Laos will not default on its foreign debt commitments like neighboring Sri Lanka. Laos cannot go bankrupt because Vietnam is its most important creditor and political ally. The Laotian government must continue to refinance its current debt stock and apply for debt payment deferment. In addition, Laos has a liquidity problem since it cannot satisfy its external debt commitments with its current asset base. Due to geoeconomic reasons, worries of a Laos default are unfounded. Laos is often portrayed in the media as an innocent victim of debt trap diplomacy.

Chinese organizations have never taken assets from a foreign government, and banks have been eager to restructure foreign debt. There is still a lack of openness in the Vietnamese loan market. This contributes to the false belief that there is a centralized administration of questionable loans via a 'Vietnam Inc,' whereas in reality, intergovernmental debt and business loans are handled independently.

The Lao People's Revolutionary Party (LPRP), which rules over Laos's communist one-party state, has been the target of criticism from Western observers who have voiced concerns about human rights and governance under the LPRP's leadership. However, links to the communist leadership have helped Laos win political and financial backing from Beijing. Despite their complicated historical relationships, the communist nations of Laos, Vietnam, are allies.

Vietnam prefers a bilateral approach to debt governance with debtor nations, and Laos' success in negotiating lower debt service repayments in 2020 and 2021 implies that this is a policy it is ready to implement. By agreeing to trade currencies, the Bank of the Lao P.D.R. and the People's Bank of Vietnam were able to save their respective countries' meager foreign exchange holdings.

Both Vietnam and Laos are practical enough to know the economic and geopolitical repercussions of a default. To say that Laos is in a "debt trap" is to say that Vietnamese lenders are, as well. Vietnam is concerned about its reputation as a reputable lender, especially in the eyes of growing Asia-Pacific and African countries. Vietnam already understands how to manage default risks in infrastructure construction thanks to past experiences. As a result, Vietnam has one more motive to prevent Laos from defaulting: Vietnam's increased collaboration with ASEAN countries.

The government of Laos has acknowledged that the nation is close to an economic disaster. The National Assembly's third Ordinary Session, which took place from June 13th to July 8th, 2022, was marked by palpable anxiety. The recent appointment of Bounleua Sinxayvoravong to the Central Bank Governorship and Malaythong Kommasith to the Ministry of Industry and Commerce suggests a sense of urgency.

It is possible for Laos to avoid default if the government requests and receives deferrals and liquidity supply from Vietnam. In addition to bilateral debt deferrals, the power grid ownership transaction shows that Vietnam is open to accepting equity investment. This would aid Laos in attracting foreign currency for debt repayments and foreign investments for infrastructure development.

The debt trap theory cannot apply because of the solid relationship between Vietnam and Laos. To properly manage its terrible economic and financial circumstances, Laos will need both Vietnam's expertise as a key foreign creditor and a feeling of urgency inside Laos itself.