On the same day that the imf officials departed, Bloomberg, a news service, reported that other national creditors, led by India, were working on a deal, and that it would not include China. They may end up insisting that Sri Lanka suspends repayments to China or forces it onto a comparable deal. Either would be almost impossible to enforce. Creditors usually only agree to something because everyone agrees to the same terms. Even creditors at war with one another usually manage to hash out a deal. The decision to proceed without China reveals the extent of the breakdown in sovereign-debt negotiations.
It was hoped that a recent deal in Zambia, to which China signed up, would provide a template. But the solution was unique to the structure of Zambian debt, which allowed creditors to relabel some Chinese lending as private rather than public. And China only agreed to much of the compromise, which includes low interest rates and slower repayment, on the condition that it could back out if Zambia’s economy picked up. At a recent g20 summit, where the agenda ranged from cryptocurrencies to global tax, officials observed that debt restructuring was the issue on which the least progress had been made.
Worse, middle-income countries like Sri Lanka cannot even get into the process through which Zambia secured its deal. The Common Framework, a g20 mechanism for creditors, only applies to poor countries. Middle-income ones must negotiate with China alone. Chinese officials refuse even to sit on a committee with the rest of Sri Lanka’s national creditors. Many economies near default today, from Egypt to Pakistan, are also too rich to qualify.
Sri Lanka’s situation also exposes a worrying new fault line. Some think that China was put off joining Sri Lanka’s creditor committee because India was a co-chair. After all, it was willing to participate in Zambia’s committee, which it jointly led with France. Such tensions will only become more of a problem, since India’s lending is growing. Bradley Parks of William & Mary, an American university, suspects that India’s officials have decided to lend to countries already indebted to China to counter their rival’s influence. Future standoffs are therefore likely to be in places where both countries are big creditors.
