Sri Lanka bonds hammered by default worries

(LONDON) REUTERS: Sri Lankan government bonds tumbled heavily yesterday, a day after one of the main credit rating agencies, Moody’s, warned about the mounting pressure on the country’s finances.

The government bonds fell as much 3.7 cents on the dollar ballooning the “spread” - bond markets speak for risk premium to 1,300 basis points.

Only basket cases such as Venezuela and Lebanon, or countries like Zambia, Belize and Argentina, which are either going into or coming out of debt restructurings, have larger spreads.

“It is definitely the rating action (that has caused the fall in bonds),” said Richard Briggs, an emerging market portfolio manager at GAM.

“But it has been rough over the last couple of weeks,” he added, referring to suggestions from some Sri Lankan ministers that the country might try to avoid a new IMF programme and a broader sell-off in emerging markets.

Moody’s on Monday downgraded Sri Lanka to Caa1, one of the last rating rungs before default, warning the coronavirus-induced shock will “significantly weaken” its “already fragile funding and external positions” and send debt-to-gdp to 100 percent.

Sri Lanka’s Ministry of Finance called the move a “reckless reaction” and “unwarranted” based on “erroneous” analysis, adding that it had repeatedly expressed both its “ability and willingness” to pay all its debt obligations.

External debt payments between now and December amount to US$ 3.2 billion. Other costs could bring that up to US$ 6.5 billion in the next 12 months, Morgan Stanley estimates, and with FX reserves of just US$ 7.4 billion, it has described the situation as a “tightrope walk”.