ALEX BRUMMER: The crisis in Sri Lanka is a test for the West

The tragic loss of life and scenes of mayhem in Sri Lanka, where the presidential residence was ransacked, are deeply disturbing.

The dominance of the Rajapaksa dynasty in the leadership of the country proved to be toxic.

A country’s collapse into chaos is an extreme case of what happens when the cost of living and debt spiral out of control.

Sri Lanka’s problems are a red flag for further abuses in the developing world.

Since Russia invaded Ukraine, much attention has been focused on how the energy shock is damaging advanced economies with near-double-digit inflation, higher interest rates and a potential recession.

Among the casualties is former European Central Bank president Mario Draghi, who resigned as Italy’s prime minister after his coalition fell apart amid rising inflation.

Little attention has been paid to the impact of inflation on non-oil producing developing countries.

The first signs of serious stress for Sri Lanka date back to the start of the pandemic, when its foreign exchange reserves dried up as a result of doomed tourism and a mountain of debt.

The first port of call for the troubled nation was supposed to be a loan from the International Monetary Fund. Then it could join dozens of other countries that agreed on debt restructuring through the Paris Club.

Instead, the Rajapaksa regime relied on $3bn (£2.5bn) from its main lenders in China, allowing the government and citizens to avoid the fiscal and monetary discipline that accompanies Western bailouts.

As China cooled from pouring good money after bad, Sri Lanka became the first Asia-Pacific country to default on its debt in more than two decades.

By the time it applied to the IMF this year, protesters, battling skyrocketing food and fuel prices, had taken to the streets.

In a number of developing and low-income countries, China has displaced the West and the IMF and World Bank as key financiers.

Data from the World Bank show that China lends more to poor countries than all the Paris Club countries combined.

Instead of writing off Sri Lanka’s $35bn (£30bn) external debt, China continued the repayments, leaving the underlying debt intact.

Sri Lanka is not alone on the burning deck. Africa, Zambia and Ethiopia are seeking debt restructuring. Other developing countries with Chinese debt include Kenya, Laos and Cambodia.

The West urgently needs to embrace the next administration in Sri Lanka or risk further chaotic outcomes in the developing world.

Aerial combat

How much longer can smug chief executive John Holland-Kaye stay in the Heathrow control tower? It is under siege amid a sharp decline in airport service, rapid cancellations, changes to flight schedules and a black hole in communications.

The latest to match him is Sir Tim Clark, who turned Emirates from Dubai into one of the most respected carriers in the world.

Emirates accuses Heathrow of creating “airmageddon” with its decision to limit flights. He is outraged at the short-notice capacity cuts, claiming the owner of the Spanish-controlled airport disrupted the flight from an empty seat.

Heathrow is now in the cross-hairs of the often too docile regulator, the Civil Aviation Authority, which has raised concerns about the airport’s failure to deliver acceptable customer service.

If Holland-Kaye had invested in staff and premises in the good times, rather than paying dividends to indifferent foreign investors, the current disgrace to the UK’s major airport hub could have been avoided.

The goal is a mess

The next day, another cryptocurrency company, New Jersey-based Celsius, filed for bankruptcy. It lists his assets and liabilities as between $1bn (£840m) and $10bn (£84bn).

The huge range of numbers almost certainly reflects the difficulty in valuing holdings in a market collapse.

An estimated 100,000 creditors will have a long and anxious wait before they have any idea if and when any of their valuable investments will be repaid.

On Thursday, the Financial Conduct Authority warned of the need to regulate crypto companies. By the time he and other executives deal with the dangerous trading environment, there may be no players left.

The guard dogs barked too late and did not manage to sink their teeth into it.