Zambia Closer to Default After Bondholders Refuse Relief

Bondholders rejected Zambia’s request for debt relief, setting the southern African nation on course to becoming Africa’s first sovereign default since the onset of the coronavirus pandemic.

Holders of Zambia’s $3 billion of Eurobonds voted against the country’s proposal to suspend interest payments for six months, the finance ministry said on Friday. The government, which skipped a $42.5 million coupon on Oct. 14, now has until the end of Friday to either pay the arrears or trigger a default event that could leave the government shut out of debt markets for years.

In response, the finance ministry implied it’s heading for a default, saying its only other option was to run up arrears, even after Vice President Inonge Wina said earlier Friday that Zambia would honor its debt obligations.

“We remain committed to finding a consensual and collaborative resolution to debt sustainability issues,” the finance ministry said in an emailed statement after the bondholders meetings. “Agreeing to consensual standstills or accruing arrears are the only options available to the country while we design a plan to put our debt on a sustainable trajectory.”

Keenly Watched

The standoff is being keenly watched by other poor nations seeking debt relief, as well as fixed-income investors worried about where the next potential default may be. Zambia said it wants to treat commercial and official creditors on an equal basis, but bondholders were concerned any relief they granted would be used to service debts owed to Chinese state lenders, which account for more than a quarter of its external liabilities.

Zambia Closer to Default After Bondholders Refuse Relief

While the coronavirus pandemic added to Zambia’s woes, with the economy forecast to shrink for the first time since 1998, its debt problems started years earlier. The government borrowed heavily since 2012, building up nearly $12 billion in external debt and ignoring warnings from the IMF of growing debt distress risks.

The country’s $1 billion of 2024 Eurobonds held a gain of 1% to trade at 45.3 cents on the dollar by 11:38 a.m. in London. The bonds are down 34% this year.

©2020 Bloomberg L.P.

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