Paris Club requests US court to grant SL’s plea for stay order extension in case filed by HRB

By Ashwin Hemmathagama 

in New York

France together with Canada, Japan, Netherlands, Spain and United Kingdom as long-standing and active members of the Paris Club recently requested the Southern District Court of New York to consider extending the five-month stay in support of the Government of Sri Lanka to safeguard the ongoing debt restructuring process.

Paris Club Secretary General Philippe Guyonnet Duperat, in a letter to Judge Denise L. Cote, strongly pointed out a judgment in favour of the plaintiff Hamilton Reserve Bank Ltd. (HRB) before the conclusion of the debt restructuring process would risk disrupting the negotiations by creating an incentive for creditors to hold out. 

“On the basis of continuing negotiations, which are critical to enduring the successful implementation of the International Monetary Fund-support program, including the smooth conclusion of its second review leading to the expected IMF Board approval at the end of June, and paving the way for Sri Lanka’s return to a sustainable economic and financial trajectory, France together with Canada, Japan, Netherlands, Spain, and United Kingdom, therefore, support Sri Lanka’s request to extend the motion to stay proceedings,” said the Secretary General.

According to Paris Club, since the beginning of this year, the Official Credit Committee (OCC) has been actively working to finalise the Memorandum of Understanding to be shared with the Sri Lankan authorities. The OCC for Sri Lanka is composed of Paris Club members with exposure to Sri Lanka, as well as India and Hungary, who are not members of the Paris Club. The People’s Republic of China participated in the OCC as an observer.

“Additionally, the OCC has been informed that discussions are underway for a formal agreement between the Sri Lankan authorities and Exim Bank China, while negotiations with cooperative commercial creditors continue in good faith. It is expected that the debt restructuring agreement with the OCC should be completed in the coming months, facilitating the advancement of negotiations with bondholders in view of ensuring comparability of treatment between official creditors and the private sector,” he added.

In a letter dated 31 August 2023, France and the United Kingdom expressed their support for Sri Lanka’s motion to stay. Since then, and supported by this decision to stay, Sri Lanka has demonstrated significant progress in restructuring debt with relevant creditor groups. This began with the OCC, which deliberated on potential debt treatment scenarios during a dedicated meeting in September and established the main financial terms of debt treatment. 

“Additionally, the OCC identified key non-financial clauses to be included in the forthcoming memorandum of understanding, such as the requirement for Sri Lanka to respect the long-standing principle of comparability of treatment. Based on a consensual agreement by the OCC on these elements, the OCC and the Sri Lankan authorities reached an agreement in principle for a debt treatment on 29 November 2023. Sri Lanka secured a further agreement in principle with the Exim-Import Bank of China on 11 October 2023, an agreement built upon OCC discussions open to China. Additionally, the Sri Lankan authorities continue to hold regular, good-faith discussions with their cooperative commercial creditors, with a view to securing debt restructuring agreements as quickly as possible, while respecting the need to satisfy the parameters laid out under the IMF’s Debt Sustainability Analysis — a core pillar of Sri Lanka’s IMF-supported program. Concurrent with efforts to advance the debt restructuring process with official and private creditors, the Sri Lankan authorities have made commendable progress in implementing macroeconomic reforms that are facilitating the first signs of economic recovery: positive real GDP growth at the end of 2023, lower inflation, improved revenue collection and the rebuilding of external reserves. Sri Lanka has also successfully conducted a domestic debt restructuring to contribute to the restoration of debt sustainability,” further explained the courts.

According to the Paris Club, the completion of these numerous steps paved the way for the Board of the IMF to approve the first review of Sri Lanka’s IMF-supported program on 12 December 2023. However, it remains the case that with debt restructuring negotiations ongoing, these processes continue to be of great importance to securing the success of the IMF-supported program for Sri Lanka. The Paris Club is an informal group of creditor countries whose role is to find coordinated and sustainable solutions to the payment of difficulties experienced by debtor countries.

Sri Lanka was sued in the United States by a bondholder after the government defaulted on its debt for the first time in history while struggling to stop an economic meltdown where HRB, owns over $ 250 million in principal amount of $ 1 billion worth of Sri Lanka’s 5.875% International Sovereign Bonds (ISBs) issued in 2012, filed the lawsuit in June 2022 in a New York federal court seeking full payment of principal and interest. The Bonds matured on 25 July 2022. HRB alleged that due to Sri Lanka’s default, it is owed $ 250.19 million in principle and $ 7.349 million in accrued interest (before accounting for pre-and post-judgement interest). Sri Lanka in mid-April announced a moratorium on foreign debt repayments, including the Bonds and since then has made no payments on the Bonds. The Government of Sri Lanka filed a motion in September 2022 to dismiss on the grounds that the plaintiff lacks contractual standing.