The price line chart (cents on the US dollar) shows that Zambia's international debt is trading at extremely distressed levels

Zambia is on the brink of default after lenders denied debt relief requests

Zambia is on the verge of becoming the first African country to default on payments since the pandemic began after investors rejected a request to suspend interest payments on its $ 3 billion bonds.

Africa’s second largest copper producer has until the end of Friday to make an overdue interest payment to bondholders. Shortly before the deadline, Vice-President Inonge Wina told the Zambian parliament that “we will not be in default”.

However, at a meeting on Friday, Zambia failed to win the approval of two-thirds of the bondholders required for a six-month suspension of debt payments.

“Although the government regrets that bondholders did not approve in good faith the applications made by Zambia, we remain committed to finding an amicable and collaborative solution to debt sustainability issues,” the Zambian Finance Ministry said in a statement.

A group of creditors representing fund managers, who hold around 40 percent of the bonds, previously announced they would block the proposal, citing concerns about a lack of transparency regarding Zambia’s other debts, particularly those to China. The Zambian Ministry of Finance has not addressed these concerns in recent weeks, according to two people familiar with the thinking of the group of creditors.

“As for us, we still don’t know what’s going on with most of China’s debt, so I don’t see how we can agree to that,” said a member of the group of creditors.

Failure to pay out the $ 42.5 million coupon before midnight on Friday would mean a default on the Zambian dollar bonds. The debt continued to trade at a sharp discount to face value on Friday. A bond with a term until 2027 was 43 cents against the dollar.

Zambia was already struggling with rising debts before the Covid crisis, which further weakened its finances. Attempts to restructure $ 12 billion in credit are seen as a crucial test case for poorer nations trying to find debt relief during the pandemic. It benefited from a G20 initiative to stop payments to official bilateral creditors this year, but private creditors were unwilling to participate.

The Zambian government has announced that it will treat all creditors equally, but bondholders have raised concerns that some Chinese lenders will only participate in a debt suspension if their $ 200 million share of arrears is first cleared.