Sri Lanka’s government bonds fell heavily on Wednesday as the United States ratcheted up pressure on the country’s government over its ties with China.
U.S. Secretary of State Mike Pompeo, who was visiting Sri Lanka as part of a four-nation Asian tour, said the Chinese Communist Party was operating as a “predator” in the country and had brought “bad deals” and “lawlessness”.
Worries that the COVID-19 crisis will make it hard for Sri Lanka to pay its debts have already seen its bonds lose over 40% of their face value this year.
Wednesday’s falls saw its 2022 dollar-denominated bonds shed nearly 5 cents, according to Tradeweb data. Meanwhile its 2025, 2026 2027 and 2028 bonds all dropped to the 55 cents on the dollar threshold.
“The reality with Sri Lanka is that it has very high debt levels and a very large deficit, but they are not in an IMF programme and nor is the government willing to do what it takes to make the debt sustainable,” said Kevin Daly at Aberdeen Standard Investments.
“So the market is looking at the credit and thinking something has got to give.”
Tell-tale crisis signs have developed this year: a tumbling currency, credit rating downgrades, bonds at half their face value, debt-to-GDP levels nearing 100% and almost 70% of government revenues being spent on interest payments alone.
It did make a bond payment this month however, and the central bank has repeatedly vowed that the country will “honour all its debt service obligations”.
Its next major payment is a $1 billion bond due to be repaid in July next year.