Option 4 of 8
Ask lenders for easier terms
Agree with the people owed money to repay less, later, or at a lower interest rate.
In the house
Visit the bank and ask for lower payments, a longer loan term, or a smaller total.
The idea
When a country cannot pay all that it owes, it can negotiate with lenders. The deal may lower the interest rate, extend repayment dates, or reduce the amount owed (a haircut). The aim is a bill the country can actually pay.
How it works
- Stop or pause payments while talks take place, or negotiate before payments are missed.
- Agree with official lenders (other governments) and private lenders (such as bondholders) on new terms.
- Swap old loans for new ones with the agreed terms.
How long
Talks can take a long time, because many lenders must agree.
Who has to agree
Every group of lenders. The IMF usually has to confirm the debt will be sustainable.
Who feels it first
Lenders, who lose some value. Domestic holders such as banks and pension funds can be affected if domestic debt is included.
What makes it hard
- Lenders differ on how to share the losses fairly.
- Borrowing from abroad can become harder and costlier for some time afterwards.
- The relief must be big enough, or the country may need to do it again.
How people and the world may react
Households
Day-to-day life changes little directly, but savers can be affected if banks or pension funds hold the restructured debt.
Businesses
Firms may find loans harder to get until trust returns, but a clear deal removes uncertainty.
Lenders and other countries
Reactions vary. Lenders dislike losses. Others see an orderly deal as better than an unplanned default.
Pros and cons
Pros
- Directly reduces the repayment bill.
- Can free money for services and investment.
- An agreed deal ends uncertainty.
Cons
- Lenders take losses and may lend less in future.
- Slow, and each side bargains hard.
- Does not fix the reasons the debt grew.
A real example
Sri Lanka 2022 to 2024, and Greece 2012
Sri Lanka announced an interim policy on external public debt on 12 April 2022. In September 2024 it reached an agreement in principle with bondholders on about US$12.6 billion of bonds, with a 27% haircut on the nominal amount. In 2012 Greece's private creditors accepted a 53.5% cut to the face value of their bonds, about 97% of privately held bonds took part, and the debt stock fell by about EUR 107 billion.
Sources:
Try it with numbers
The starting settings show this option as a simple example. Change any slider to explore. Open the full calculator, or build a mix of options in Try your strategy.
The average interest rate on the debt is 3 points lower, for example after new loan terms.
Each year, debt as a share of GDP = last year's share × (1 + interest rate) ÷ (1 + growth of GDP in rupees) − primary surplus. Growth in rupees combines real growth and inflation. Debt starts at 96.8% of GDP in 2025 (IMF, general government gross debt). The interest rate is the Central Bank's actual interest paid in 2025 divided by central government debt at the end of 2025. This is a simple illustration with the settings you choose, not a forecast, and it cannot show shocks such as exchange rate moves or new borrowing for other reasons.
These pages describe options and what happened when countries tried them. Budgets LK does not recommend any option, and nothing here is a forecast or financial advice.