The Nightmare Scenario: A Default on Sovereign Debt

On December 17, 2021, Fitch downgraded Sri Lanka’s rating to “CC”, the lowest rating prior to default. With external reserves at around $1.6 billion and almost $1 billion in debt-service payments coming due in January 2022 (and $7 billion during the coming year), the country faces a very real possibility of a sovereign debt default. If this were to happen, what would be the consequences for the economy, the poor, and society?