Will Ethiopia Be The Next African State to Default On Debt?
Ethiopia may be the next African state to default on debt financing charges despite international ratings agencies and local analysists saying they expected the current payment to be made.
The current payment, which has been missed is only considered a default after a 14 day grace period.
Paying The Interest on Your Debts
When you borrow funds from credit providers, they charge interest (so they can make a profit).
Often such credit providers will demand a minimum payment (like on a credit card). This is, many times, designed to cover the interest portion of the credit granted so that the amount owed does not grow and grow.
Of course, if you want to make the debt shrink you have to pay not just the interest charge but more than that to make the debt start to shrink.
Ethiopia Must Pay $33 Million In Interest
Ethiopia is facing the possibility of officially defaulting on its financial commitments, joining countries like Zambia and Ghana.
The Ethiopian government recently informed bondholders that it won’t be able to make a $33 million interest payment due on its $1 billion Eurobonds, citing a “vulnerable external position with lower foreign-exchange reserves”.
This basically means they don’t have the foreign assets or currency to pay with.
So, What Now?
In order to sort out the current financial challenges, Ethiopia is looking to renegotiate its obligations through what is called the Group of 20’s ‘Common Framework’, which is what Zambia and Ghana also did.
If they don’t, their existing debt will shoot up in price (long term cost) and they will struggle to get others to trust them enough to give them any more money because they might just never pay it back.
They desperately need to make a plan or new agreement. If you can’t pay what you are meant to you either (1) go find money somewhere else or (2) you ask the people you owe money to, to make some sort of arrangement for you. Often times such an arrangement will cost you more in the long run, of course.
‘Often times such an arrangement will cost you more in the long run, of course’
With regard to all their other massive debts, the International Monetary Fund (IMF) recently offered Ethiopia a temporary debt service suspension deal but Ethiopia must strike a detailed long term deal with the IMF by March 31 or it could nullify the temporary agreement.
It seems that the coming weeks over year end will be critical as Ethiopia navigates its financial challenges and negotiates with international creditors.