Sri Lanka debt default ‘has begun’, says leading rating agency

sri lanka

Sri Lanka is about to default on its debts, two of the world’s largest credit rating agencies have warned.

Fitch Ratings lowered its assessment of the South Asian nation, saying “a sovereign default process has begun”.

S&P Global Ratings made a similar announcement and said that a default is now a “virtual certainty”.

This week, Sri Lanka said it will temporarily default on its foreign debts as it faces its worst economic crisis in more than 70 years.

Meanwhile, faced with mass protests over major power cuts and the soaring cost of food and fuel, officials have urged Sri Lankans working abroad to send money home.

On Monday, Sri Lanka is due to make $78m (£59.4m) of interest payments on its international sovereign bonds.

If the payment is not made within a 30-day grace period it would mark the country’s first default on its foreign debt since independence from the UK in 1948.

Fitch’s latest rating puts Sri Lanka at “near default” and indicated that its “payment capacity is irrevocably impaired”.

“We will downgrade the [rating] once a payment on an issuance is missed and the grace period has expired,” the firm said in a statement on Wednesday.

S&P also downgraded Sri Lanka “to reflect the virtual certainty of a default on some affected obligations”.

The ratings agency said it was waiting for more details on Sri Lanka’s debt restructuring plan, or confirmation that its government had failed to pay its creditors.

“We expect the government to miss paying these coupons,” S&P said in a note. A coupon is the interest payment due on a bond.

Credit ratings are intended to help investors understand the level of risk they face when buying a financial instrument, in this case a country’s debt – or sovereign bond.

On Tuesday, the Sri Lankan government said it would temporarily default on $35.5bn in foreign debt.

Its finance ministry said the impact of the pandemic and the war in Ukraine made it “impossible” to pay its creditors.

The country is due to start talks with the International Monetary Fund (IMF) next week on a loan programme to get its economy back on track.

It steeply devalued its currency last month ahead of talks with the IMF over a bailout.

  

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