Paris Club exposed over 'misleading' announcement on Hurricane Mitch debt deal

Leading creditors face a barrage of criticism following news that the debts of Honduras and Nicaragua will continue to have interest added - despite a payments freeze agreed by lenders after the devastation of Hurricane Mitch. Evidence has also emerged indicating that the agreed three-year freeze will actually last little over two years.

The Paris Club of lending countries, including Germany, Britain, the United States and Japan, announced on 9 December a three-year debt moratorium for Nicaragua and Honduras, and debt relief for Nicaragua of $100 million. It has now emerged that the detail of the Paris Club announcement was seriously misleading. Government sources present at the Paris Club meeting have disclosed to the Brussels-based monitoring organisation, Eurodad, that the interest that is deferred during the moratorium period will be added to the debt stock when it finishes. It claims that Nicaragua will benefit with "debt relief" of more than $100 million. This figure simply refers to the debt service Nicaragua will not have to pay during the moratorium, but with the capitalisation of interest, the two countries will have to pay more when the moratorium is over.

The Paris Club also stated unequivocally that they had granted a moratorium of 3 years for both Nicaragua and Honduras on payments of foreign debt. However, Eurodad has discovered from sources attending the meeting that a moratorium for both countries will last only until February 2001 - little over two years. This is a long way short of a three-year moratorium.

The Paris Club discussions were held behind closed doors, without a representative from Nicaragua or Honduras, and the cartel considered it sufficient to provide a press release that ran to no more than half a page. The fact that even the little information released there now appears to have been seriously misleading has raised major questions about the accountability of the Club - technically made up of representatives of democratically elected governments.

The IMF demands market interest rates from Honduras

The power of the creditors was in evidence again in the demands placed on Honduras. The country has been told that it will not be eligible for debt relief, unless it agrees to an Enhanced Structural Adjustment Programme from the IMF. The IMF is using the opportunity of Honduras' total vulnerability to impose its own policies on the country's economy. Honduras will certainly sign, as it not only needs debt relief, but it requires all the external financial assistance it can get.

The IMF agreed on December 7 to release a new loan of $66 million to the stricken country. However, according to Oxfam International, it is not a concessional loan, but a market-interest loan. The interest rate on the loan will be 5%. Payments must begin in just over 3 years and the entire loan must be paid off by the end of the 5th year. This shows the inflexibility of the institution and its resistance to responding in a way that would go somewhere near to meeting the needs of recovery from the devastation of the natural disaster.