* Zambia defaulted Friday after failing to pay Eurobond coupon
* Bank governor said Zambia had money to pay
* Need to treat all creditors equally meant it couldn't (Adds Fitch downgrade)
By Chris Mfula and Joe Bavier
LUSAKA/JOHANNESBURG Nov 18 (Reuters) - Zambia could have paid a coupon on one of its sovereign dollar bonds last Friday, but chose not to do so due to the need to treat all creditors equally, the copper producer's central bank governor said on Wednesday.
However, the finance minister later said that the decision had increased the risk of bondholders taking legal action.
Zambia became Africa's first sovereign pandemic-era default after it failed to pay $42.5 million coupon at the expiry of the grace period on Friday. Holders of Zambian Eurobonds had rejected a government request to defer interest payments until April.
Facing the impact of the coronavirus pandemic and a limping economy, Governor Christopher Mvunga said that Zambia was seeking broad debt relief, including within the framework of a debt service suspension backed by the Group of 20 wealthy nations.
"One of the conditions is that all creditors have to be treated equally. ... It's not that we could not pay. It's just that if we pay one creditor then we need to pay all the creditors," Mvunga told a news conference.
Eurobond holders have criticised the government, saying its lack of engagement had made providing near-term debt relief impossible. One creditor group said it may consider other options in the wake of the default, setting the stage for a potentially acrimonious debt restructuring.
In a briefing to parliament, Finance Minister Bwalya Ng'andu said not paying the coupon had helped improve the atmosphere for negotiating with some other creditors "who previously have shown no indication to do so."
However, while reaffirming Zambia's commitment to working transparently with creditors towards a solution, he acknowledged the decision came with risks.
"These include bondholders taking legal action to enforce their rights under the financing arrangements," he said, adding that the government would work closely with its legal advisers to respond to that eventuality.
On Wednesday evening, ratings agency Fitch downgraded Zambia's long-term foreign currency rating to "restricted default", citing non-payment of the coupon on the 2024 Eurobond.
Ng'andu said the government was in discussion with the International Monetary Fund over the "appropriate policy instrument" to help manage public debt.
The Fund's involvement was important to give an orderly restructuring process "credibility and impetus", he said.
Zambia's three defaulted sovereign-dollar bonds are trading just over 43 cents on the dollar, according to Tradeweb data.
The central bank also left its main lending rate unchanged at 8.0% on Wednesday.
Inflation, which rose to 16% in October from 15.7% in September, is expected to average 16.7% in the fourth quarter, before declining to 13.5% next year.
Gross international reserves, meanwhile, slipped by $111.8 million to around $1.32 billion, or 2.3 months of import cover, from end-June to end-September, because of increased foreign exchange sales and debt service payments.
(Writing by Alexander Winning and Joe Bavier; Graphic by Karin Strohecker; Editing by Toby Chopra and Alexandra Hudson)