• Sri Lanka is restructuring its defaulted $13 billion debt through macro-linked bonds, as reported by the Financial Times.
• These bonds would track the country's recovery and include GDP-tied payouts, aiming to attract international investors to riskier emerging markets.
• Creditors would accept a one-third haircut on their debt in exchange for a new $9 billion bond, with payments adjusted based on Sri Lanka's GDP performance by 2028.

The Financial Times reported that Sri Lanka and its bondholders have tentatively agreed to replace the country’s $13 billion debt in default with macro-linked bonds, which would track the country’s recovery. This innovative step includes GDP-tied payouts and aims to attract international investors back to riskier emerging markets. Analysts quoted by the Financial Times praised this move, highlighting its potential to develop debt structures enticing to investors. According to the proposal, creditors would accept a one-third haircut on their original debt in exchange for a new $9 billion bond, with payments adjusted based on Sri Lanka's average US Dollar GDP achieved by 2028.

Sri Lanka has also explored other methods of setting GDP-linked payments and is evaluating a creditor proposal for a governance-linked bond. Despite the potential, some investors remain skeptical due to past challenges with linking payouts to volatile economic factors. For instance, Argentina's previous experience with GDP-linked warrants raised concerns among investors. However, proponents of macro-linked bonds believe they could attract investors who have shied away from riskier sovereign debt markets in recent years. In the proposed scenario, Sri Lanka's GDP recovery to $84 billion in 2023 suggests that achieving higher GDP scenarios is plausible, provided there is no significant currency depreciation in the coming years.

Proposed GDP-linked bonds could attract investors | The Morning