Sri Lanka Enters Default and Warns Inflation May Surge to 40%

The government of Sri Lanka fell into default for the first time in its history due to an economic crisis that led to mass protests and a political crisis.

The central bank Governor said that policy makers flagged to the debt holders that the nation wouldn't be able to make payments until the debt is restructured.

The country has been in turmoil due to surging inflation and an economic crisis that has left it short of hard currency it needs to import food and fuel. The government decided last month to stop making payments on its foreign debt because of public anger and violent protests.

It is the nation's first debt default since it gained independence. Its bonds are one of the worst performers in the world this year, with holders bracing for losses approaching 60 cents on the dollar.

If a missed payment in a single bond drags all the outstanding dollar debt into default, it's called a cross-default clause. The clause is triggered if the debt is over $25 million. The country was declared in default by S&P Global Ratings in April.

Sri Lanka is in talks with the International Monetary Fund and needs to restructure its debt. The country has said it needs between $3 billion and $4 billion to pull itself out of crisis.

The co-head of emerging-market hard-currency debt at Pictet Asset Management said it was not a surprise.

He wants a Finance Minister to sign aid agreements. The appointment of a Prime Minister gave Weerasinghe comfort to continue in the job. He had threatened to quit if political stability didn't return soon.

The low-income country, which is the biggest issuer of junk dollar bonds in Asia, has been badly affected by tighter global credit brought about by a number of factors. The tourism earnings were reduced by more than three quarters.

Sri Lanka's bonds were mixed on Thursday but higher than their record lows last week, suggesting traders expect better recovery values. The dollar bonds due in 2030 were shown to be 0.28 cents lower at 38.39 cents on the dollar and the notes due in July were shown to be 0.22 cents higher at 42.78 cents. The all-share index fell more than 3%.

Chamorro said thatDefaults are not the end, they can signal a new beginning.

With help from Carolina Wilson and Srinivasan Sivabalan.