Ethiopia faces prolonged restrictions on international financing after talks on restructuring its $1 billion Eurobond collapsed for the second time in seven months, largely due to differing demands imposed by the bondholders and the bilateral creditors.

The setback means Africa’s second-most populous economy could be forced to look elsewhere for funding or ramp up domestic revenue mobilisation to finance its operations and support private investment.

At the centre of the dispute are concerns from creditors that the restructuring proposal advanced by Ethiopia does not guarantee fair treatment for all creditors and could favour bondholders.

Why talks failedThe January deal also envisaged the creation of a Value Recovery Instrument (VRI), which would have provided bondholders with additional payments based on Ethiopia’s export performance by linking payouts to the value of the country’s exports.

However, bilateral lenders argued that the fast-evolving macroeconomic environment is not conducive to the use of a VRI.

A VRI is a financial tool tied to economic performance and is used primarily in sovereign debt restructuring. When a country defaults, it issues VRIs to sweeten restructuring deals. If the economy recovers, creditors receive additional payouts.

The OCC, co-chaired by France and China, said implementation of the preliminary agreement was likely to result in a very low restructuring effort from bondholders, in breach of the comparability of treatment principle.

The committee also said the introduction of a VRI in debt restructuring significantly adds complexity to the assessment of comparability of treatment and carries the risk of vastly diverging restructuring efforts compared with those undertaken by official creditors.

In light of this feedback, Ethiopia prepared an alternative restructuring proposal for the 2024 Notes, which excluded the VRI.

The revised proposal was first shared with the OCC co-chairs, who confirmed that it satisfied the CoT principle. It was then approved by official creditors and presented to an ad hoc committee of bondholders during the latest round of talks between May 6 and May 27.

Bondholder rejectionHowever, the restricted discussions on restructuring the debt ended in deadlock after bondholders rejected the government’s proposal.“The Ad Hoc Committee rejected the Revised Proposal, and the Restricted Period was subsequently terminated,” Ethiopia’s Ministry of Finance said in a statement dated May 27, 2026.

Ethiopia regretted the decision by the Ad Hoc Committee but said it remains committed to finding and implementing a market-based solution for the 2024 Notes that is consistent with the CoT principle and compatible with its International Monetary Fund (IMF) programme commitments.“To this end, Ethiopia will continue to engage constructively with all stakeholders, and at the same time will assess all its available options to resolve the current situation, including a potential exchange offer or other market transaction relating to the 2024 Notes,” the ministry said.

The Ad Hoc Committee represents US and European investors who hold more than 45 percent of the 2024 Eurobond.“Initially there was a disagreement between Ethiopia and the bondholders in terms of how the VRI could be calculated and how Ethiopia should settle it. However, back in January this year Ethiopia and the bondholders agreed on the VRI and the bondholders agreed on the haircut as well. That was a huge milestone,” Mered Fikireyohannes, founder and chief executive of Pragma Capital, a finance and investor advisory firm based in Addis Ababa, told The EastAfrican.“However, the OCC chaired by France and China rejected Ethiopia’s proposal. The basis of the rejection was the VRI. It is a very unique way of restructuring sovereign debt and really the bondholders are asking for this because they want to recoup more of their investment by hedging on Ethiopia’s export performance. Mind you, before the IMF restructuring programme came about, Ethiopia’s exports were around $3.8 billion, but last fiscal year they reached $8.3 billion and are now expected to reach $9.5 billion. So the bondholders want to take the upside of Ethiopia’s export performance.”“So this sort of sovereign debt restructuring is quite unique and then the committee, the G20 committee, rejected it on the basis that it gives Eurobond holders preferential treatment over other creditors, especially bilateral and multilateral institutions. They said this does not comply with the comparability of treatment principle, which requires fair treatment of all creditors, and at the same time they found it risky to tie export performance to a debt instrument. So that was the basis of the rejection,” he said.“So clearly the bondholder committee rejected this one. We are in a stalemate and, as you can see, Ethiopia is trying to make sure that both parties – bondholders and other creditors, including bilateral and multilateral lenders – are aligned.”Road to deadlockEthiopia formalised its restructuring deal with official creditors in July 2025, paving the way for negotiations with bondholders, which led to the failed initial deal in October 2025.

Addis Ababa had initially proposed a 15 percent haircut on the original $1 billion principal, alongside paying missed coupon payments in full, principal repayments between 2026 and 2029, and an interest rate of 6.125 percent.

In addition to these terms, bondholders are seeking a share of Ethiopia’s future exports without a cap, granting them potentially unlimited upside.

The Ethiopian government and the Ad Hoc Committee of international bondholders terminated restricted talks after reaching an impasse over specific provisions, particularly the VRI and downside adjustments linked to the country’s export performance.

While creditors had tentatively agreed to a 15 percent write-off on the loan principal, negotiations stalled over the operational details of linking potential payouts to Ethiopia’s export performance.

Ethiopia’s Eurobond, issued in 2010 and due in 2024, first defaulted in December 2023 after the country missed a $33 million interest payment, the continent’s largest sovereign default at the time.

Following the default, Ethiopia opted to restructure its debt under the G20 Common Framework initiative, which requires official creditors to agree on relief terms before private lenders can be offered comparable deals.

The process requires borrower governments to seek at least as much debt relief from private creditors as that provided by official bilateral creditors.

Launched in 2020, the Common Framework was designed to bring different lenders to poorer countries under one roof, particularly China, whose lending surged in the decade before the Covid-19 pandemic.

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