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Sri Lanka Govt getting ready for sovereign default?

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Jeremy

Jeremy
Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics

India holding Sri Lanka to ransom to ensure they sign the ECTA. Otherwise country will face soveign debt default for the first time in the history of Sri Lanka.

Sovereign default
A sovereign default (/ˈsɒvᵊrᵻn dɪˈfɔːlt/)[n 1] is the failure or refusal of the government of a sovereign state to pay back its debt in full. Cessation of due payments (or receivables) may either be accompanied by formal declaration (repudiation) of a government not to pay (or only partially pay) its debts, or it may be unannounced. A credit rating agency will take into account in its gradings capital, interest, extraneous and procedural defaults, failures to abide by the terms of bonds or other debt instruments. Countries have at times escaped the real burden of some of their debt through inflation. This is not "default" in the usual sense because the debt is honored, albeit with currency of lesser real value. Sometimes governments devalue their currency. This can be done by printing more money to apply toward their own debts, or by ending or altering the convertibility of their currencies into precious metals or foreign currency at fixed rates. Harder to quantify than an interest or capital default, this often is defined as an extraneous or procedural default (breach) of terms of the contracts or other instruments.

If potential lenders or bond purchasers begin to suspect that a government may fail to pay back its debt, they may demand a high interest rate in compensation for the risk of default. A dramatic rise in the interest rate faced by a government due to fear that it will fail to honor its debt is sometimes called a sovereign debt crisis. Governments may be especially vulnerable to a sovereign debt crisis when they rely on financing through short-term bonds, since this creates a situation of maturity mismatch between their short-term bond financing and the long-term asset value of their tax base.

They may also be vulnerable to a sovereign debt crisis due to currency mismatch: if few bonds in their own currency are accepted abroad, and so the country issues mainly foreign-denominated bonds, decrease in the value of their own currency can make it prohibitively expensive to pay back their foreign-denominated bonds (see original sin).[2]

Since a sovereign government, by definition, controls its own affairs, it cannot be obliged to pay back its debt.[3] Nonetheless, governments may face severe pressure from lending countries. In a few extreme cases, a major creditor nation, before the establishment of the UN Charter Article 2 (4) prohibiting use of force by states, made threats of war or waged war against a debtor nation for failing to pay back debt to seize assets to enforce its creditor's rights. For example, Britain invaded Egypt in 1882. Other examples include the United States' "gunboat diplomacy" in Venezuela in the mid-1890s and the United States occupation of Haiti beginning in 1915.[4]

Today a government which defaults may be widely excluded from further credit, some of its overseas assets may be seized;[4] and it may face political pressure from its own domestic bondholders to pay back its debt. Therefore, governments rarely default on the entire value of their debt. Instead, they often enter into negotiations with their bondholders to agree on a delay (debt restructuring) or partial reduction of their debt (a 'haircut or write-off').

Some economists have argued that, in the case of acute insolvency crises, it can be advisable for regulators and supranational lenders to preemptively engineer the orderly restructuring of a nation’s public debt- also called "orderly default" or "controlled default".[5][6] In the case of Greece, these experts generally believe that a delay in organising an orderly default would hurt the rest of Europe even more.[7]

The International Monetary Fund often lends for sovereign debt restructuring. To ensure that funds will be available to pay the remaining part of the sovereign debt, it has made such loans conditional on acts such as reducing corruption, imposing austerity measures such as reducing non-profitable public sector services, raising the tax take (revenue) or more rarely suggesting other forms of revenue raising such as nationalization of inept or corrupt but lucrative economic sectors. A recent example is the Greek bailout agreement of May 2010.

https://en.m.wikipedia.org/wiki/Sovereign_default

Teller

Teller
Moderator
Moderator

A tragedy story...how can we help to our mother land?

Sstar

Sstar
Vice President - Equity Analytics
Vice President - Equity Analytics

Our projection of net current transfers--mostly workers' remittances, of
which more than half come from the Gulf states--dropping to 7.2% of GDP
in 2016 versus an average 7.7% in the three preceding years.
A pickup in short-term capital outflows.
On the financing side, negative net portfolio inflows in 2015. We
currently do not expect a recovery before 2017.


We expect external liquidity (measured by gross external financing needs as a
percentage of current account receipts [CAR] plus usable reserves) will
average 122% over 2016-2019, compared with 111% in 2014-2015. We also forecast
that the country's external debt (net of official reserves and financial
sector external assets) will be about 143% of CAR this year but will rise
gradually to a little below 146% by 2019.

The risks associated with Sri Lanka's weak external settings had previously
been mitigated by growing reserve buffers that buttressed the country's
external resilience. We estimate, however, that Sri Lanka's gross
international reserves (excluding gold deposits) were US$5.5 billion as of
January 2016 (over two months coverage of current account payments), compared
with an average of US$8.2 billion in 2014 (3.5 months of current account
payments). These reserves include a fully drawn contingent currency-swap
facility of US$1.1 billion with the Reserve Bank of India (RBI; due for
repayment in March 2016) and the US$2.15 billion proceeds from bonds issued in
May and October 2015 (both maturing in 2025)

We believe the attendant risks could be mitigated by extending the maturity of
the currency-swap facility with the RBI, increasing a US$1.6 billion facility
with the People's Bank of China, and a US$400 million financing facility for
South Asian Association for Regional Cooperation member country Central Banks.
Securing external liquidity support from the IMF could also ease rising
external funding pressure. Other factors that mitigate Sri Lanka's external
risks include its low banking sector external borrowings and some exchange
rate flexibility (the rupee fell about 9% in 2015, although this has yet to
translate into higher export demand).

Fundamental weaknesses remain in the government's fiscal metrics. We project
annual growth in general government debt to average 6.2% of GDP for 2016-2019.
In view of Sri Lanka's robust nominal GDP growth, we expect net general
government debt to remain near current levels of close to 70% of GDP through
2019. Should the rupee depreciate further against the U.S. dollar, the net
debt ratio may rise further, given about 60% of government debt is denominated
in foreign currencies. In addition, we expect only slow progress in reducing
debt-servicing costs, which we project to account for more than 40% of
government revenue in 2016. This is the second-highest ratio among all 131
sovereigns that Standard & Poor's currently rates, second only to Lebanon (see
"Sovereign Risk Indicators," published Dec. 14, 2015; a free interactive
version is available at spratings.com/sri).

The gaps we observe in Sri Lanka's policymaking capacity partly reflect the
political uncertainty associated with two elections within seven months. We
believe this hinders responsiveness and predictability in policymaking and
weighs particularly on business confidence, investment plans, and overall
growth prospects. Elsewhere, we believe the Central Bank of Sri Lanka's (CBSL)
ability to sustain economic growth while attenuating economic or financial
shocks has improved somewhat. Although CBSL is not independent of other
policymaking institutions and we continue to consider monetary policy
credibility and effectiveness as a weakness, the central bank is building a
record of credibility, shown in reducing inflation through the use of
market-based instruments to conduct monetary policy.

Sri Lanka's growth outlook continues to be underpinned by government
investment (including rebuilding the war-torn northern districts), rising
tourist arrivals, and declining inflation, which we expect to remain in the
single digits.

We continue to expect Sri Lanka's growth prospects to be favorable. We believe
the country will most likely maintain growth in real per capita GDP of 5.5%
per year over 2016-2019 (equivalent to 6.2% real GDP growth). Stronger growth,
in our view, would require an improved business environment and a pick-up in
export markets.

Combining our view of Sri Lanka's state-owned enterprises and its small
financial system (banks' loans to the private sector account for only a third
of GDP), we view the government's contingent liabilities as limited.


OUTLOOK
The negative outlook indicates that we could lower our rating on Sri Lanka in
the next 12 months if we see no tangible signs of a substantial and sustained
reversal of the weakening of external and fiscal credit metrics we currently
project.

We may revise the outlook back to stable if Sri Lanka's external and fiscal
indicators improve significantly, or if we conclude that the strength of Sri
Lanka's institutions and governance practices is on a significant and
sustained improving trend.

DealKing
Senior Manager - Equity Analytics
Senior Manager - Equity Analytics

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Vice President - Equity Analytics
Vice President - Equity Analytics


+
-
Indian Central Bank Governor = Reserve Bank of India's Governor Dr. Raghuram Rajan in Pressure from Indian Government for Lending Sri Lanka's Yahapalanaya after March 2015 - Indian Sovereign Sources note that India will push government of Sri Lanka to get ETCA signed soon so that some 'Salary Money from Sri Lanka will come to Indians when they work as Engineers, Software Developers, Professionals in Sri Lanka' or pull out US $ 1.5 billion Currency Swap (Loan) they provided to Yahapalanaya amidst Sri Lanka's Yahapalanaya going down in Reserves and Credit Rating in a 'Crisis Created Economy' Amidst Yahapalanaya facing 'Threat' of Defaulting Financial Agreements for next three years from 2016-2019.

EquityChamp

EquityChamp
Moderator
Moderator

Every professional is expecting that this government will be on for sovereign debt default. Which has never happened in its history. Just watch out Q2 of year 2016. They all will see how Sri Lanka's foreign reserves climb up to USD 8bn. They will be amazed how the existing debts will going to be restructured. And they will be writing fantastic reports of our island nation in September 2016. Of course you will see a rise in inflation rates, a rise in policy rates as well as steep rise in government income.

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