Rather than reducing the risk of future debt trouble, Sri Lanka’s macro-linked bonds set up the risk that Sri Lanka will fall back into debt trouble in 2029 or 2030.
by Brad W. Setser
Sri Lanka’s macro-linked bonds (MLBs) are, in fact, not really macro-linked bonds.
After 2027, they are standard fixed-income instruments which provide no help in the event of future shocks. The final restructuring terms are just left open until just after Sri Lanka’s IMF program ends, and the creditors and Sri Lanka have agreed that the final terms will largely be a function of Sri Lanka’s dollar GDP between 2025 and 2027.
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| A lotus tower and a walking man's reflection can be seen from a waterway in Colombo, Sri Lanka, on July 23, 2023. |
The new bonds thus aren’t true state-contingent instruments.
Payments after 2027 aren’t linked to real GDP growth, tourism inflows, or the price of Sri Lanka’s oil imports. Theorists who extol the advantages of state-contingent instruments shouldn’t be fooled. Bond traders still need to worry about the risk that the payments will reset up based on Sri Lanka’s economic performance between 2025 and 2027—a period when risks are low because Sri Lanka is more or less fully funded by the official sector. Good performance over the next few years thus creates more risk of trouble after 2028, as external debt service ratchets up during a period when Sri Lanka is expected to be back financing in the international bond market with a debt to GDP ratio of around 100%.
Brad W. Setser is the Whitney Shepardson senior fellow at the Council on Foreign Relations (CFR). His expertise includes global trade and capital flows, financial vulnerability analysis, and sovereign debt restructuring. He regularly blogs at Follow the Money.
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