Private-sector investors are preparing legal action against Ethiopia over its $1 billion Eurobond default, after official creditors—led by China and France—blocked a restructuring deal that bondholders say was already agreed with Addis Ababa.
A committee representing private holders of Ethiopia’s sole international bond said official lenders had acted “unreasonably”, leaving investors with little choice but to seek enforcement through the English courts—nearly three years after the country slipped into default.
Ethiopia’s finance ministry last month unveiled a proposal to exchange the $1bn bond, originally due in 2024, for a new instrument maturing in 2029. The plan would have reduced the principal to about $850m—a 15% haircut—while linking future payouts to export performance. Ethiopia has already reached agreements on more than $8bn of official bilateral debt, securing roughly $3.5bn in relief.
That bondholder deal unravelled last week after official creditors objected, arguing that the terms were more favourable than those applied to their own loans. They cited Ethiopia’s “favourable macroeconomic perspectives”, contending that private investors were being asked to make too small a contribution to the overall restructuring.
Common Framework Faces First Court Test
If pursued, the lawsuit would mark the first time a sovereign restructuring under the G20’s Common Framework has spilled into formal litigation. Launched during the pandemic to coordinate relief among Paris Club members, Chinese state lenders, and private creditors, the framework has struggled with delays and disputes.
Bondholders said the process had proven “opaque, unpredictable and capriciously wielded,” echoing frustrations seen in earlier cases such as Ghana and Zambia, where talks also came close to court action.
The bondholder committee—which includes hedge funds VR Capital and Farallon Capital Management—said it remained open to negotiations but warned that legal proceedings would consolidate claims, including past-due interest, potentially making an eventual settlement harder.
Exports at the Heart of the Dispute
At the core of the disagreement is Ethiopia’s recent export surge. Africa’s largest producer of arabica coffee has also climbed the ranks of gold exporters, strengthening its external position. Under the proposed deal, bondholders would have accepted further payment reductions if exports fell short of IMF forecasts, but would share in upside gains via a so-called value recovery instrument if exports outperformed.
Such instruments—linked to GDP, exports, or other indicators—have become common in recent restructurings, including in Zambia and Suriname. Ethiopia’s version would have paid bondholders 2.5% of export outperformance above IMF projections between 2028 and 2037, capped at $35m annually and conditional on reserve thresholds set with the International Monetary Fund.
Despite the stalemate, Ethiopia’s bond has rallied sharply, trading around 105 cents on the dollar—up from roughly 50 cents during the 2022 civil war in the Tigray region—suggesting investors still expect a negotiated outcome.
Civil Society Pushback
Not everyone sees the blocked deal as a setback. Debt Justice, a UK-based campaign group, welcomed the official creditors’ stance. “Official creditors were right to reject the deal with bondholders, which would have forced the people of Ethiopia to pay far too much, putting essential public services at risk,” said Heidi Chow, the charity’s executive director.
For now, Ethiopia remains one of the last unresolved defaults under the Common Framework. Whether the threat of court action accelerates compromise—or deepens creditor fractures—will be closely watched by investors and policymakers across emerging markets.
