No Outright Cancellation of Debt Portion

Do not assume that modern Sovereign debt restructuring will result in an outright cancellation of a significant portion of Sri Lanka’s Sovereign debt, global debt restructuring expert warned on Thursday (5).

Professor Lee C.  Butchheit, delivering the 74th Central Bank of Sri Lanka oration at the Bank’s premises in Colombo further said that recent Sovereign debt workouts have been only characterised by extension of the maturities of the defaulted debt, often coupled with some near-term interest rate relief, rather than what are known as ‘principal haircuts.

He also warned that official creditors in particular show a deep aversion to forgive any part of the Sovereign borrower’s defaulted debt.  The result: Modern debt restructuring pushes the repaying of the defaulted debt to the future, the U.S. academic said.

Butchcheit, emphasised that such a defaulted debt restructuring does not avoid the intergenerational sin of bequeathing unsustainable defaulted debt to one’s posterity. “On the other hand, it compels the commission of that sin,” he said.

“Confronted with a mountain of inherited and unsustainable debt, our posterity will have to restructure such debt and suffer the pain that goes with such restructuring,” the speaker warned. However, the option of a cathartic debt restructuring will at the least temporarily stain the country’s credit reputation and thus impair the possibility of it borrowing at tolerable terms, he further warned. “

“Profligate debt, such as that which Sri Lanka suffers, includes money borrowed to finance a Government’s current expenditure on subsidies, the cost of a bloated public sector workforce, liberal donatives (public money) disbursed for elections and overly generous pensions,” Butchheit said.

He also said if refinancing inherited debt becomes impossible, such as in the case of Sri Lanka, then such a country will have to either tax and pay or undergo debt restructuring, which two policies Sri Lanka is currently following, the U.S. academic added.

Even when a Sovereign debt crisis is addressed with discipline and courage, such as the discipline and courage shown by Sri Lanka over the last two-and-a-half years, the effects can be devastating and long lasting.

“We have witnessed in many countries; that over the last two years, even mild inflation, such as which the U.S.A. is currently suffering from, may decide the outcome of the forthcoming U.S. presidential election, Butcheit, also inferring to the local presidential poll due on 21 September.”

“Despoiling the environment and bequeathing gargantuan debt to our posterity are closely related,” the speaker further said. “Therefore, our immediate posterity will need all the fiscal space to finance the required projects that will reduce and ameliorate the effects of planetary climate change,” Butchheit said. “

However, what these people will soon realize is that their fiscal space has been severely curtailed by the profligacy of their parents, grandparents and great grandparents. “The cause for this malfeasance which is ourselves because we found it difficult to control our own appetite during our tenure on the planet, consequently consuming the fiscal space of our descendants because that was more pleasant than controlling our current expenditure or taxing ourselves to pay for that expenditure.

Therefore, the explanation for such a calamitous condition is because we committed such intergenerational sins because we found it convenient to do so,” Butchheit in conclusion said.

Source: Ceylon Today