Paris Club

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Map of the permanent members of the Paris Club

The Paris Club (French: Club de Paris) is an informal group of financial officials from 20 of some of the world's biggest economies,[1] which provides financial services such as debt restructuring, debt relief, and debt cancellation to indebted countries and their creditors. Debtors are often recommended by the International Monetary Fund after alternative solutions have failed.[citation needed]

It meets every six weeks at the French Ministry of Economics and Finance in Paris. It is chaired by a senior official of the French Treasury, currently the Director General of the Treasury, Ramon Fernandez. The club grew out of crisis talks held in Paris in 1956 between Argentina and its various creditors. Its principles and procedures were codified at the end of the 1970s in the context of the North-South Dialogue.[citation needed]

History[edit]

Formation[edit]

The Paris Club was officially established as a debt relief organization on May 14, 1956. This establishment occurred when France responded to a request from Argentina who was working to prevent a credit default and requested a review of their needs as a debtor nation by the foreign nations to whom the country had accumulated financial obligations. This resulted in discussions in Paris from May 14 to May 16, 1956 where the first agreement, drafted by the Paris Club, was set forth.[2]

Early Years[edit]

After the initial agreement with Argentina, the Paris Club experienced very little activity in terms of subsequent agreements during this initial period of time in which it was an established financial group. Many of the group’s efforts during this period were focused on creating guidelines for the functioning and execution practices of the organization. During the first 20 years of being an established debt relief organization, the Paris Club focused its efforts on countries within Latin America and Asia. The first agreement outside of these regions was with Zaire (now Democratic Republic of Congo), a country in Africa. During this time, debt agreements were primarily simple, straightforward debt restructuring where repayment plans were established with debtor nations. Beginning in the 1980s, the Paris Club began to establish more complex debt relief programs where new repayment avenues came into play from debt deferral to certain situations of debt forgiveness.[3]

Objectives[edit]

From 1930 to 1980, there were several huge debt crises and advanced countries realized that they could not overlook the increasing role played by developing countries to the world economy. Thus, Western countries devised a bilateral approach to control debt and credit offering between individual creditor nation and debtor nation before the 1950s. However, bilateralism did not work because it was too expensive and time consuming. Therefore, the U.S. requested its assistance for cooperation and in 1960, multilateralism has then been adopted.

The Paris Club is an unofficial group of public creditors that helps to discharge the obligation of countries in debt that face the risk of default. The Paris Club started the group in Paris to reschedule the public export credit support of Argentina in 1956. In the 1960s, Brazil, Chile, Turkey, etc. also agreed to reschedule with similar conditions as Argentina did. The main objective of The Paris Club is to maximize the profit of credit nations by multilateral cooperation. They promote separate, limited, foreign currency equal to credit nations rather than individuals moving even though it takes longer. They also carry on cooperating to restore repayment ability and also ease the pressure of redeeming foreign loan through rescheduling debts. Although The Paris Club is responsible to solve national debts of countries, they remain an unofficial organization. However, Paris Club is like an official organization with an executive office, members and existing rules.

The principles and rules of Paris Club lost their binding power, but members still follow them strictly. They will require holding meetings with representatives from the IMF, OECD, World Bank and UNCTAD, who participate as observers. They also include holding Tour d’ Horizon which is a meeting that foster exchange between standing nation member’s opinions and also hosts negotiation sessions if need be.

Organizational Structure[edit]

Permanent members[edit]

Associated members[edit]

Observers[edit]

List of chairpersons[edit]

Incomplete list:[4]

Functioning of the Group[edit]

Contrary to public opinion and high expectation from first-time debtor countries, the Paris Club has remained strictly informal since its birth. Unlike established international organizations the Paris Club still does not have any fixed institutional structure. However, the legal vacuum does not impede the functioning of the club thanks to a number of rules and principles inherited from the very first rescheduling in 1956 with Argentina. Since then, as its role inflates, from the beginning of the debt crises in 1982, specific procedures of the Paris Club evolved over time to address new challenges confronting debtors.[5]

Paris Club Meetings[edit]

Each month, except in February and August, Paris Club creditor countries get together for a one-day meeting in Paris called a “Tour d'Horizon.” The purpose of these meetings is to evaluate the external debt situation of previous or potential debtor countries. Most of the meetings end with a discussion about methodological issues regarding the debt of developing countries. The informal culture of the club begs for this discussion and an effective teamwork in order to devise methods and rules necessary for the functioning of the club. All of the twenty permanent members of the Paris Club can participate in the Tour d’Horizon or request to be an observer during a negotiation even if the debtor country in question does not owe them anything. Similarly, a minor-creditor member, called de minimis creditor, may participate to the session as an observer when its rescheduled debt is less than a minimum amount. Creditor countries are usually represented by high officials from their ministry of finance (except for the United States, whose team is led by the U.S. Department of State) In general, negotiation meetings with one or more debtor countries may also be part of the agenda of the session.[6] In addition, representatives of international institutions, including the IMF and the World Bank participate to all the meetings. Also, relevant regional development banks such as the African Development Bank, Inter-American Development Bank, and the Asian Development Bank, are often invited to negotiation sessions as observers. With the approval of permanent members and debtor countries, other official bilateral creditors may also be invited to attend negotiation meetings.

Eligibility[edit]

There are two main criteria for debtor countries to get help from the Paris Club. First, the debtor country has to default or to be about to default on its payments; either it has accumulated arrears or it makes the convincing argument that it will default on its payments if not granted a reschedule. The budget deficit for a year or so is projected in order to support decision-]making. Very often, debtor countries provide the financial deficit estimated by the IMF. The second condition is the implementation or commitment to implement reforms, under an IMF program such as structural adjustment, to restore the economic and financial situation. This second condition is paradoxical since the IMF has to agree with the debtor country about the debt relief granted by creditor countries. Nevertheless, debt relief is conditional on economic reforms.[7] What that means in practice is that debtor countries must have a current program supported by an appropriate arrangement with the IMF.

Paris Club Procedures[edit]

Preliminaries[edit]

Compared to other institutions such as the London Club, the strength of the Paris Club is its speed in completing a rescheduling agreement involving billions of dollars of obligations. Its long experience of official creditors and the fact that a Paris Club agreement is an ad referendum framework agreement that is implemented by a separate bilateral agreement between the debtor country and each participating Paris Club creditor enable the club to reach an agreement in two days.[8]

When debtors need the assistance of the Paris Club, they send a formal request for a meeting with the debtor’s official creditors to negotiate a debt-relief agreement. Negotiations are quickly scheduled upon reception of this document if the debtor already has an IMF standby covering the period for which the relief is requested, otherwise the debtor is reminded of this prerequisite.

Negotiations[edit]

Negotiations typically take place in a conference room in Paris and chaired by France although another country can host and chair the negotiation (Ghana’s 1970 debt-relief negotiations were held in London). The chairman begins the session after few welcoming words and the official meeting begins with a statement by the ministry of the debtor country, who basically orally presents the written requested debt treatment. This statement is followed by the IMF, the World Bank, and the regional development bank. This process constitutes the first part of the meeting. After lunch, a second round gathers creditor countries and the IMF representative without debtors being present. Creditors come up with an agreed-upon proposal that is presented to the debtor country by the chairman. The delegation of the debtor country can make amendments or agree to the terms. This cycle of proposition and counter-offer, mediated by the chair, can take a while. It is usually possible to reach an agreement by lunchtime of the next day. As soon as an agreement is reached, the secretary prepares a document called the Agreed Minutes and contains the terms of the negotiation.[9]

Rescheduling Terms[edit]

Rescheduling agreements with the Paris Club are never a restructuring or rescheduling of an entire stock of outstanding debt on a specific date, but rather a rescheduling of payments of principal and interest due during the period of time called “consolidation.” Thus official creditors do not reschedule the stock but the flow of debt. The reason behind this wisdom is that the stock of debt may include some foreign-aid credits with payments due in the distant future. On top of past obligations, debtors face new layers of future payments at the end of the consolidation period. Creditors have a strong preference to limit the consolidation period to one year coinciding with the debtor country’s IMF standby arrangement whereas debtors prefer a multi-year consolidation period of two to five years.[10]

Over the years, longer repayment periods have been considered by the club. Before, repayment terms did not exceed ten years including a grace period (in which only payments of interest on the consolidation are due). However, the terms now go up to 40 years (including 16 years of grace) for official development aid loans. The number and percentage of debt cancellation has also been on the increase and can reach up to 90 percent for some Heavily Indebted Poor Countries. Below is a graph that provides a synopsis of the Paris Club’s claim for the last few years.[11]

Accomplishments[edit]

There are many notable contributions from Paris club, which is an informal group of 20 sovereign creditor countries, working in the development of coordinated and sustainable solutions for the problems and difficulties in payment faced by countries in the debtors list.[12] The Paris club completed an important role in debt crisis resolution for a period greater than 50 years, in emerging and developing countries.[13] The IMF and World Bank take part in every Paris club meeting. The rules and principles that are established for negotiations of different types of debt treatments have proven to be highly efficient towards resolving of various debt crises. Pragmatism and flexibility are important features in the past activity of the Paris club, with the decisions of the group influenced by both political and technical criteria. The Paris club uses the Evian approach for the HIPC (Heavily Indebted Poor Countries Initiative) debt relief.[14]

There are many contributions of Paris club which are deemed notable. The recent deal with the creditors of the Paris Club and the Argentinean Government on the 28th and 29 May 2014, is a landmark deal, where an arrangement was made to clear the debt in the arrears which are due to the creditors of the Paris Club in a span of 5 years. The deal covers some amount of the USD $9.7bn debt by April 30, 2014. Additionally, there is flexible structure to get the arrears cleared with a minimum of USD $1,150 million by May 2015, with the payment due to be paid by May 2016. The debt accumulated for Argentina is due to the 2001-02 Argentinean default crises, where there is default amount of $132bn.[15]

Paris Club also worked on settling of Seychelles's debts by about 45% where the reduction of the debt is completed in two different phases, the first being 22.5% by the 1st of July, 2009 and the balance 22.5% debt reduced by the 1st of July, 2010. The Paris Club's deal with Seychelles is helpful in transforming the economic landscape of the country, thereby stabilizing the country's economy. While this arrangement of debt is related to comparing of the debt arrangement’s initial review with IMF and also related to the comparison of debt treatments with other creditor companies, the balance of debt is expected to undergo restructuring in the 18-year period that included the grace period of 5 years. The debt restructuring is completed at low interest rates. The World Bank and IMF, which are the Bretton Woods institutions,helped Seychelles in securing the deal.[16]

The Paris Club helped with providing debt relief for the construction of Iraq and this was through four components which are bilateral debt for non-Paris Club members that is $67.4 million, bilateral debt of Paris Club that is $42.5 billion, multilateral debt of $0.5 million and commercial debt of $20 billion.[17] The negotiations related to debt relief in Iraq resulted in the debt reduction for Paris club by 80%.[18]

The Paris Club creditor countries gave commitment towards providing debt relief estimated at US $21.3 billion for 36 countries in 2012 PV terms. The laudable point is that majority of the Paris club members have committed voluntarily to provide additional debt relief, beyond the relief required under the initiative of HIPC, for nearly 35 HIPCs ranging from Afghanistan to Zambia. The global nature, the transparent and open nature of members, and the principles of Paris Club, can help it make a greater impact in different countries in the future to come.[19]

Criticism of the Paris Club[edit]

Creditors have been able to run the Paris Club for years without any threat of criticism or any negative comments; however, bondholders are now irritated that the Paris Club is refusing to adjust its methods to fit the new and different economic environment, one in which private finance calls the shots. The Paris Club has always been known as a secretive organization. Rules of the Paris Club are not written down, but are instead simply known by only the treasury officials who keep these ideas completely to themselves. Along with the secretive nature of the decisions made by creditors, participants are known to be “kept working - or waiting - throughout day and night, with little sleep or food, until one side cracks. The creditors sit in a windowless conference hall while the debtors are crammed into a tiny meeting room downstairs.” [20] These working conditions are accompanied by unfair treatment to the representatives of the debtor countries.

Who Are Attacks Coming From?[edit]

• Former participants: Former UK treasury official who attended Paris Club meetings is quoted in saying: "It always struck me that there must be a better way of doing it, when it gets to 3am, your mind is fuzzy and you just want to sleep, can you really be producing the best results? This approach seems hopelessly out of date." Another said: "Paris Club meetings are surreal it’s like being in a production of the Wizard of Oz. You lose all track of time." [21]

Hedge fund managers

• Senior Bankers: Senior debt negotiator and vice chairman of Citigroup Bill Rhodes had this to say: “There needs to be more transparency [in the Paris Club], more Flexibility and more dialogue with the private sector."[22]

When Paris Club creditors and officials were asked who could be involved in the Paris Club their reply was: “The Paris Club invites all creditors of good faith.” This begged the question: Who decides who is a good faith creditor?[23] Disagreements and criticism of the Paris Club have come from more than one avenue and have increased drastically compared to early Paris Club history.

See also[edit]

References[edit]

  1. ^ "Israel joins Paris Club of rich creditor nations". Business Week. AP. 24 June 2014. Retrieved 24 June 2014. 
  2. ^ "About Us". Club de Paris. 2014-06-21. 
  3. ^ "About Us". Club de Paris. 2014-06-21. 
  4. ^ Lex Rieffel. Restructuring Sovereign Debt: The Case for Ad Hoc Machinery. Brookings Institution Press, (2003). ISBN 081577446X
  5. ^ L’allegement de la dette au club de Paris: les evolutions recentes en perspective (Working Papers No. 71), Vourc'h, Ann (OECD Development Centre), 1992 
  6. ^ About Us, Club de Paris, 2014-06-21 
  7. ^ L’allegement de la dette au club de Paris: les evolutions recentes en perspective (Working Papers No. 71), Vourc'h, Ann (OECD Development Centre), 1992 
  8. ^ Rieffel, Alexis. “The role of the Paris Club in managing debt problems”. Princeton: Princeton University.
  9. ^ Rieffel, Alexis. “The role of the Paris Club in managing debt problems”. Princeton: Princeton University.
  10. ^ Rieffel, Alexis. “The role of the Paris Club in managing debt problems”. Princeton: Princeton University.
  11. ^ Kinds of Debt Treatments Granted, Club de Paris, 2014-06-21 
  12. ^ Welcome to the Paris Club, Club de Paris, 2014-06-21 
  13. ^ Trichet, J-C (2014-06-21), Celebrating the 50th anniversary of the Paris Club 
  14. ^ Courbe, T (2014-06-21), Paris Club’s role in the financing of development 
  15. ^ Argentina in deal with Paris Club to pay $10bn debts, BBC News, 2014-06-21 
  16. ^ Paris Club cuts Seychelles’ debts by 45%, Seychelles Nation, 2014-06-21 
  17. ^ Weiss, M.A. (2014-06-21), Iraq’s Debt Relief: Procedure and Potential Implications for International Debt Relief 
  18. ^ Rebuilding Iraq: U.S. Achievements through the Iraq Relief and Reconstruction Fund, United States Department of State, 2014-06-21 
  19. ^ Tiwari, S., & Lewis, J. (2014-06-21), Heavily indebted poor countries (HIPC) Initiate and multilateral debt relied Initiative (MDRI) - statistical Update. International Monetary Fund 
  20. ^ "Paris Club Comes Under Attack". Euromoney Magazine Banking Industry News & Analysis of International Finance. 2014-06-09. 
  21. ^ "Paris Club Comes Under Attack". Euromoney Magazine Banking Industry News & Analysis of International Finance. 2014-06-09. 
  22. ^ "Paris Club Comes Under Attack". Euromoney Magazine Banking Industry News & Analysis of International Finance. 2014-06-09. 
  23. ^ "Debt Management a La Louis XVI – A Short Promenade through the Programme and Practice of the Paris Club". Erlassjahr. 2014-06-09. 

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