Ethiopia Faces Lawsuit Over $1 Billion Debt Default

A group of Ethiopia's bondholders has formally initiated a process to sue the government over a defaulted $1 billion debt. Members of the Ethiopia Ad Hoc Bondholder Committee sent a pre-action letter to the government last week, notifying them of their intent to file a claim in the English courts. The authorities have 14 days to acknowledge the letter.

This move marks the first time a country is being sued under the Common Framework, a set of debt restructuring guidelines established by the Group of 20 during the pandemic in 2020. The action threatens to derail Ethiopia's efforts to restructure at least $13 billion of external loans. Under the Common Framework, borrowers must treat all creditors comparably.

The dispute centers around a deal sweetener the authorities agreed to with the bondholders, known as a value-recovery instrument. This proposal would have Ethiopia pay investors more if the economy outperformed International Monetary Fund projections. If it underperformed, bondholders would receive smaller payouts.

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However, the official creditor committee, co-chaired by China and France, has not agreed to such instruments in its restructuring agreement with Ethiopia. In a January letter to the government, the committee warned that value-recovery instruments can significantly add complexity to the assessment of comparability of treatment.

Ethiopia defaulted on its only eurobond in December 2023 by failing to make an interest payment. The country is one of four that requested debt treatment under the Common Framework, along with Chad, Zambia, and Ghana.

Debt Restructuring Comparison