 16 June statement said affirmation of Sri Lanka’s ‘CCC’ junk rating reflected a challenging foreign-currency sovereign external debt repayment burden over the medium term, low foreign-exchange reserves and high and rising Government debt that give rise to sustainability risks.

“External liquidity pressures have eased somewhat in recent months following bilateral loan disbursements, and our expectation of a forthcoming IMF special drawing rights (SDR) allocation,” it said.

It said a total of about $ 29 billion in foreign-currency debt obligations were due between now and 2026, against foreign exchange reserves of $ 4.5 billion as of end-April 2021. The Central Bank data showed that the Government has to repay $ 7.2 billion in the 12 months through end April 2022.

The island nation has no option of rolling over the $ 1 billion sovereign bond, maturing this month, but has to pay from the reserves.

Fitch early this month said Sri Lanka’s largest banks were the most susceptible to heightened sovereign risk due to their higher exposure to foreign-currency denominated Government securities and, in some cases, weaker capital positions.

Grappling With Pandemic

Before proving his economic policies, President Gotabaya Rajapaksa unfortunately had to deal with an unpreceded pandemic since early last year and it is still uncertain when the country will see the normalcy.

A shrinking economy, excess printing of money, excess local borrowing, higher cost of living despite moderate inflation, depleting foreign reserves, job losses, lack of foreign inflow from tourism and lack of aid from pro-West nations – all indicate that Sri Lanka is yet to come out of a possible default crisis.

“I see many issues in Sri Lanka similar to what happened in Lebanon. However, I do not see any default coming this year,” a London-based financial analyst who has been doing research on Sri Lanka’s external debts said.

“The issue is I still don’t see any concrete statement from the Government on how they are going to face the external debt repayment throughout 2026.”

Updated: 5-3-2022

Ghana At Risk Of Debt Default, Main Opposition Leader Warns

* Debt Servicing Costs Have Risen 500% From 2017, Mahama Says
* Former President Calls For Cabinet Reshuffle, Spending Cuts

Ghana’s main opposition leader and former president warned that West Africa’s second-largest economy is at risk of defaulting on its debt unless “something drastic is done.”

Total public debt increased to 351.8 billion cedis ($46.7 billion), or 76.6% of gross domestic product, at the end of last year, from 291.6 billion cedis, or 74%, at the end of 2020, according to data from the Ministry of Finance.

It stood at almost 380 billion cedis at the end of the first quarter, John Mahama, the head of the National Democratic Congress said in a lecture on Monday. Annual debt service costs have risen five-fold to about 50 billion cedis since 2016, he said.

“More than half of what government collects in taxes is used to service debt, with the remainder going almost exclusively into public-sector wages,” Mahama said. “The effect of this, is that government is unable to meet its spending obligations in the most critical sectors of the economy on which the livelihoods of millions of our people depend.”

He urged President Nana Akufo-Addo to sack his finance minister, reshuffle his cabinet, reduce expenditure and overhaul the Economic Management Team to deal with soaring debt. The government in March said it would deepen spending cuts to achieve its budget deficit targets, and it recently started collecting a tax on electronic payments.

The new tax is unlikely to make a significant contribution in resolving the nation’s problems and will have an adverse effect on Ghana’s people, Mahama said.

The opposition leader’s comments add to mounting pressure on the government to do more about Ghana’s worsening economic outlook and high living costs.

On Sunday, the Trade Unions Congress called on the government to scrap taxes on gasoline and diesel until crude prices and the cedi stabilize, and for public sector workers to be given a 20% cost of living allowance.

The inflation rate has surged to 19.4%, a more than 12-year high, and interest rates have risen by 350 basis points since November. The cedi is the worst-performing African currency against the greenback this year, depreciating by 19%, and dollar-denominated government debt is trading at distressed levels.

Mahama seeks to lead the NDC to victory in the 2024 polls after losing to Akufo-Addo of the New Patriotic Party in the 2016 and 2020 votes.

Updated: 5-22-2022

Sri Lanka Is A Small Preview Of A Global Default Crisis

The country is already wracked with shortages. The social order may shatter if the economy isn’t infused with cash soon.

High school teacher S. Jeeva has spent two days in the baking sun lining up for cooking gas in the north of Sri Lanka’s capital. He’s been standing with thousands of others waiting for a delivery that, so far, hasn’t come.

Meanwhile, many of his students, who will sit for important national exams Monday, have joined protests against the government at the waterfront along Colombo’s iconic Galle Face Green.

Both are symbols of the economic and political crisis gripping the nation — the result of decades of corruption and financial mismanagement that pushed the country to default on May 19.

It is, Jeeva says, his students’ democratic right to protest and demand a better government. Daily life has become such a struggle that it is impossible for them to study. “How can they memorize their material if they have no lights, no power, no fuel to get to school,” the 32-year-old language teacher told me.

An endless row of empty blue LPG gas cylinders lines the street next to him. These teenagers should be thinking about their future and preparing for university — instead they are worrying about how the island nation will ever emerge from under its pile of debt.

What happens in Sri Lanka matters way beyond its borders. Global markets see it as a bellwether for a raft of potential defaults across the developing world as countries face a growing, post-pandemic debt burden.

So What Does A Country In Default Look Like In 2022?

Armed soldiers are on the streets and there’s days-long queues for gasoline and cooking gas. Harvests are down by 50% because farmers either cannot afford to cultivate crops, or they’re only growing enough for themselves because there’s no fuel to transport what they’ve produced.

Pharmacies are running out of medicine; and hospitals are dangerously short of lifesaving drugs and devices. Incomes are shrinking and inflation is accelerating above 30%. Parents are eating just one meal a day so their children can have three, while doctors report that patients are rationing essential medicines for serious conditions like heart disease and diabetes.

There’s also growing unrest — protesters may not be burning down the family homes of the ruling Rajapaksa clan as they did on May 9 — but there are daily demonstrations throughout the country calling for the resignation of President Gotabaya Rajapaksa (his brother Mahinda stepped down as prime minister on May 10 after that deadly violence.)

Police and security forces are pushing back with water cannons and tear gas. It’s a tactic that risks tipping the country further toward a broader rebellion.

How did Sri Lanka go from being named by Lonely Planet the world’s best travel destination for 2019 to nearly running out of foreign reserves and defaulting on its debts? The warning signs were there from the moment the powerful Rajapaksa clan retook control of the country following a sweeping election victory in November 2019.

Their divisive dynastic politics, combined with questionable financial decisions — including heavy capital-market borrowing that now accounts for some 38% of the debt — go a long way to explaining its path to ruin.

Yes, the pandemic was a disaster for the tourism-reliant economy, and so too were the deadly Easter Sunday bombings in 2019 that ushered in a return of the Rajapaksa dynasty, but the rot had set in well before that.

Sri Lanka’s interest payments on decades of borrowing are now almost equal to the principal, as political economist and senior lecturer at the University of Jaffna, Ahilan Kadirgamar, noted.

Importantly, Sri Lanka has lost its agency — with the International Monetary Fund, the World Bank and its bilateral lenders, China, India and Japan — if it ever had any to begin with. Kadirgamar says the country has never set its own terms for its development: It has always been at the mercy of external powers. There have been 16 IMF agreements since 1965.

“This time it is much more desperate,” he told me. “We cannot even pay for the next shipment of fuel even though the ship is sitting outside our port.”

There are many other emerging-market economies with similarly unsustainable debt that are facing the possibility of default, says Kadirgamar.

“Things are unraveling across the globe, with the disruptions from Ukraine and Russia on a scale we have not seen in recent history.” The international community is watching the situation and wondering: Can Sri Lanka’s crisis be solved via a framework applicable to other countries?

In South Asia, Pakistan is teetering on the edge economic peril. If the government doesn’t increase fuel prices, it is in danger of defaulting in just three months. It needs an IMF program to avoid this eventuality.

The World Bank noted in March as many as a dozen developing economies may be unable to service their debt in the next year. The biggest challenge for these nations, it says, is sovereign debt restructuring, just like Sri Lanka.

The Group of Seven economic powers announced their support for debt relief efforts for Sri Lanka on May 19. Assistance may also come up at the Quad meeting in Tokyo on Tuesday, where the leaders of the US, Japan, India and Australia will hold talks on issues of regional concern.

In the meantime, Sri Lanka is negotiating with the IMF for a bailout that will help it negotiate debt restructuring with its creditors. The country has previously said it needs between $3 billion and $4 billion this year to pull itself out of crisis, but the true extent of its debt has yet to be exposed.

Only last week, new Prime Minister Ranil Wickremesinghe (in his sixth time serving in this role) revealed a previously undisclosed debt of $105 million to a Chinese bank that had also fallen due. That means, as Lakshini Fernando, the senior vice president and economist of Asia Securities, told me, Sri Lanka actually defaulted on $183 million, not $78 million as previously thought.

In the short term, Fernando said, the situation is only going to get worse, especially for daily wage earners who are most vulnerable to inflationary pressures.

“The only way the entire population is going to simmer down is when there is gasoline available and no more food shortages, and that is not going to happen any time soon,” she said.

But because Sri Lanka is such a small economy, a large and immediate infusion of US dollar aid could quickly stabilize the situation.

Then it will be up to the government to ensure the structural reforms are in place to ensure Sri Lanka does not find itself back at the IMF for the 18th time. And on a global scale, the international community will need to step in to try and stop the domino effect of the nation’s default rippling through any more emerging economies.

Updated: 5-27-2022

Sri Lanka Looks To Rely More On India Until Imf Funding Agreed

* Envoy In Talks With Finance Minister Sitharaman In New Delhi
* Government Needs $4 Billion To Pay For Food, Medicines, Fuel

Sri Lanka is counting on more help from India until it secures an International Monetary Fund program that’s hoped would unlock aid from other lenders to help face the worst economic crisis of its independent history.

The South Asian nation has been plagued by shortages of necessities, power cuts, and rampant inflation, which has triggered calls for the ouster of President Gotabaya Rajapaksa.

Prime Minister Ranil Wickremesinghe, who this week also took on the role of finance minister, said on May 26 that he’s looking to fast-track talks with the IMF as the nation will need about $4 billion this year from the multilateral lender and creditors including China and Japan.

Sri Lanka’s High Commissioner to India, Milinda Moragoda, met Finance Minister Nirmala Sitharaman in New Delhi on Friday and reiterated that the island nation would require bridging finance until the IMF program is finalized.

“In this context, the minister and the high commissioner explored the possibility of increasing and restructuring the assistance provided by India in the form of credits for essential commodities and fuel, as well as balance-of-payment support,” the high commission said on its Facebook page.

Sri Lanka’s central bank governor, Nandalal Weerasinghe, told a committee meeting in parliament this week that discussions with India were also ongoing for a swap facility of about $1 billion from the Reserve Bank of India.

Weerasinghe said the next three months would be the “biggest challenge” as the nation faced foreign-exchange shortages of about $500 million monthly.

While Sri Lanka expects about $800 million to be channeled from ongoing World Bank and Asian Development Bank projects toward emergency assistance over the coming six months, the nation has so far largely been dependent on Indian credit for essential imports.

Updated: 6-11-2022

Ghana Gets $1 Billion Pledge From Banks To Spur Finances

* Country Seeks To Cut Its Fiscal Deficit, Stabilize Currency
* Deal May Be Presented To Parliament For Approval Next Week

International banks have pledged to lend Ghana $1 billion for budget purposes and to boost central bank reserves as the country seeks to cut its fiscal deficit and stabilize the currency.

The West African nation raised $750 million through syndicated loans with the participation of about eight African and European banks and $250 million from multilateral lenders, according to two people familiar with the transaction, who didn’t want to be identified because the deal is not yet public. Standard Bank Group Ltd., Standard Chartered Plc and Rand Merchant Bank Ltd. led the arrangements.

The transaction is the first part of $2 billion in syndicated loans that Ghana targets to raise this year to stabilize its finances and financial markets. Ghana lost access to Eurobond markets this year due to higher debt and budget deficit levels, caused by the impact of the coronavirus pandemic.

The country, which aims to cut its budget shortfall to 7.4% of gross domestic product this year from an estimated 12.1% of GDP, will dedicate $750 million of the syndicated loans to the budget, for expenses and liability management, the people said. The rest will go to the Bank of Ghana to beef up its resources for swap deals, they said.

Ghana’s debt ratio rose to 78% of GDP at the end of March, from 66.3% of GDP a year before. The cedi lost 22% against the dollar this year compared with 1% appreciation for the same period a year ago.

The deal will likely be presented to parliament next week for approval, the people said.

The country will consider the second tranche of $1 billion in the latter part of the year, after the mid-year review of the budget and taking into account the impact of the electronic transactions levy, oil and food prices, as well as geopolitics, they said.

Finance Ministry spokeswoman Cecilia Akwetey was unable to immediately comment when contacted by phone and text message. A spokesman for the Bank of Ghana, who asked not to be identified, said he couldn’t immediately comment when contacted by phone.

Updated: 6-22-2022

Sri Lanka’s Prime Minister Says Economy Faces ‘Complete Collapse’

Leader prepares country for possible austerity measures amid negotiations for an IMF bailout.

Sri Lanka’s prime minister said its indebted economy faced complete collapse, as he laid the groundwork for what are expected to be tough austerity measures as part of negotiations over its budget and an International Monetary Fund bailout.

Sri Lankans have endured months of double-digit inflation, rolling power blackouts and acute shortages in food and medicines. A bailout from the IMF is the only option to avert an impending economic disaster, Prime Minister Ranil Wickremesinghe said.

“We are now facing a far more serious situation beyond the mere shortages of fuel, gas, electricity and food,” he said on Wednesday. “Our economy has faced a complete collapse.”

Sri Lanka is in the throes of its worst economic crisis after running out of foreign reserves to fund essential imports, a warning signal for potential financial trouble in the developing world from slowing growth and rising interest rates.

As the U.S. Federal Reserve raises interest rates, the strain in many heavily indebted emerging-market economies has been evident, with bond yields rising and some currencies hitting multiyear lows. Despite the pressure, economists say the risk for contagion—when a crisis in one economy causes investors to flee from the assets of others—appears to be contained for now.

Sri Lanka defaulted for the first time in its history last month, and an IMF delegation arrived in the country on Monday to begin discussions on possible financial assistance. Authorities this week imposed a two-week shutdown of schools and nonessential government services to conserve fuel.

Frustration has continued to swell after violent nationwide protests prompted Mr. Wickremesinghe’s predecessor, Mahinda Rajapaksa, to step down as prime minister on May 9.

Food inflation soared to 57.4% in May and lines for fuel have more than doubled in recent weeks. Across the country, lines snake for miles, with people sometimes waiting for days in searing heat to refuel at gas pumps.

Sulakshana Chalith, a 25-year-old IT worker in the southern coastal town of Ambalantota, said he parked his motorcycle in a line for three days before his local gas station was able to restock on fuel. Local media outlets have tallied as many as 11 deaths of people while waiting in line for fuel or cooking gas across Sri Lanka since late April.

“It’s getting worse day by day,” Mr. Chalith said. “Some people slept on the road.”

Sri Lanka’s president, Gotabaya Rajapaksa, has blamed the Covid-19 pandemic and the war in Ukraine—which have hurt tourism revenue and driven up commodity prices—for eroding the country’s finances.

But Sri Lanka’s financial problems had taken root earlier, economists say, stemming from an accumulation of debt on infrastructure spending and tax cuts that drained government revenue.

Crucial to securing an IMF deal is the swift restructuring of external debt, with some $35 billion owed to sovereign bondholders and bilateral creditors such as China and Japan.

Mr. Wickremesinghe said advisers from financial services company Lazard Ltd. and law firm Clifford Chance LLP were in Sri Lanka to help formulate a debt-restructuring framework, and that a high-level delegation from India and a team from the U.S. Treasury Department were set to arrive in the coming days.

He said Sri Lanka intended to enter into an official agreement with the IMF by the end of next month.

“If we receive the IMF seal of approval, the world will once again trust us,” he said. “It will help us to secure loan assistance as well as low-interest loans from other countries in the world.”

Mr. Wickremesinghe, who is also Sri Lanka’s finance minister, said the South Asian country had difficulty importing fuel because its state-owned Ceylon Petroleum Corp. already had a $700 million debt it couldn’t repay, and that it wasn’t sustainable to rely on Indian financial assistance for its fuel supply. India has provided $4 billion in financial assistance to Sri Lanka during the crisis.

“Even India will not be able to continuously support us in this manner,” he said. “Even their assistance has its limits.”

Mr. Wickremesinghe said Sri Lanka would also organize a credit aid conference led by India, Japan and China to solicit more financial assistance, and that discussions were under way with the World Bank, Asian Development Bank and the U.S. to secure interim short-term loans before securing IMF support.

The negative effects of Sri Lanka’s political turmoil and energy shortages on the country’s economy—from manufacturing to tourism—have also continued to mount. Sri Lanka’s statistics department delayed publication of the economy’s first quarter GDP data, due on Wednesday, because of staff shortages and delays in data inputs.

“We have seen businesses we have built over 25 years suffering not due to any managerial issues or our capabilities but due to poor economic management, and we feel very scared about future generations of this country,” said W.K.H. Wegapitiya, founder of diversified conglomerate LAUGFS Holdings, an importer of liquefied petroleum gas. “It’s a very depressing situation.”

Mr. Wickremesinghe called on opposition parties to support an interim budget in August and an economic recovery plan that he said would boost exports and stabilize the economy once an agreement with the IMF is reached.

Mr. Wickremesinghe said last month that the budget would cut bloated public sector expenditure “to the bone” and redirect funds earmarked for infrastructure projects into a two-year economic relief program.

The prime minister’s unvarnished assessment of what is in store, analysts said, could be designed to remind the public of the scale of the challenge and to reset expectations of swift change.

Sirimal Abeyratne, an economics professor at the University of Colombo, said Mr. Wickremesinghe was also counting on the severity of the crisis to push through much-needed economic overhauls that had been politically infeasible in the past, such as raising income taxes, cutting public-sector expenditure and breaking down state monopolies.

“If the government misses this opportunity, that will be a crime,” he said.

How Iran Tapped International Banks to Keep Its Economy Afloat

Global financial institutions handle transactions for Iran’s sanctioned companies, enabling Tehran to resist U.S. pressure, documents show.

Chinese, Middle Eastern and Western banks have provided banking services to Iran’s sanctioned energy and industrial sectors, corporate documents show, as part of Tehran’s efforts to steer capital toward its embattled economy and defy U.S. pressure to restrict its nuclear program.

Through a network of proxy companies, foreign exchange houses and intermediaries, Iran holds bank accounts that collectively transact tens of billions of dollars a year in trade that is otherwise banned under U.S. sanctions, according to Western diplomats, intelligence officials, corporate documents and bank statements.

The network was designed and implemented by Iran’s political leadership, which recognized as early as 2011 that the country needed to set up a system of sanctions-evading finance to withstand international pressure to curb its nuclear program, according to diplomats and officials as well as senior Iranian officials.

Bank statements and corporate documents reviewed by The Wall Street Journal show that HSBC Holdings PLC and Standard Chartered PLC, two of the largest banks in the world by assets, were among a slew of institutions that provided services to companies that handled banned trade on behalf of major Iranian exporters.

U.S. sanctions imposed under the Trump administration to coerce Iran into a nuclear and security deal prohibit international banks from managing accounts for Iranian companies.

Violators risk a range of penalties under U.S. and local laws and international anti-money-laundering regulations, including billion-dollar fines and the loss of access to the dollar and the world’s most important financial market. Those sanctions are intended in part to cut Iran off from the global reserve currencies vital for trade and a stable economy.

Yet the transactions conducted through international banks have provided a critical release valve from the U.S. financial pressure. They have bought Iran time to advance its nuclear program even while negotiations were under way to revive the 2015 nuclear deal that imposed limits on Iran’s nuclear development in return for relief from sanctions.

Former President Donald Trump withdrew the U.S. from the deal in 2018 and reimposed sanctions in hopes of pushing Iran into a tougher pact. President Biden has kept the sanctions in place during the talks.

The Biden administration on Thursday took a step toward tightening the pressure against Iran by levying sanctions against several firms in the United Arab Emirates and China that the Treasury Department said were front companies for Tehran’s state-owned energy giants.

According to documents and Western officials, Iranian-controlled foreign exchange houses outside the country set up proxy companies and bank accounts for them. Through those companies and their bank accounts, sanctioned Iranian companies sell their oil and other goods to foreign purchasers, receiving dollars, euros and other foreign currencies.

Iranian importers then use those funds to pay for goods the country needs to keep the economy afloat. An electronic clearinghouse run by Iran’s central bank settles those currency trades between Iranian exporters and importers.

Western intelligence officials have no evidence that the banks are complicit in permitting the sanctioned Iranian transactions. But senior bank compliance officers said companies registered outside of Iran that secretly maintain bank accounts for Iranian companies could escape controls meant to catch money laundering.

Iran’s ability to circumvent the West’s blockade on its financial system shows the limits of global financial sanctions at a time when the U.S. and European Union have sought to use their economic might to punish Russia for its invasion of Ukraine. Russian Transport Minister Vitaly Savelyev said in late March that Moscow wanted to learn from Tehran’s sanctions-evasion efforts, as the Western pressure campaign created a shortage of parts and grounded scores of commercial aircraft.

“Russia is guided by Iran’s experience,” Mr. Savelyev was quoted as saying in Russian and Iranian state-run news services.

The Journal reviewed financial transactions for scores of Iranian proxy companies in 61 accounts at 28 foreign banks in China, Hong Kong, Singapore, Turkey and the U.A.E. totaling several hundred million dollars.

Western intelligence officials say there is evidence of tens of billions of dollars of similar transactions secretly conducted throughout the global financial system. Senior U.S. officials have repeatedly warned in recent months the U.A.E, Turkey, China and other nations must crack down on sanctioned Iranian transactions or risk their own penalties.

“Iran is very sophisticated in its [sanctions] circumvention infrastructure,” said a senior compliance officer at a major global bank. “They’ve got the technology, the skills, the people, and the state sponsorship behind that.”

Iran’s sanctions-evasion system evolved from a set of policies established in 2014 under Supreme Leader Ali Khamenei, as part of an effort to armor the Iranian economy against foreign pressure campaigns.

Key to the “Resistance Economy,” as the effort was named, was the establishment of a financial system that would enable foreign trade and international finance to continue even if those sectors were sanctioned.

The mechanism and its apparatus are managed by the elite Islamic Revolutionary Guard Corps, the Central Bank of Iran, and other government institutions, according to senior Iranian officials, Iranian government websites, and the Western officials.

A representative of Iran’s mission to the United Nations rejected allegations that “Iranian entities” were engaged in money laundering, but said “it is to be reminded that Iran has every right, in accordance with international law, to break the illegal and unjust sanctions against its people.”

HSBC maintained an account in Hong Kong for a company called Scofield HK Ltd., which was registered in 2019 in Hong Kong, according to corporate and banking records reviewed by The Journal.

In July 2020, Scofield agreed to sell 198 metric tons of a petrochemical product used in plastic manufacturing to an Indian buyer that agreed to pay $170,000 into Scofield’s HSBC account.

A virtually identical invoice reviewed by The Journal issued the same date and carrying the same invoice number, buyer information, product code, quantity, sales quote and more lists the seller as Persian Gulf Petrochemical Industry Commercial Company.

The U.S. Treasury Department has described Tehran-based Persian Gulf Petrochemical as Iran’s largest petrochemical company, and has sanctioned the company for its alleged financial support of the Islamic Revolutionary Guard Corps’s engineering conglomerate.

Scofield acted as a proxy for Iranian companies, according to the Western officials, maintaining accounts at other banks, including the Industrial and Commercial Bank of China. ICBC didn’t respond to requests for comment.

Meanwhile, as recently as January 2021, a Hong Kong branch of Standard Chartered held U.S. dollar and euro denominated accounts for two Hong Kong companies that handled trade for the National Iranian Tanker Co., according to Western intelligence officials and bank documents reviewed by The Journal.

That company, a subsidiary of the National Iranian Oil Company, transports the country’s oil and other petroleum products.

A Standard Chartered spokesman said the bank can’t comment on its clients or relationships but was “committed to adhering to the highest standards of compliance.” A spokeswoman for HSBC said the bank “is committed to combating financial crime and complying with all applicable sanctions laws.”

Other banks that handled trade for Iranian firms include Commercial Bank of Dubai, founded by a former prime minister of the U.A.E. and ruler of Dubai, and the Abu Dhabi Islamic Bank, according to documents and Western intelligence officials.

The Abu Dhabi Islamic Bank said in a statement that it doesn’t comment on individual clients, but “ADIB takes all compliance matters extremely seriously and works tirelessly to adhere to them, including by making the most thorough checks prior to opening any account.”

The bank in late 2020 shut down an account held by a firm suspected of transacting sanctioned trade for Iran’s National Petrochemical Co., according to a person familiar with the matter.

Commercial Bank of Dubai didn’t respond to requests for comment.

The clandestine system of proxy companies conducting banned trade through banks outside Iran’s borders enables Tehran to keep its economy functioning. Iran’s international trade is forecast to hit a record $220 billion this year, according to the IMF, even though most is barred by international sanctions.

That suggests the banks’ compliance systems are failing to block the bulk of Iran’s activities, according to current and former Western officials.

Although some banks screen potential clients and review more than a billion transactions a month, companies working on behalf of Iranian importers and exporters set up multiple accounts across several institutions and it can take banks six months to a year to detect, evict and report them to law enforcement, banking compliance officers said.

U.S. and local laws and international anti-money-laundering rules require financial institutions to vet their clients and transactions and report any suspicious transactions to authorities such as the U.S. Treasury Department’s Financial Crimes Enforcement Network.

Authorities largely rely on the financial institutions to enforce anti-money-laundering rules because they constitute the infrastructure through which the money flows.

If those firms fail to detect and disrupt money laundering—because of complicit employees or inadequate vetting systems—they are liable for a range of penalties that include fines, loss of access to reserve currencies, sanctions and criminal charges.

“We work vigorously to counter sanctions evasion,” Secretary of State Antony Blinken said on Thursday after the Treasury Department imposed sanctions on individuals and firms it alleged were fronts for an Iranian oil smuggling operation.

The U.S. says much of the revenue generated from the state’s sale of energy products and other exports finances its military, weapons programs and foreign militia acting as Iranian proxies.

“We will not hesitate to target those who provide critical support for the [Islamic Revolutionary Guard Corps] or Hezbollah and facilitate their access to the international financial system,” he said.

Updated: 6-26-2022

Russia Defaults On Foreign Debt For First Time Since 1918

* The Grace Periods On Two Eurobond Coupons Expired On Sunday
* Russia’s Finance Minister Calls The Default Label A ‘Farce’

Russia defaulted on its foreign-currency sovereign debt for the first time in a century, the culmination of ever-tougher Western sanctions that shut down payment routes to overseas creditors.

For months, the country found paths around the penalties imposed after the Kremlin’s invasion of Ukraine. But at the end of the day on Sunday, the grace period on about $100 million of snared interest payments due May 27 expired, a deadline considered an event of default if missed.

It’s a grim marker in the country’s rapid transformation into an economic, financial and political outcast. The nation’s eurobonds have traded at distressed levels since the start of March, the central bank’s foreign reserves remain frozen, and the biggest banks are severed from the global financial system.

But given the damage already done to the economy and markets, the default is also mostly symbolic for now, and matters little to Russians dealing with double-digit inflation and the worst economic contraction in years.

Russia has pushed back against the default designation, saying it has the funds to cover any bills and has been forced into non-payment. As it tried to twist its way out, it announced last week that it would switch to servicing its $40 billion of outstanding sovereign debt in rubles, criticizing a “force-majeure” situation it said was artificially manufactured by the West.

“It’s a very, very rare thing, where a government that otherwise has the means is forced by an external government into default,” said Hassan Malik, senior sovereign analyst at Loomis Sayles & Company LP. “It’s going to be one of the big watershed defaults in history.”

A formal declaration would usually come from ratings firms, but European sanctions led to them withdrawing ratings on Russian entities. According to the documents for the notes whose grace period expired Sunday, holders can call one themselves if owners of 25% of the outstanding bonds agree that an “Event of Default” has occurred.

With the final deadline passed, focus shifts to what investors do next.

They don’t need to act immediately, and may choose to monitor the progress of the war in the hope that sanctions are eventually softened. Time may be on their side: the claims only become void three years on from the payment date, according to the bond documents.

“Most bondholders will keep the wait-and-see approach,” Takahide Kiuchi, an economist at Nomura Research Institute in Tokyo.

During Russia’s financial crisis and ruble collapse of 1998, President Boris Yeltsin’s government defaulted on $40 billion of its local debt.

The last time Russia fell into default vis-a-vis its foreign creditors was more than a century ago, when the Bolsheviks under Vladimir Lenin repudiated the nation’s staggering Czarist-era debt load in 1918.

By some measures it approached a trillion dollars in today’s money, according to Loomis Sayles’ Malik, who is also author of ‘Bankers and Bolsheviks: International Finance and the Russian Revolution.’

By comparison, foreigners held the equivalent of almost $20 billion of Russia’s eurobonds as of the start of April.

“Is it a justifiable excuse to say: ‘Oh well, the sanctions prevented me from making the payments, so it’s not my fault’?” Malik said.

“The broader issue is that the sanctions were themselves a response to an action on the part of the sovereign entity,” he said, referring to the invasion of Ukraine. “And I think history will judge this in the latter light.”

Finance Minister Anton Siluanov dismissed the situation on Thursday as a “farce.”

With billions of dollars a week still pouring into state coffers from energy exports, despite the grinding conflict in east Ukraine, he reiterated that the country has the means, and the will, to pay.

“Anyone can declare whatever they like,” Siluanov said. “But anyone who understands what’s going on knows that this is in no way a default.”

His comments were prompted by the grace period that ended on Sunday. The 30-day window was triggered when investors failed to receive coupon payments due on dollar- and euro-denominated bonds on May 27.

The cash got trapped after the US Treasury let a sanctions loophole expire, removing an exemption that had allowed US bondholders to receive payments from the Russian sovereign. A week later, Russia’s paying agent, the National Settlement Depository, was also sanctioned by the European Union.

In response, Vladimir Putin introduced new regulations that say Russia’s obligations on foreign-currency bonds are fulfilled once the appropriate amount in rubles has been transferred to the local paying agent.

The Finance Ministry made its latest interest payments, equivalent to about $400 million, under those rules on Thursday and Friday. However, none of the underlying bonds have terms that allow for settlement in the local currency.

So far, it’s unclear if investors will use the new tool and whether existing sanctions would even allow them to repatriate the money.

According to Siluanov, it makes little sense for creditors to seek a declaration of default through the courts because Russia hasn’t waived its sovereign immunity, and no foreign court would have jurisdiction.

“If we ultimately get to the point where diplomatic assets are claimed, then this is tantamount to severing diplomatic ties and entering into direct conflict,” he said. “And this would put us in a different world with completely different rules. We would have to react differently in this case — and not through legal channels.”

Russia Is Hours Away From Its First Foreign Default In A Century

* Sanctions Have Blocked Payments To Holders Of Russian Debt
* Russia Says It’s Not A Default Because It Has Enough Funds

After months of teetering on the edge of default, Russia is now just hours away from a dramatic moment in the financial battle that the US and others have waged against the Kremlin over its invasion of Ukraine.

A grace period on about $100 million of missed bond payments — blocked because of wide-ranging sanctions — ends on Sunday night. There won’t be an official declaration, and Russia is already disputing the designation, but if investors don’t have their money by the deadline, there will be an “event of default” on Monday morning, according to the bond documents.

It’s largely a symbolic development for now, given that Russia is already an economic, financial and political outcast across most of the world. But it showcases how the US, Europe and others have tightened the screws since the invasion started in February to make it all-but impossible for Russia to conduct what would otherwise be normal financial business.

For Russia, it will mark its first foreign default since the Bolshevik repudiation of Czarist-era debts in 1918. The country tipped very near to such a moment earlier this year, but managed a last-ditch escape by switching payment methods.

That alternative avenue was subsequently shut off in May — just days before the $100 million was due — when the US closed a sanctions loophole that had allowed American investors to receive sovereign bond payments.

Now the question is what happens next, as markets are faced with the unique scenario of a defaulted borrower which has the willingness and resources to pay, but can’t.

Major ratings agencies would usually be the ones to issue a default declaration, but sanctions bar them from Russian business. Bondholders could group together to make their own statement, but they may prefer to wait to monitor the war in Ukraine and the level of sanctions as they try to figure out the chance of getting their money back, or at least some of it.

“A declaration of default is a symbolic event,” said Takahide Kiuchi, an economist at Nomura Research Institute in Tokyo. “The Russian government has already lost the opportunity to issue dollar-denominated debt. Already as of now, Russia can’t borrow from most foreign countries.”

As the penalties on Russian authorities, banks and individuals have increasingly cut off payment routes, Russia has argued that its met its obligations to creditors by transferring the May payments to a local paying agent, even though investors don’t have the funds in their own accounts.

Earlier this week, it made other transfers in rubles, despite the fact that the bonds in question don’t allow that payment option.

Finance Minister Anton Siluanov has cited “force-majeure” as a justification for the currency switch, calling the situation a “farce.” The legal argument of force majeure hasn’t historically encompassed sanctions, according to lawyers who spoke to Bloomberg earlier this month.

“There is every ground to suggest that in artificially barring the Russian Federation from servicing its foreign sovereign debt, the goal is to apply the label of ‘default’,” Siluanov said Thursday. “Anyone can declare whatever they like and can try to apply such a label. But anyone who understands the situation knows that this is in no way a default.”

Russia Slips Into Historic Default As Sanctions Muddy Next Steps

* Grace Periods On Two Eurobond Coupons Expired On Sunday
* Russia’s Finance Minister Calls The Default Label A ‘Farce’

Russia defaulted on its external sovereign bonds for the first time in a century, the culmination of ever-tougher Western sanctions that shut down payment routes to overseas creditors.

For months, Russia had found paths around the penalties imposed after the Kremlin’s invasion of Ukraine. But at the end of the day on Sunday, the grace period on about $100 million of trapped interest payments due May 27 expired, a deadline considered an “Event of Default” if missed.

The route to this point has been far from normal, as Russia has the resources to pay its bills — and tried to do so — but was blocked by the sanctions. Those restrictions also mean there’s huge uncertainty about what comes next, and about how investors can go about getting their money.

“With Russia benefiting from the high price of its energy exports, it clearly has both the means and the desire to pay its foreign debt,” said Giles Coghlan, chief analyst at HYCM Group. It’s a “default in a technical sense, so many investors may be prepared to wait it out.”

Moody’s Investors Service said the missed payments constituted a default under its definition and warned that the government would likely also default on future bond payments. Moody’s and other assessment firms no longer rate Russia due to sanctions.

Given the damage already done to the economy and markets, the default is also mostly symbolic for now, and matters little to Russians dealing with double-digit inflation and the worst economic contraction in years.

But still, it’s a grim marker in the country’s rapid transformation into an economic, financial and political outcast. The nation’s eurobonds have traded at distressed levels since the start of March, the central bank’s foreign reserves remain frozen, and the biggest banks are severed from the global financial system.

Russia has pushed back against the default designation, saying it has the funds to cover any bills and has been forced into non-payment.

As it tried to twist its way out, it announced last week that it would switch to servicing its $40 billion of outstanding sovereign debt in rubles, criticizing a “force-majeure” situation it said was artificially manufactured by the West.

Russia’s last sovereign default occurred in 1998, during the nation’s financial collapse and ruble devaluation.

At the time, Russia avoided defaulting on its foreign eurobonds, although President Boris Yeltsin’s government reneged on $40 billion of ruble-denominated debt, and also missed payments on dollar notes issued by state-owned Vnesheconombank.

While those bonds were issued after an agreement with the so-called London Club in 1997 to restructure Soviet-era debt held by Western banks, they were technically obligations of Vnesheconombank rather than the Russian Federation, according to a paper published by the International Monetary Fund.

In May 1999 the government also defaulted on a Soviet-era dollar bond, known as the MinFin III that was domestically issued, but was widely held by foreign investors.

According to Lee Buchheit and Elena Daly, sovereign debt lawyers who provided advice to Russia during its 1990s restructuring, while the country did restructure some of its debt then, that didn’t include its Eurobonds at the time.

“MinFins, while denominated in dollars, were governed by Russian law and therefore could be viewed as internal debt,” they said.

The last time Russia fell into direct default vis-a-vis its foreign creditors was more than a century ago, when the Bolsheviks under Vladimir Lenin repudiated the nation’s staggering Czarist-era debt load in 1918.

By some measures it approached a trillion dollars in today’s money, according to Hassan Malik, senior sovereign analyst at Loomis Sayles & Company LP.

By comparison, foreigners held the equivalent of almost $20 billion of Russia’s eurobonds as of the start of April.

A formal default declaration would usually come from ratings firms, but European sanctions led to them withdrawing ratings on Russian entities. According to the bond documents, holders can call one themselves if owners of 25% of the outstanding bonds agree that an “Event of Default” has occurred.

Finance Minister Anton Siluanov dismissed the situation on Thursday as a “farce.”

He also said it makes little sense for creditors to seek a declaration of default through the courts because Russia hasn’t waived its sovereign immunity, and no foreign court would have jurisdiction.

“If we ultimately get to the point where diplomatic assets are claimed, then this is tantamount to severing diplomatic ties and entering into direct conflict,” he said. “And this would put us in a different world with completely different rules. We would have to react differently in this case — and not through legal channels.”

The 30-day grace period was triggered when investors failed to receive coupon payments due on dollar- and euro-denominated bonds on May 27. Bondholders have time to assess the situation: the claims only become void three years on from the payment date, according to the bond documents.

With payments blocked, Vladimir Putin introduced new regulations that say Russia’s obligations on foreign-currency bonds are fulfilled once the appropriate amount in rubles has been transferred to the local paying agent.

The Finance Ministry made its latest interest payments, equivalent to about $400 million, under those rules on Thursday and Friday. However, none of the underlying bonds have terms that allow for settlement in the local currency.

So far, it’s unclear if investors will use the new tool and whether existing sanctions would even allow them to repatriate the money.

“Is it a justifiable excuse to say: ‘Oh well, the sanctions prevented me from making the payments, so it’s not my fault’?” said Malik, who is also author of ‘Bankers and Bolsheviks: International Finance and the Russian Revolution.’

“The broader issue is that the sanctions were themselves a response to an action on the part of the sovereign entity,” he said, referring to the invasion of Ukraine. “And I think history will judge this in the latter light.”

Updated: 6-27-2022

Sri Lanka Under Virtual Lockdown With Fuel Supplies Halted For Private Cars

* Distribution To Be Limited To Essential Services Until July 10
* Prime Minister Had Said Economy Has ‘Completely Collapsed’

Sri Lanka abruptly restricted fuel supplies and told residents to stay home, raising the risk of more unrest as the government struggles to provide essential goods due to a crippling sovereign debt crisis that has rocked the country for months.

The island nation’s cabinet of ministers Monday decided to limit distribution of fuel to essential services until July 10, spokesman Bandula Gunawardena said in a televised statement, adding that inter provincial public transport would likely come to a halt.

“Port, health services, food transport will be provided petrol and diesel while all other sectors are requested to stay at home and provide services online in this difficult time,” Gunawardena said. “Our country is facing an unprecedented state of finance and foreign exchange crisis.”

Sri Lankan Prime Minister Ranil Wickremesinghe told lawmakers last week the economy had “completely collapsed,” saying the island nation is unable to purchase fuel as shortages of essentials and electricity worsen.

His government is in talks with the International Monetary Fund as well as bilateral creditors such as India and China for fresh funds to pay for imports after it defaulted on its dollar bonds earlier this year and saw foreign reserves dwindle.

The government had already closed public schools and asked civil servants to work from home to curtail transport, leaving many roads in and around the capital, Colombo, deserted over the past days, even as thousands of vehicles lined up in queues stretching for kilometers waiting for filling stations to be replenished.

Violent protests erupted in May after President Gotabaya Rajapaksa’s brother resigned as prime minister following clashes between government supporters and opponents. Although Rajapaksa has since shored up support in parliament and vowed to serve out the final two years in his term, tensions remain high.

Sri Lanka plans to allow foreign companies to distribute fuel in a bid to ease crippling shortages that have paralyzed most economic activity, Energy Minister Kanchana Wijesekera said Sunday.

The governor of the Central Bank of Sri Lanka has agreed to pay outstanding dues to companies for fuel supplies “with a plan,” the president’s office said in a statement late Monday.

President Rajapaksa also instructed officials to take “immediate action to import fuel using the existing funds available until then,” it said without elaborating.

The government is sending its envoys to Qatar and Russia this week to secure fresh supplies and is hoping for approval from India of a $500 million credit line for fuel imports.

The High Commissioner of Sri Lanka to New Delhi Milinda Moragoda met with India’s Minister of Petroleum & Natural Gas and Housing and Urban Affairs Hardeep Singh Puri in New Delhi on Monday to discuss the possibility of securing petrol and diesel supplies that are required by the island nation on an urgent basis.

Moragoda also briefed Puri on the “acute challenges that Sri Lanka is currently facing with regard to the supply and distribution of petroleum products and the severe hardships that the people are undergoing,” according to a Facebook post from the high commission.

Updated: 7-1-2022

Rising Borrowing Costs Spur Ghana To Cut Loans Plan, Tap IMF

* Interest Rate Tied To Fed’s Secured Overnight Financing Rate
* Nation Has Been Shut Out Of Eurobond Market; Needs $1 Billion

Ghana slashed its plan to borrow as much as $750 million from international banks because of surging borrowing costs, according to a finance ministry official with knowledge of the matter, and will also tap the International Monetary Fund to bolster its finances.

The West African nation will borrow $250 million from banks at an interest rate of about 8.4% to fund budget needs such as roads, railways, energy and health.

The five-year syndicated loan facility brokered by lead arrangers Standard Bank Group Ltd., Standard Chartered Plc and FirstRand Ltd.’s Rand Merchant Bank Ltd. will be repaid at the Federal Reserve’s secured overnight financing rate plus 6.85% per annum, according to a copy of the terms sent to parliament by the finance ministry and seen by Bloomberg. The SOFR stood at 1.5% as of the close on June 30.

Ghana will now borrow up to $750 million from African Export-Import Bank to meet its $1 billion target by mid-July. The seven-year loans are slightly cheaper at SOFR plus 6.25% per year, according to the document.

A finance ministry spokeswoman declined to immediately comment when reached by phone.

After failing to find cheaper sources of funding, President Nana Akufo-Addo’s government on Friday said Africa’s second-largest gold and cocoa producer will seek a bailout from the IMF.

The nation’s dollar reserves dropped to $8.3 billion at the end of April from $9.7 billion at the end of last year, according to the central bank. The country’s public debt increased to 78% of gross domestic product at the end of March from 76.6% in December.

The rate on the $250 million loan is far lower than the 23.27% yield on Ghana’s dollar bond maturing in five years, a level that locks West Africa’s second-biggest economy out of the Eurobond market. Ghana lost access this year due to higher debt and budget deficit levels, partly caused by the impact of the coronavirus pandemic.

Stitched into the loan terms is a $50 million comprehensive insurance cover from the Africa Trade Insurance Agency, that will include all principal together with interest. That will pay out the banks in the event of a default.

While Ghana aims to cut its budget shortfall to 7.4% of GDP this year from an estimated 12.1% of GDP in 2021, that is becoming more difficult after price pressures emanating from Russia’s invasion of Ukraine started to take a toll on economic activity.

The inflation rate rose to a more than 18-year high of 27.6% in May. The economy, which grew 5.4% last year, expanded less than expected in the first three months at 3.3%.

Updated: 7-4-2022

Sri Lanka Aims To Stop Money Printing As Inflation Nears 60%

Sri Lanka, which has run out of dollars to purchase fuel and is printing rupees to pay local salaries, aims to stop injecting local currency to quash Asia’s fastest inflation.

The inflation rate is estimated to reach 60%, Prime Minister Ranil Wickremesinghe told parliament Tuesday before a monetary policy review due Thursday. Talks for a bailout from the International Monetary Fund are complicated because the nation is bankrupt, he added.

Wickremesinghe now sees Sri Lanka reaching a staff-level agreement with the IMF in August, delayed from the June deadline provided earlier.

Consumer prices rose 54.6% in June from a year earlier, with transport surging 128% from the previous month and food 80% amid acute shortages of crops and crude oil. The Central Bank of Sri Lanka is on track to print more rupees in a shrinking economy this year than it did when output grew in 2021, which is also fanning costs.

Updated: 7-6-2022

Sri Lanka Is ‘Bankrupt,’ Prime Minister Says

Sri Lanka is “bankrupt,” Prime Minister Ranil Wickremesinghe said Tuesday, as the country suffers its worst financial crisis in decades, leaving millions struggling to buy food, medicine and fuel.

Wickremesinghe told lawmakers that negotiations with the International Monetary Fund (IMF) to revive the country’s “collapsed” economy are “difficult,” because the South Asian nation of 22 million has entered the talks as a bankrupt country, rather than a developing one.

“We are now participating in the negotiations as a bankrupt country. Therefore, we have to face a more difficult and complicated situation than previous negotiations,” Wickremesinghe said in parliament.

“Due to the state of bankruptcy our country is in, we have to submit a plan on our debt sustainability to (the IMF) separately,” he added. “Only when they are satisfied with that plan can we reach an agreement at the staff level. This is not a straightforward process.”

Sri Lanka is in the midst of its worst financial crisis in seven decades, after its foreign exchange reserves plummeted to record lows, with dollars running out to pay for essential imports including food, medicine and fuel.

President Gotabaya Rajapaksa tweeted Wednesday that he had sought assistance from Russian President Vladimir Putin and requested “an offer of credit support to import fuel.”

In several major cities, including Sri Lanka’s commercial capital, Colombo, hundreds continue to queue for hours to buy fuel, sometimes clashing with police and the military as they wait. Schools have been suspended and fuel has been limited to essential services.

On Sunday Sri Lanka’s energy minister, Kanchana Wijesekera, said the country had less than a day’s worth of fuel left.

“In terms of fuel and food, our country was going to have to face this crisis at some point in time. Fuel was scarce. Food prices went up,” he said, adding international crises like Russia’s war in Ukraine have made things worse.

“Due to the recent global crises, this situation has become more acute and we who were in the frying pan fell into the oven,” Wijesekera said.

On Tuesday, Prime Minister Wickremesinghe said he hoped that a report on debt restructuring and sustainability would be submitted to the IMF by August. Once there is an agreement, a comprehensive loan assistance program would be prepared for a period of four years, Wickremesinghe said.

His speech in parliament was interrupted by opposition lawmakers chanting cries of “Gota go Home” — a reference to the president, who was in attendance. Rajapaksa was seen leaving the building amid exclamations.

For months, large numbers of Sri Lankans have been calling for Rajapaksa to resign over accusations of economic mismanagement.

Wickremesinghe said that by the end of this year, inflation will rise to 60%.

“This will be a difficult and bitter journey,” Wickremesinghe said. “But we can get relief at the end of this journey. Progress can be made.”

The British government said on Tuesday it is now advising against all but essential travel to Sri Lanka due to the impact of the economic crisis.

Updated: 7-7-2022

Historic Cascade of Defaults Is Coming For Emerging Markets

Number of developing nations trading distressed has doubled, with El Salvador, Ghana, Egypt, Tunisia and Pakistan appearing particularly vulnerable.

A quarter-trillion dollar pile of distressed debt is threatening to drag the developing world into a historic cascade of defaults.

Sri Lanka was the first nation to stop paying its foreign bondholders this year, burdened by unwieldy food and fuel costs that stoked protests and political chaos. Russia followed in June after getting caught in a web of sanctions.

Now, focus is turning to El Salvador, Ghana, Egypt, Tunisia and Pakistan — nations that Bloomberg Economics sees as vulnerable to default.

As the cost to insure emerging-market debt from non-payment surges to the highest since Russia invaded Ukraine, concern is also coming from the likes of World Bank Chief Economist Carmen Reinhart and long-term emerging market debt specialists such as former Elliott Management portfolio manager Jay Newman.

“With the low-income countries, debt risks and debt crises are not hypothetical,” Reinhart said on Bloomberg Television. “We’re pretty much already there.”

The number of emerging markets with sovereign debt that trades at distressed levels — yields more than 10 percentage points above that of similar-maturity Treasuries, which can indicate investors believe default is a real possibility — has more than doubled in the past six months, according to data compiled from a Bloomberg index.

Collectively, those 19 nations are home to more than 900 million people, and some — such as Sri Lanka and Lebanon — are already in default.

At stake, then, is $237 billion due to foreign bondholders in notes that are trading in distress. That adds up to almost a fifth — or about 17% — of the $1.4 trillion emerging-market sovereigns have outstanding in external debt denominated in dollars, euros or yen, according to data compiled by Bloomberg.

And as crises have shown over and over again in recent decades, the financial collapse of one government can create a domino effect — known as contagion in market parlance — as skittish traders yank money out of countries with similar economic problems and, in so doing, accelerate their crash.

The worst of those crises was the Latin American debt debacle of the 1980s. The current moment, emerging-market watchers say, bears a certain resemblance.

Like then, the Federal Reserve is suddenly ratcheting up interest rates at a rapid-fire clip in a bid to curb inflation, sparking a surge in the value of the dollar that is making it difficult for developing nations to service their foreign bonds.

Those under the most stress tend to be smaller countries with a shorter track record in international capital markets. Bigger developing nations, such as China, India, Mexico and Brazil, can boast of fairly robust external balance sheets and stockpiles of foreign currency reserves.

But in more vulnerable countries, there’s widespread concern about what’s to come. Bouts of political turmoil are arising around the globe tied to soaring food and energy costs, casting a shadow over upcoming bond payments in highly-indebted nations such as Ghana and Egypt, which some say would be better off using the money to help their citizens.

With the Russia-Ukraine war keeping pressure on commodity prices, global interest rates rising and the US dollar asserting its strength, the burden for some nations is likely to be intolerable.

For Anupam Damani, head of international and emerging-market debt at Nuveen, there’s deep concern about maintaining access to energy and food in developing economies.

“Those are things that are going to continue to resonate in the second half of the year,” she said. “There’s a lot of academic literature and historical precedence in terms of social instability that higher food prices can cause, and then that can lead to political change.”

At The Edge

A quarter of the nations tracked in the Bloomberg EM USD Aggregate Sovereign Index are trading in distress. Of course, market trading doesn’t determine which countries will actually be able to pay in the end, and not all of them are likely to default.

The gauge has tumbled almost 20% this year, already exceeding the full-year loss it notched during the global financial crisis in 2008. Some of that, of course stems from big losses in underlying rate markets, but credit deterioration has been a major driver for the most distressed nations.

Samy Muaddi, a portfolio manager at T. Rowe Price who helps oversee about $6.2 billion in assets, calls it one of the worst sell-offs for emerging-market debt “arguably in history.”

He points out that many emerging markets rushed to sell overseas bonds during the Covid pandemic when spending needs were high and borrowing costs were low. Now that global developed-market central banks tighten financial conditions, driving capital flows away from emerging markets and leaving them with heavy costs, some of them will be at risk.

“This is an acute period of challenge for many developing countries,” Muaddi said.

Risk aversion has also spread to active traders who are snapping up insurance against default in emerging markets. The cost is lingering just below the peak seen when Russian troops invaded Ukraine earlier this year.

“Things can get worse before they get better,” said Caesar Maasry, head of emerging-market cross-asset strategy at Goldman Sachs Group Inc., in a Bloomberg Intelligence webinar. “It’s late cycle. There’s not a strong recovery to buy into.”

That’s sent foreign money managers marching out of developing economies. They pulled $4 billion out of emerging-market bonds and stocks in June, according to the Institute of International Finance, marking a fourth straight month of outflows as Russia’s invasion of Ukraine and the war’s impact on commodity prices and inflation dragged on investor sentiment.

“This could have really long-term impacts that actually change the way we think about emerging markets, and in particular, emerging markets in a strategic context,” said Gene Podkaminer, head of research at Franklin Templeton Investment Solutions. “The first thing it does is to reaffirm the reputation of emerging markets — they are volatile. There were certainly periods of time when investors perhaps had forgotten that, but it’s hard to ignore that fact now.”

Ballooning bond spreads are also a special concern for central bankers, who are seeing an increasingly stark trade-off between tightening interest rates to protect currencies and damp inflation versus staying accommodative to help keep fragile post-Covid recoveries on track.

Multilateral institutions like the International Monetary Fund have also have warned of further on-the-ground strife associated with the burden of soaring costs of living, especially where governments are ill-placed to provide a cushion for households.

Sri Lanka’s political turmoil was fanned by sweeping electricity cuts and surging inflation that deepened inequality. That’s something Barclays Plc analysts led by Christian Keller warned could be repeated elsewhere in the second half this year.

“Populations suffering from high food prices and shortages of supplies can be a tinderbox for political instability,” his team wrote in a mid-year report.

Here Is What’s Unfolding In Some Of The World’s Distressed Emerging Markets Right Now:

El Salvador

The Central American nation’s rating has been slashed by credit assessors as its dollar bonds slumped, driven by the sometimes-unpredictable policies of President Nayib Bukele. The adoption of Bitcoin as legal tender, plus moves by Bukele’s government to consolidate power, has spurred concern about El Salvador’s ability and willingness to stay current on foreign obligations — especially given its wide fiscal deficits and an $800 million bond coming due in January.

Ghana, Tunisia And Egypt

These nations are among the less-frequent and lower-rated borrowers with low reserve buffers that Moody’s Investors Service warns will be vulnerable to rising borrowing costs. The African sovereigns have relatively low amounts of foreign reserves on hand to cover bond payments coming due through 2026. That could become an issue if they are unable to roll over their maturing notes due to the increased cost of tapping foreign debt markets. Ghana is seeking as much as $1.5 billion from the IMF. Egypt has almost $4 billion due on external debt in November 2022 and another $3 billion in February 2023, according to data compiled by Bloomberg.

Pakistan

Pakistan just resumed talks with the IMF as it runs thin on dollars for at least $41 billion of debt repayments in the next 12 months and to fund imports. Reminiscent of events in Sri Lanka, protesters have taken to the streets against power cuts of as long as 14 hours that authorities have imposed to conserve fuel. While the finance minister said the nation has averted a default, its debt is trading in distressed levels.

Argentina

The South American nation is lingering in distress after the most recent of its nine defaults, which took place in 2020 during a pandemic-fueled recession. Inflation is expected to top 70% by year-end, adding to pressure on authorities to limit the flight of dollars out of the economy to control the exchange rate. At the same time, a new finance minister and political infighting between President Alberto Fernandez and his Vice President Cristina Fernandez de Kirchner have clouded the outlook for the economy ahead of elections in 2023.

Ukraine

The invasion of Russian troops has led to the exploration of debt restructuring by Ukrainian officials as the war-ravaged country’s funding options are at risk of running out, according to people familiar with the discussions. The nation has also indicated that it needs between $60 billion and $65 billion this year to meet funding requirements, billions more than its allies have so far been able to pledge. Policy makers in Kyiv are struggling to keep the budget running as the military fends off Russia’s invasion, which has destroyed cities, brought the nation’s key grain exports to a standstill, and displaced more than 10 million people. The nation also unveiled a longer-term reconstruction plan that could exceed $750 billion.

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