Domestic debt remains under local law

Domestically issued government debt instruments remain under domestic law. This opens legal recourse to domestic debt holders by way of the local legal system.

“If domestic debt holders are to contend that they have not been fairly treated in Net Present Value terms they can contest within the local court system.”

An official from the Ministry of Finance with close ties to the diplomatic team of China has indicated that they have no intention of pushing for a restructuring of domestically issued instruments.

The local courts will then be able to pass judgment on the issue in line with the normal timeline of legal proceedings in Sri Lanka. The courts may also prevent the Central Bank from enacting elements of its debt restructuring plan on local participants. The Central Bank has suggested in the past that they will not restructure domestic debt. If the domestic debt is not included in the scope of the debt restructuring then international creditors will have to contend that they are not receiving equal treatment after the April announcement.

In the likely event that the Central Bank leaves domestic debt outside of the remit of the debt restructuring then the sequence of events makes it in the interests of the international creditors not to contest it as it will include domestic debt in the computation of the Most Favored Creditor clause.

In Net Present Value Terms with the advent of new taxes, currency depreciation, and high inflation the domestic debt holders are already well behind international creditors in Net Present Value Terms. In recent weeks there has been a huge foreign influx into the local government securities market. (TP)