Economists warn that hedge funds are holding back vital debt for crisis-hit Sri Lanka Hedge Funds

Some of the world’s most powerful hedge funds and other investors are providing vital help to crisis-hit Sri Lanka with their hard-line stance in debt relief talks after the Asian country suffered a $51bn (£42bn) bankruptcy last year, according to 182 economists and development experts from the whole world.

In a statement released to the Guardian on Sunday, the group said widespread debt cancellation was needed to give the economy a chance to recover and that Sri Lanka would be a test of the international community’s readiness to tackle the looming global debt crisis.

The group – including Indian economist Jayati Ghosh, Thomas Piketty, author of the best-selling book Capital and former Greek finance minister Yannis Varoufakis – said private sector lenders such as investment firms and hedge funds were blocking the deal.

“Sri Lanka’s debt negotiations are now at a crucial stage,” the statement said. “All lenders – bilateral, multilateral and private – must share the burden of restructuring, while securing additional financing in the near future.”

Private creditors hold nearly 40% of Sri Lanka’s external debt, mostly in the form of international government bonds, although higher interest rates on those bonds mean they receive more than 50% of external debt repayments.

“Such lenders charged a premium to lend to Sri Lanka to cover their risks, which brought them huge profits and contributed to Sri Lanka’s first default in April 2022. Lenders who benefited from higher returns due to the ‘risk premium’ must be prepared to take the consequences of that risk”.

Negotiations have been ongoing since an economic crisis forced Sri Lanka’s government to step down for the first time in the country’s history last spring.

The loan from the International Monetary Fund will only be secured once the Washington-based organization is satisfied that Sri Lanka’s debts are sustainable, but 182 economists fear a tough stance by private lenders will mean a bad deal for Colombo.

Campaign group Debt Justice said Sri Lanka is one of several countries that have defaulted on or sought debt restructuring since the start of the Covid pandemic.

Ghana became the latest country to suspend many of its external debt payments last month, following Lebanon, Suriname, Ukraine and Zambia.

“With rising global interest rates and a widespread recession expected in 2023, many more countries could follow suit,” Debt Justice said, noting that two-thirds of lower-income countries are vulnerable to debt default.

A statement by 182 economists and development experts said: “The case of Sri Lanka will provide an important indicator of whether the world – and in particular the international financial system – is equipped to deal with the increasingly pressing issues of sovereign debt relief and sustainability; and to ensure a modicum of justice in international debt negotiations.

“Therefore, it is crucial not only for the people of Sri Lanka, but also to restore faith in a multilateral system that is already under fire for its lack of legitimacy and basic sustainability.”

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