Sri Lanka’s debt trap and the vultures

7 November by Michael Roberts

Last week a US district court granted Sri Lanka’s request for a six-month pause on a creditor lawsuit against the country. Hamilton Reserve Bank holds a big chunk of one of Sri Lanka’s now-defaulted bonds and had been suing it for immediate repayment.

The court decided that there should be a pause in Hamilton’s demand for immediate repayment so that Sri Lanka could arrange a deal with other private sector creditors and bilateral lenders, as well as obtaining new funds from the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
. The IMF has been unwilling to cough up money as long as it considered Sri Lanka unable to pay back its debt obligations. It is insisting that all creditors agree to a ‘restructuring’ of existing debt before agreeing to new IMF funding (which would also be accompanied by strong ‘conditionalities’ ie fiscal austerity, privatisations etc).

The IMF, World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

and other Western creditors have claimed that what is holding up a rescheduling is China. In turn, China is refusing to agree to a deal unless all other parties are agreed on the terms, and it does not like the terms currently proposed.

In the case of Sri Lanka and many other poor peripheral countries in serious debt distress, it is regularly argued that they are in a ‘debt trap’ caused by taking loans from China to such an extent that they cannot repay them and then China insists on taking over the country’s assets to meet the bill. Indeed, US President Biden reiterated this charge only this week in a speech claiming that the West was ready to help poor countries expand their infrastructure.

This widespread charge does not hold much water. It leaks badly. First, China is not a particularly large lender to poor countries like Sri Lanka compared to Western creditors and the multi-national agencies.

In the case of Sri Lanka, Japan and the World Bank remained significant lenders at 9-10%, China has 10% too and the IMF’s proportion has shrunk to just 4%, with the UK and Germany accounting for around 1% each. All these official lenders have been replaced by mainly by commercial lenders at nearly 50%.

Second, the rise in Sri Lanka’s debt burden was not the result of China’s ‘imperialist’ debt trap, but was caused by the desperate need of the corrupt and autocratic Sri Lankan government. After the 2008 Global Financial Crisis, interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
fell globally, and Sri Lanka’s government looked to international sovereign bonds to further finance spending. But then Covid-19 hit, ravaging the tourism sector, a major source of income. Covid-19 required increased spending and increased imports of health and other products, exacerbating the trade deficit. Foreign currency reserves dropped by 70 percent, meaning less dollars to purchase essential yet increasingly expensive imports including fuel and commodities Commodities The goods exchanged on the commodities market, traditionally raw materials such as metals and fuels, and cereals. . To solve this, the government started to ‘print money’ to cover its deficits. . Inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. rocketed to 60 percent by June 2022. As the right-wing Chatham House study shows, “Sri Lanka’s debt crisis was made, not in China, but in Colombo, and in the international (i.e. Western-dominated) financial markets.”

By 2016, 61 per cent of the government’s sustained budget deficit was financed by foreign borrowing, with total government debt Government debt The total outstanding debt of the State, local authorities, publicly owned companies and organs of social security. increasing by 52 per cent between 2009 and 2016. Three-quarters of external government debt was owed to private financial institutions, not to foreign governments. Despite ample warnings about the Sri Lankan economy, foreign creditors kept lending, while the government refused to change course for political reasons. This was the real nature of the ‘debt trap’.

That brings us the Sri Lankan port project, the usual issue raised about China’s supposed ‘debt trap’. China did not propose the port; the project was overwhelmingly driven by the Sri Lankan government with the aim of reducing trade costs. To quote Chatham House, “Sri Lanka’s debt trap was thus primarily created as a result of domestic policy decisions and was facilitated by Western lending and monetary policy, and not by the policies of the Chinese government. China’s aid to Sri Lanka involved facilitating investment, not a debt-for-asset Asset Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). swap. The story of Hambantota Port is, in reality, a narrative of political and economic incompetence, facilitated by lax governance and inadequate risk management on both sides.”

In 2022, Rajapaksa was forced out of office after major popular protests but was only replaced by his close supporter, Ranil Wickremesinghe, who despite agreeing to fiscal measures with the IMF, has failed to get its approval to release funds while the debt rescheduling Debt rescheduling Modification of the terms of a debt, for example by modifying the due-dates or by postponing repayments of the principal and/or the interest. The aim is usually to give a little breathing space to a country in difficulty by extending the period of repayment and reducing the amount of each instalment or by granting a period of grace during which no repayments will be made. agreement has not been achieved.

And it is the obscure Hamilton Bank that is opposed to any agreement and instead is demanding full repayment on its holding of Sri Lankan bonds. Hamilton is what is called a ‘vulture’ fund’, buying up the ‘distressed debt’ of poor country governments at rock bottom prices and then pushing for full repayment at par (the original bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. issue price), using the blackmail of refusing to agree to any ‘restructuring’. These vulture hedge funds Hedge funds Unlisted investment funds that exist for purposes of speculation and that seek high returns, make liberal use of derivatives, especially options, and frequently make use of leverage. The main hedge funds are independent of banks, although banks frequently have their own hedge funds. Hedge funds come under the category of shadow banking. specialise in sniffing out vulnerable sovereign bonds, amassing a blocking stake, waiting patiently for a broader restructuring to take place, and holding out for full repayment once a country has secured debt relief from other creditors. It’s called being a “holdout”.

The most infamous and successful example of this strategy was by Paul Singer’s Elliott Management which managed to extract $2.4bn out of Argentina in 2016 from the right-wing Macri government. In paying Elliott off, Macri was then able to get the biggest ever IMF fund deal in history, designed to ensure that government’s position in office for a long time – although that payout was squandered and the Macri government fell. The debt crisis goes on in Argentina.

Hamilton wants to follow in Elliott’s footsteps. In a bank presentation, the bank says “suing a sovereign for non-debt payment can be a justified and lucrative business”. So Hamilton is a typical ‘vulture’ fund. The shareholder is a company called Fintech Holdings based, guess where, Puerto Rico. And behind Fintech is a Benjamin Wey, a Chinese-American, who describes himself as a “philanthropist and global financier”. In 2015, he was arrested for fraud, but charges were eventually dropped in 2017 after a federal judge threw out evidence that prosecutors had obtained in a search of his apartment and office. The New York Post dubbed Wey the “Horndog CEO” after he had to pay $18mn to an intern he had sexually harassed (later reduced to $5.65mn).

Hamilton Bank’s directors are not Wey, but Sir Tony Baldry, a former MP and aide to Margaret Thatcher, who is now chair. (For my sins I was at university with Baldry!). The CEO is Prabhakar Kaza, who is a British Conservative councillor. Hamilton is now registered in the tiny Caribbean island of St Kitts and Nevis. And Hamilton is demanding $250m in bond repayment and interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. from the Sri Lankan government. The US court has intervened on behalf of the US government and other creditors to stop Hamilton getting its pound of flesh, at least until there is a general restructuring deal that Hamilton will be forced to go along with.

Even if Hamilton is thwarted and a deal with creditors is reached, Sri Lanka will still be burdened by a huge debt liability that can only be ‘serviced’ by cuts in the already low living standards of 22m Sri Lankans. The IMF has already indicated it will encourage austerity in Sri Lanka – reducing spending and increasing taxes. Sri Lanka did not seek IMF debt relief in the 1990s or early 2000s for that reason. But now it is either Hamilton or the IMF.

Michael Roberts

worked in the City of London as an economist for over 40 years. He has closely observed the machinations of global capitalism from within the dragon’s den. At the same time, he was a political activist in the labour movement for decades. Since retiring, he has written several books. The Great Recession – a Marxist view (2009); The Long Depression (2016); Marx 200: a review of Marx’s economics (2018): and jointly with Guglielmo Carchedi as editors of World in Crisis (2018). He has published numerous papers in various academic economic journals and articles in leftist publications.
He blogs at

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