Sri Lanka’s move to suspend payment was classified as a default


Sri Lanka was downgraded to junk by Fitch Ratings as the nation’s decision to suspend payments on its external debt triggered a sovereign bankruptcy process.

itch Ratings downgraded the country’s long-term foreign currency to C, one notch above the default. Previously, S&P had also lowered the country’s score to CC, the third-lowest rating.

The decisions come amid widespread social and political unrest, which prompted the government on Tuesday to announce it would default on its external debt to save foreign exchange for essential imports like food and fuel.

“There are limited upside scenarios for the ratings at this time,” S&P analysts Andrew Wood and Rain Yin wrote in a statement yesterday.

The company warned it could downgrade Sri Lanka to selective default if it “confirms that the government has missed a coupon or principal payment on commercial foreign currency debt.”

S&P said Sri Lanka’s next interest payments are due Monday April 18 and failure to meet them will likely result in a default, as will a full debt restructuring.

Fitch said a sovereign bankruptcy process has begun and will reduce the country to RD once a payment fails and the grace period expires.

While the Sri Lankan authorities said they want to accelerate talks with the International Monetary Fund, S&P said negotiations appear to be at an early stage. Political uncertainty could also complicate efforts to reach an IMF deal and debt restructuring plan, analysts wrote.

“Sri Lanka’s debt restructuring process will likely be complicated and take months to complete,” Wood and Yin wrote.

The country is rated Caa2 by Moody’s Investors Service, at the lower end of the scale.

S&P has a negative outlook on the country’s creditworthiness, reflecting high default risk given the country’s economic, fiscal and external pressures.

Sri Lanka was rocked by power outages, food shortages and a free-fall currency as protests erupted and cabinet members resigned. Demands for the resignation of President Gotabaya Rajapaksa and his brother, Prime Minister Mahinda Rajapaksa, have grown louder as inflation drives up food and fuel costs.

Tuesday’s announcement was seen as a “last resort” by the Treasury Department as the country seeks to avert lasting damage to its economy. Sri Lanka’s move to suspend payment was classified as a default

Fry Electronics Team

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