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New governance-linked bond could restart debt talks
View(s):A governance-linked bond has been proposed by the group of creditors as a way of overcoming the current impasse in debt structuring talks between the
Sri Lankan Government and the Group of creditors involving US$12 billion in bond investments.
Talks between the Government and the Group of creditors at a two day session in London on March 27-28 ended inconclusively where the governance-linked bond proposal developed by Sri Lanka’s Verite Research, a top economic consulting agency, was proposed but not fully discussed.
But government negotiators were hopeful the talks would resume soon and enable the third IMF tranche to come in June.
“We feel this is the best solution to the problem and (we) made this proposal to the group of creditors who in turn submitted it at the last talks,” said Verite Research Executive Director Nishan de Mel. He said this proposal has found favour in some other countries with similar debt issues, and Sri Lanka would be the first, if accepted, to implement such a proposal in the world.
In its proposal, Verite Research said Sri Lanka’s ability to sustainably recover from its debt crisis would depend on its ability to improve governance and reduce corruption vulnerabilities. This has been the view of the Sri Lankan civil society, as well as the IMF, and the emphasis of the current IMF programme in Sri Lanka.
“If governance in Sri Lanka improves, there will be a risk-reduction dividend for bond-holders as well. Therefore, adding to Sri Lanka’s restructuring portfolio a governance-linked bond, where there is a coupon step-down in response to defined governance improvements, aligns the interests of both bond-holders and that of the country,” the proposal revealed.
It said the governance-linked bond would offer the country a transparent, popularly visible financial incentive to implement a set of measures that would foster improved financial governance and help reduce corruption. The country’s efforts to meet the criteria set out in the bond would tend to de-risk bond-holders and thereby contribute to the increase in bond prices.
It said this approach mitigated the risk of weakening governance and unsustainable economic policies leading to a reduction in the secondary market value of the bonds, allowing Sri Lanka to also benefit by splitting the benefit of lowered risk – and therefore higher secondary market prices – between the government and the bond-holders, according to the proposal.
Bond-holders would gain a “de-risking dividend” simply by the creation of such a governance-linked ESG bond for the restructure. This was because, even if the governance improvements did not fully achieve the set criteria, the partial attempts towards achieving those benchmarks would still have the effect of reducing the counterfactual risk of deteriorating governance, according to the proposal.
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