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Sri Lanka Default Hints at Trouble Ahead for Developing Nations

  • Surging costs for food and fuel have sapped nation’s coffers
  • As inflation rages, some emerging markets look vulnerable
Police officers stand guard at a gas station in Colombo on May 16.
Police officers stand guard at a gas station in Colombo on May 16.Photographer: Buddhika Weerasinghe/Bloomberg
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Sri Lanka’s impending default on $12.6 billion of overseas bonds is flashing a warning sign to investors in other developing nations that surging inflation is set to take a painful toll.

The South Asian nation is set to blow through the grace period on $78 million of payments Wednesday, marking its first sovereign debt default since it gained independence from Britain in 1948. Its bonds already trade deep in distressed territory, with holders bracing for losses approaching 60 cents on the dollar. The government said last month it would halt payments on foreign debt.