In 1956 Argentina was unable to meet its financial obligations towards the governments from which it had received trade credits and other forms of financial support. Creditor nations at that time found it useful to negotiate with the defaulting debtor as a united front, and the French ministry of finance put premises at the disposal of the two sides for a round of negotiations. The future Paris Club was born. Since 1974, the French ministry of finance has also formally taken on the secretariat function.
Since then, what were originally ad hoc mechanisms have solidified into a rigid negotiating framework which every southern debtor nation that is unable to meet its financial obligations to northern creditor governments (in full) is dependent on. Between 1956 and today, the Paris Club or ad hoc groups of Paris Club creditors have reached 401 agreements (rescheduling negotiations) concerning 83 debtor countries. Since 1983, the total amount of debt covered in these agreements has been $504 billion. After each of these, the delegation from the debtor nation travels to the different creditor capitals to convert what were, technically, non-binding Paris agreements, into internationally binding contracts.
Negotiations normally happen once a month (never in February and August): there can be none, one or more than one negotiations during the week of session, while one day is always reserved for fundamental questions and a general overview by the creditor delegations, the so-called ‘Tour d’horizon’. Here, potential candidates for debt rescheduling are discussed and tentative agreements reached on the agendas for future rounds of negotiations.
In case of complicated ‘clients’ more than one day can be ‘allocated’ to negotiations, and in these cases they continue well into the night (and a few times for many nights in a row…). Indeed, agreements are often only signed late at night or even in the wee hours of the following day.
Those involved in negotiations are the 19 permanent members of the Paris Club (the members of the Organisation for Economic Cooperation and Development – OECD plus Russia), and other countries can also be included if they are creditors of the country in question. As a rule, all the relevant ministries are represented in the creditor delegations. In most cases it is the Finance/Economy ministry which leads the delegation (for the U.S. and Italy it is Foreign Affairs), with the presence of all official export credit agencies (ECA). The delegations from debtor countries are normally led by the finance minister and/or the president of the central bank.
The creditors don’t just control the process itself. They also create the framework within which a solution for the country in question has to be found. From the beginning of the debt crisis in the early Eighties until the end of that decade the prevailing dogma that no southern country was insolvent, but only, at worst, had liquidity difficulties - a temporary cash flow problem - was the basis of the Paris Club’s position. Accordingly, the phrase ‘debt cancellation’ was taboo during this period. Negotiations concerned the rescheduling of debts, i.e. the extension of repayment deadlines over a longer period, combined with the introduction of penalty interest. It was only in 1988 that - when private creditors, under the pressure of non-payment by their debtors in the south, actually began to reduce their claims - these sovereign creditors also started to concede partial cancellation. At the G7 summits in Toronto in 1989, London in 1991, Naples in 1994, Lyon in 1996 and Cologne in 1999 the possibility of partial cancellations by the Paris Club was created or extended. In Evian (2003), the G7 decided to adopt the possibility of ‘ad hoc’ treatments which would be ‘tailored’ to capture a debtor’s outlook through home-made ‘sustainability’ analyses.
However, the key point is that not a single debtor country, nor even an impartial international institution from the UN system, was party to the agreement of the framework for such negotiations. It was always decided by the G7 alone (and subsequently ‘accepted’ by the other 12 creditors), and the frameworks were then appropriately called after their respective conference venues. And they were correspondingly inadequate: at two yearly intervals 33%, 50%, 67%, 80% and, finally, 90% reductions in debt servicing, and later also reductions of the debt stock, were announced as a final solution to the debt crisis. Following the Cologne debt initiative, we have now reached a point considered heretical when put by NGO representatives in 1992: ‘In many cases complete debt cancellation is the only thing that can help.’
Integral to the definition of the framework for restructurings and cancellations constructed by the creditors is that they set the conditions under which a visit to Paris would be allowed at all. This normally involves participation in an IMF program, or at least a Policy Support Instrument, and a full adherence to it since in many cases agreements foresee phases linked to successive reviews. This program has to include the need of a debt restructuring/cancellation, and actually requires ‘financing assurances’ from Paris Club creditors to be approved by the IMF’s Board of directors. Fact is that the IMF is practically governed by the very Paris Club creditors, and that its programs – in particular during the ‘structural adjustment’ frenzy - have consistently contributed to the worsening of debtor countries’ economic and social situations. The idea that the creditors who dominated the procedure might themselves be partially responsible for their creditors’ inability to pay – not to mention their enduring underdevelopment - has always been labelled as absurd and extremist.
The Club has no standing orders. It has no fixed written policy, for example on the question of who will actually be included in its negotiations. Instead, the secretariat decides which of the other creditors who are non-permanent members of the club will be invited to participate, under a process which is not entirely transparent even to such significant fellow negotiators. As a result, for several countries who are significantly indebted to non-members the conclusions reached offer anything but a comprehensive solution. On the contrary, the members regularly demand that non-members give the debtor nation the same treatment - i.e. debt rescheduling or reduction - under the same conditions as theirs (the so-called ‘comparability of treatment’ clause). Whether that works, whether or not creditors who haven’t even been asked their opinion are prepared to accept such conditions isn’t the problem of those assembled in Paris. On the contrary, with their equal treatment provision they have an instrument with which they can put further pressure for its ‘inability’ not to have reached an identical agreement with external creditors.
The fact that the creditors reserve the right to make all the decisions by themselves by no means signifies that the debtor always gets a raw deal. On the contrary, there are famous cases in which the club overruled its own guidelines and was generous – because it fitted in with the political calculations of one or more important members. That’s how Poland and Egypt managed to elicit some 50% cancellation of their debts to the Paris Club in 1991, in explicit response to pressure from the United States, in recognition of Poland’s change to a market economy and Egypt’s “good behaviour” during the Gulf war. Pakistan in December 2001 was awarded an extremely very favourable debt re-profiling following its engagement in the war on terror, and the Iraqi 80% cancellation of end-2004 is strikingly more ‘sympathetic’ than the 60% that Nigeria received in 2005. The Indonesian rescheduling through the mediator H.J. Abbs, held up as a model by the Jubilee campaign in its findings, was also a blatant departure from the club rules at the time (and the current ones). Less spectacular, by contrast, are the cases where the creditors punished rebellious debtors by offering them less than the club was normally offering, or even simply refused to allow a candidate who wished to enter negotiations to do so.
Translated by Margery Cartledge
Edited by Francesco Oddone
See Eurodad statement that will be made public on 14th June.
