Ethiopia’s long-running efforts to restructure its foreign debt have hit a major impasse, with international bondholders now signalling they may resort to legal recourse after negotiations collapsed over irreconcilable differences.
The East African nation, which defaulted on its sole international bond in late 2023, has been trying to reach a deal through the G20’s Common Framework process. But efforts to stitch together terms acceptable to both the Ethiopian government and private creditors have faltered.
Ethiopian officials acknowledged on Tuesday that negotiations with the bondholder committee had “failed for the time being,” citing “differences over key terms.”
The government expressed optimism that talks could resume “in the foreseeable future,” pointing to prior progress as proof that a breakthrough remains possible.
That “progress,” the government argued, included agreement from bondholders to a 15 percent write-down or “haircut” on their claims, and the adoption of a Value Recovery Instrument (VRI). The VRI would allow creditors to collect additional payments in coming years if Ethiopia’s export performance exceeds certain thresholds.
However, the bondholder committee, which reportedly includes heavyweight names such as Morgan Stanley Investment Management, Franklin Templeton, VR Capital and Farallon pushed back. They said they were disappointed by the government’s last offer and noted the process had reached a “negotiations impasse.”
One of the core disputes concerned the Common Framework’s comparability requirement. Under that rule, private creditors must receive treatment comparable to official creditors, like China, which is believed to hold nearly one-quarter of Ethiopia’s total debt (estimated at about $31 billion).
Because Ethiopia has not publicly disclosed the terms it is negotiating with its official lenders, bondholders argue they cannot verify parity.
With doors to further compromise apparently narrowing, the bondholder committee said it would now “consider all options, including legal action.”
The $1 billion international bond at the heart of the dispute dropped more than one U.S. cent on the news, though it remains near its highest price since early 2021, trading around 95 cents on the dollar.
The International Monetary Fund (IMF), whose models and debt sustainability assessments underpin much of the negotiating architecture, called the prior gains “substantial progress” and urged renewed dialogue.
Yet critics caution that the crisis may expose structural flaws in the Common Framework mechanism.
Launched in 2020, the G20’s Common Framework was intended to coordinate official and private debt restructuring in low-income countries. Ethiopia, along with Zambia and Ghana, has been a test case for its efficacy. But delays, complexity and a lack of enforceability have raised questions about its utility.
Adding complication, bondholders dispute the IMF’s forecasts, claiming they understate Ethiopia’s export potential, especially given recent surges in global coffee and gold prices. Ethiopia’s government, citing official figures, said export earnings reached a record $8.3 billion in 2024/25 far above the IMF’s $6.37 billion estimate.
If bondholders mount successful legal actions abroad, Ethiopia could face judgments and asset seizures in foreign courts, compounding its financial stress. For creditors, pushing the case to litigation is risky and costly, but they may feel compelled if no alternative path emerges.
In a region where debt crises have spilled over into social instability and political tensions, Ethiopia’s standoff may also carry broader implications. Governments tracking the outcome, particularly in African and low-income economies are closely watching how the Common Framework handles its first real test.
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