Ethiopia’s debt restructuring talks stall as bondholders reject Addis Ababa’s terms, raising fears of default and possible legal action.

ADDIS ABABA, Oct 15 — Ethiopia’s plan to restructure its US$1 billion Eurobond has reached a deadlock.This happened just when the country was nearing an imf deal. Negotiations with global creditors collapsed after the government refused to accept a principal “haircut.”

According to Reuters, bondholders rejected Ethiopia’s proposal to delay repayments without cutting the principal. They argue the plan ignores the country’s weakening finances and the lost value since the nation defaulted in December 2023.

The standoff highlights growing friction between Prime Minister Abiy Ahmed’s administration and private lenders frustrated by the slow pace of the G20 Common Framework—a debt-relief plan for low-income countries.

“We’ve reached an impasse,” said one creditor representative. “Without meaningful relief, this deal isn’t sustainable.”

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Bondholders Push for a Recovery-Linked Option

Creditors had offered a Value Recovery Instrument (VRI). The bond would pay extra returns if Ethiopia’s exports or GDP improved over time.

The model mirrors successful restructurings in Zambia and Argentina. But Addis Ababa dismissed it, citing fiscal risks and administrative challenges.

“The VRI was a fair way to link our recovery with Ethiopia’s future growth,” said one investor. “Rejecting it sends a worrying signal.”

Analysts at Moody’s Investors Service say Ethiopia’s debt-service costs exceed 45 percent of government revenue. The agency cut the nation’s sovereign rating to Caa3, signalling a high chance of default.

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Economic Strain Deepens

Years of conflict in Tigray, soaring inflation near 30 percent, and a chronic dollar shortage have weakened Ethiopia’s finances.

Although the IMF sent a staff mission to Addis Ababa in August, no formal support program has followed. Disagreements persist over fiscal transparency and exchange-rate policy.

The World Bank estimates Ethiopia’s external debt at US$28.7 billion, with China holding roughly one-third. The government prefers concessional restructuring instead of principal cuts, a stance that private creditors reject.

“Without an IMF anchor, lenders doubt Ethiopia’s policy direction,” said Zemedeneh Negatu, chairman of Fairfax Africa Fund. “Uncertainty is limiting investment inflows.”

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Bondholders Consider Legal Action

Frustrated creditors are now weighing court action in the UK, where the Eurobond is governed.

Legal filings could mirror Zambia’s dispute and Argentina’s long battles with holdout investors. Sources told Reuters that a creditor coordination committee is already forming to plan a unified response.

“The legal route is a last resort,” said one bondholder. “But Ethiopia’s resistance is forcing our hand.”

Court action could block Ethiopia’s goal of re-entering global bond markets by 2026. It would also strain relations with the IMF, World Bank and Paris Club partners tracking the case.

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Economic Credibility at Stake

For Abiy Ahmed’s government, failure to close a deal threatens the Homegrown Economic Reform Agenda (HERA). The program seeks to open key sectors—telecoms, logistics, and finance—to private investors.

In 2022, Ethiopia sold a 40 percent stake in Ethio Telecom to foreign bidders, a milestone in market liberalisation. But rising debt repayments now cast doubt on those reforms.

“This isn’t just about one bond,” said an economist at Addis Ababa University. “It’s about trust. Investors want proof that reforms will hold.”

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Regional Impact

Ethiopia’s stalemate has ripple effects across Africa. Alongside Ghana and Zambia, it is a key test of the G20 Common Framework.

Failure here could discourage other nations from joining coordinated restructurings. Neighbours such as Kenya, Tanzania, and Rwanda—each facing rising debt—are watching closely for signs of market contagion.

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Outlook

Talks remain frozen as of mid-October 2025. Addis Ababa says it will keep servicing domestic debt and paying for essential imports. Yet without a deal or an IMF program, analysts warn of prolonged financial isolation.

“Each month without progress erodes confidence,” said a London-based sovereign-debt lawyer. “If litigation begins, this restructuring could drag on for years.”