Abstract

The Paris Club is an informal group of official creditors whose role is to find coordinated and sustainable solutions to the payment difficulties experienced by debtor countries. It is the major forum where creditor countries renegotiate official sector debts. A Paris Club “treatment” refers to either a reduction and/or renegotiation of a developing country’s Paris Club debts. The origin of the Club dates back to 1956 when Argentina agreed to meet its public creditors. It includes 19 permanent members, the major international creditor governments. To date, December 2013, the Paris Club has reached 429 agreements with 90 debtor countries. Since 1983, the total amount of debt covered in Paris Club agreements, rescheduled or reduced, is approximately 573 billion dollars.

History and Paris Club Terms

The origin of the Paris Club dates back to 1956 when Argentina agreed to meet its public creditors in Paris. Since 1956, the Paris Club has remained a central player in the resolution of developing and emerging countries’ debt problems. In 2004, the club agreed to write-off the debts of Iraq. In April 2006, Nigeria became the first African country to fully pay off its debt (estimated $30 billion) owed to the Paris Club. Principles and rules established at the occasion of various debt treatment negotiations proved remarkably efficient in contributing to the resolution of different types of debt crisis. Since the first debt restructuring took place in 1956, the terms, rules, and principles of the Paris Club have evolved to their current shape. There are different kind of Paris Club treatments depending on the economic circumstances of the distressed country. Under “Classic terms”, debtor countries were granted a rescheduling of credits. “Classic terms”, designed for dealing with temporary liquidity problems, were systematically used for debt treatment. In the mid-1980s, growing concerns about the ability of poor countries to repay their debts led creditors to consider new terms of treatment. In 1987, Paris Club creditors adopted “Venice terms” (non-concessional terms that provide debtor countries with longer deferral and repayment periods). In October 1988, Paris Club creditors agreed to implement “Toronto terms”, which introduced for the first time a partial cancellation of the debt of the poorest and most heavily indebted countries. In addition, the Paris Club creditors agreed in December 1991 to raise the level of debt cancellation to 50% (“London terms”). Later, the adoption of “Naples terms” in December 1994 made two substantial improvements to “London terms”. The level of debt cancellation was raised to at least 50% and a maximum of 67% of eligible. Secondly, the Paris Club made the ground-breaking decision that stock treatments could be implemented on a case-by-case basis for countries with a satisfactory track record with both the Paris Club and the International Monetary Fund (IMF).

In 1996, the international financial community realized that the foreign debt situation of a number of mostly African low-income countries had become extremely difficult. This was the starting point of the Heavily Indebted Poor Countries (HIPC) Initiative. For the non-HIPCs, the club engaged less in debt reductions and moved towards encouraging the absorption of non-HIPCs' financial losses by bondholders and other private creditors.

Principles and Rules

The Paris Club functioning relies on 5 key principles

1) Case by case debt treatment:
The Paris Club makes decisions on a case-by-case basis in order to tailor its action to each debtor country’s individual situation.

2) Consensus:
Paris Club decisions cannot be taken without a consensus among the involved creditor countries

3) Conditionality:
The Paris Club only negotiates debt restructurings with debtor countries that: need debt relief; debtor countries are expected to provide a precise description of their economic and financial situation, have implemented and are committed to implementing reforms to restore their economic and financial situation, and have a demonstrated track record of implementing reforms under an IMF program. This means in practice that the country must have a current program supported by an appropriate arrangement with the IMF (Stand-By, Extended Fund Facility, Extended Credit Facility, Policy Support Instrument). The level of the debt treatment is based on the financing gap identified by the IMF program.

4) Solidarity:
All members of the Paris Club agree to act as a group in their dealings with a given debtor country; they also agree to be careful with the impact that the management of their particular claims may have on other members’ claims.

5) Comparability of treatment:
A debtor country that signs an agreement with its Paris Club creditors should not accept from its non-Paris Club creditors terms of treatment of its debt less favorable to the debtor than those agreed with the Paris Club.

Countries Members, Observers and Participation

The Paris Club meets every six weeks (except in February and August) at the French Ministry of Economy and Finance in Paris. Each monthly session includes a one-day meeting called a “Tour d’Horizon” during which Paris Club creditors discuss among themselves the foreign debt situation of debtor countries, or methodological issues regarding the debt of developing countries. The debtor country is usually represented by the Minister of Finance, he generally heads a delegation comprising officials from the Ministry of Finance and the Central Bank. In the Paris Club meeting, not all States are involved, but only permanent members of the Club, which are the main creditors of the debtor State whose situation is examined.

The permanent membership is composed of Austria, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, Norway, Russia, Spain, Sweden, Switzerland, and the United Kingdom.

Other official creditors can also actively participate in negotiation sessions, subject to the agreement of permanent members and of the debtor country. When participating in a negotiation meeting, invited creditors agree to act in good faith and to follow the principles of the Paris Club. The following countries have participated as creditors in some Paris Club agreements: Abu Dhabi, Argentina, Brazil, Korea, Israel, Kuweit, Mexico, Morocco, New Zealand, Portugal, South Africa, Trinidad and Tobago, Turkey.

In addition, observers attend a negotiation meeting but do not participate in the negotiation itself and do not sign the agreement that formalizes the result of the negotiation. This observers are: World Bank, IMF, UNCTAD, OECD, African Development Bank (ADB), Asian Development Bank (ADB), Inter American Development Bank (IDB), European Bank for Reconstruction and Development (EBRD).

Paris Club and International Monetary Fund

Debt treatment sessions are organized in close cooperation with the IMF. A debtor country is invited to a negotiation meeting with its Paris Club creditors when it has concluded an appropriate programme with the International Monetary Fund (IMF) that demonstrates that the country is not able to meet its foreign debt obligations and thus needs a new payment arrangement with its external creditors (conditionality principle). Paris Club creditors link the debt restructuring to the IMF program because the economic policy reforms are intended to restore a sound macroeconomic framework that will lower the probability of future financial difficulties.

Paris Club Negotiation

For more than 50 years, the Paris Club has played a critical role in the resolution of debt crisis in developing and emerging countries. The restructuring request of the debtor country shall be submitted to the Paris Club during a meeting with the debtor country and the States major creditors. The meeting involved usually also the representatives of the IMF, which illustrate the economic situation of the debtor country and the prospects for growth; then are presented with reports of the representatives of the World Bank and UNCTAD as compared to that of the IMF, have a 'setting predominantly financial character. This statement is followed by statements of debtor country representative while the representatives of creditor countries may then request additional information or clarification regarding the situation in the debtor country.

The Paris Club does not exist as a formal institution. It is rather a set of rules and principles for debt relief that have been agreed on by its members. Therefore, since the Paris Club is an informal institution, the outcome of a Paris Club meeting is not a legal agreement between the debtor and the individual creditor countries. Creditor countries that participate in the negotiation sign a so-called ‘Agreed Minute.’ The Agreed Minute recommends that creditor nations collectively sign bilateral agreements with the debtor nation, giving effect to the multilateral Paris Club agreement.

A debtor country that signs an agreement with its Paris Club creditors should not accept from its non-Paris Club creditors terms of treatment of its debt less favorable to the debtor than those agreed with the Paris Club (Comparability of treatment).

Heavily Indebted Poor Countries (HIPC) initiative: Decision Point, Interim Debt Relief,Completion Point, Cut Off Date

The HIPC Initiative was initiated by the International Monetary Fund and the World Bank in 1996. The major changes introduced by this measure is to reduce the debt also against the international financial institutions and not only Governments. To be considered for the initiative, countries must adopt reform program supported by the IMF and the World Bank and implement this program for a period of three years. Countries must meet certain criteria, commit to poverty reduction through policy changes and demonstrate a good track-record over time. The Fund and Bank provide interim debt relief in the initial stage, and when a country meets its commitments, full debt-relief is provided.

1) Decision point:

To be considered for HIPC Initiative assistance, a country must fulfill the following four conditions:

be eligible to borrow from the World Bank’s International Development Agency, which provides interest-free loans and grants to the world’s poorest countries, and from the IMF’s Poverty Reduction and Growth Trust, which provides loans to low-income countries at subsidized rates; face an unsustainable debt burden that cannot be addressed through traditional debt relief mechanisms; have established a track record of reform and sound policies through IMF-and World Bank supported programs.

2) Interim Debt Relief:

The creditors of the Paris Club may grant interim relief a case by case basis between the decision point and the expected date of completion point, through treatment with a tax of 90%.

3) Completion point:

In order to receive full and irrevocable reduction in debt available under the HIPC Initiative, a country must:

establish a further track record of good performance under programs supported by loans from the IMF and the World Bank; implement satisfactorily key reforms agreed at the decision point; adopt and implement its PRSP for at least one year.

In addition, when a country requires, for the first time, the intervention of the Paris Club to restructure its foreign debt, it establishes a conventional date, the so-called "Cut Off Date". This divides the debt matured to that time, subject to restructuring, from debt that will mature later. The "Cut Off Date" protect export credit agencies which may not guarantee economic transactions within the debtor country in fear that it will not honor the new debt. The "Cut Off Date" helps the debtor country in crisis in terms of new access to credit and as stimulus to new private foreign investment. In special cases (Topping Up), the Paris Club may decide to restructure a part of debt incurred after the “Cut Off Date”, in order to close any financing gap in the balance of payments of the debtor country (Uganda was deleted 106% of the debt, then tapping, for further 6% to debt accrued in the period following the establishment of the "Cut Off Date").

References

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CLUB DE PARIS website, (https://clubdeparis.org/)

MINISTERO DEL TESORO, DEL BILANCIO E DELLA PROGRAMMAZIONE ECONOMICA (2000) Iniziative per la riduzione del Debito Estero dei PVS, Relazione No. 3 (http://www.dt.tesoro.it/export/sites/sitodt/modules/documenti_it/rapporti_finanziari_internazionali/rapporti_finanziari_internazionali/banche_multilaterali_di_Sviluppo/pag47-84.pdf)

SCISO E. (2012) Appunti di diritto internazionale dell’economia, Torino, Giappichelli Editore (https://www.giappichelli.it/home/978-88-348-2690-4,3482690.asp1)

SERIEUX J. E. and YIAGADEESEN S. (2003) Debt Relief for the Poorest Countries, New Jersey, Transaction Publishers

WEISS M. A. (2013) The Paris Club and International Debt Relief, Congressional Research Service Report, December (https://fas.org/sgp/crs/misc/RS21482.pdf)

Editor: Giovanni AVERSA