Private investors from rich nations are profiting from about $ 24.8 billion in sovereign bond debt issued by some of Asia’s poorest and most climate-vulnerable countries including Sri Lanka, a London-based development policy research institution said.
Accordingly, ahead of the World Bank and the International Monetary Fund’s (IMF) annual meetings on 9 October, the International Institute for Environment and Development (IIED) said that more than 80% of all bond debt is held by private investors in wealthier countries such as investment funds, mutual funds and private banks, based on a 2020 JPMorgan report on growing private investments in emerging markets.
Sri Lanka, Pakistan, Mongolia, Vietnam and Laos, which have some of the lowest capacities to adapt to climate change in Asia, have sunk deeper into debt as a result of the pandemic, food price rises and war in Ukraine, said IIED.
Sri Lanka has the highest bond debt among the five Asian countries surveyed by IIED, at $ 12.55 billion, whose exposure to extreme heat and flood events according to IIED, makes it highly vulnerable to climate change and saw its debt increase dramatically over the last five years forcing it to declare bankruptcy in 2022.
It said that lower-income countries are most vulnerable to painful bond debt restructurings where, without a bankruptcy process to fall back on, they are forced to navigate challenging legal structures and aggressive investors which can combine to drag out sovereign debt crises, as in the case of Sri Lanka.
Sri Lanka is yet to complete its external debt restructuring with private creditors set to take a 30% haircut on International Sovereign Bonds.
IIED Executive Director Tom Mitchell stated that restructuring these kinds of bonds is extremely difficult because most private investors will only accept reduced profits when countries officially default – a lose-lose for both parties.
He also added that by restructuring multilateral and bilateral loan debt owed by the poorest nations, which is the lower-hanging fruit, wealthy nations can give struggling governments time and fiscal wiggle room to deal with holdout hedge funds and other institutions that make bond debt so difficult to tackle.