G8 Finance Ministers announce dramatic changes to Paris Club

Commentary on „A new Paris Club approach to debt restructuring“ – annex to the Deauville G7 Finance Ministers’ communiqué; May 17th 2003

The Paris Club is desperately trying to modernize itself

Last April US Finance Minister John Snow called upon Russia, France and Germany to cancel the considerable debt owed to them by Iraq in order to support the reconstruction of that country. The three countries, particularly German finance minister Hans Eichel reacted by claiming that any debt restructuring of that kind fell into the sole responsibility of the Paris Club and would therefore not be done unilaterally. They insisted that any solution to Iraq’s debt problem needed to be a multilateral one, which would involve all members of the Paris Club. The problem, however, was that the Paris Club did not have the rules and regulations, which would allow it to make the inevitable concessions, which Iraq will need. Under existing rules the country would have to be dealt with under “Houston Terms”, which only allow for medium term restructurings with a grace period and some concessions regarding interest rates – supposing the Club would respect its own rules. Those rules have, in fact, been broken by the Club in the past years, when powerful members deemed it opportune. The last case in point was Yugoslavia, which in 2001 received a two thirds stock of debt reduction, which normally is only available to the poorest countries, mostly in Subsaharan Africa.

In today’s communiqué G7 ministers, who traditionally set the rules for the 19 member Club, decided to change those rules fundamentally. Thus they will (finally) throw some of the most holy rules and principles of that creditor cartel overboard:

“Evian Terms” – let us call them so, pre-supposing the official baptism at the summit in two weeks – are not fixed rules and quantitative relief thresholds any more like their predecessors (Toronto, Naples, Lyon, Cologne Terms) were. Instead, “the Paris Club should taylor its response to the specific financial situation of each country rather than defining standard terms under this new approach.” Of course, up to now the G7 had always claimed that the relief thresholds which they had established were by definition adequate. Often enough, of course, they weren’t, as countries like Uganda, which has received three “final solutions, solving definitely its external debt problem” in Paris over the last seven years, will attest. Obviously the times of this masquerade are over.
So far Paris Club relief has functioned on the basis of a world nicely segregated into countries which are poor and indebted enough to “merit” relief and those which are not. Criteria underlying this world view are also bound to be considerably softened. The ministerial communiqué announces new rules for “low and middle-income countries ready to follow an exit strategy and to seek comparable treatment.” This could be practically anybody in the Non-OECD world, even the G8- and Paris-Club-member Russia.
Up to now relief is being conceded either in the form of a “flow” rescheduling of payments due within a period of up to three years, or in the form of a stock of debt reduction. This latter is – right- or wrongfully – considered to be an exit strategy. Now it seems like the Club intends to use relief as a carrot or its withholding as a stick for complying respectively non-complying countries – pretty much the same way, Bank and Fund use their fresh money handouts. Debt relief is planned to be granted in “stages”, which “would be designed to have a strong link with economic performance and public debt management.” Which means: Relief will be available in portions over longer time periods, and each portion will be delivered only, if the debtor country complies with its structural adjustment program. How many stages will be set up and what they will look like, will probably also be a matter of individually tailored decisions. Foreseeable attempts by Club members to withdraw from once conceded relief, after a country like, say, Nigeria, has not complied with conditionalities at any later stage, and to rather collect an original debt, are already promising quite some fun – for those who monitor from the sidelines!

Once starting to clean up the stuffy corridors of the Paris Club, the G7 disposed of another holy but more and more untenable principle: The “cut-off-date” which separates negotiable from non-negotiable debt, is to be “adjusted”. At least for once one useful adjustment from the creditors! In fact debts contracted before the individual “cut-off-dates” (for most countries somewhere in the eighties) have become relatively less and less important. In parallel two well-known elements of sovereign debt management of the early nineties celebrate their resurrections within the new framework: debt-buybacks, which the World Bank once supported in an earlier phase of poor country debt reduction and debt swaps are all of a sudden back on the agenda.

Conclusions:

The Paris Club has for long been considered as beyond any realistic chance for reform, because, as a classical piece-meal forum, it was rather part of the problem than of the solution, which needed to be a comprehensive one. With the Deauville proposal some sense of realism may enter the French treasury building in Bercy. This is good news after all. However, such a step towards reform inevitably raises some questions, which Club-insiders may eventually find hard to respond to:

What does actually remain of the raison d’etre of the Club, if it ceases to provide comparative treatment of debtors via clear quantitative benchmarks? Why not simply dissolve it into a broader comprehensive forum, which indeed would involve all creditors, particularly with a view to those middle income countries for which the new rules are intended, and which generally have a diversified creditor structure?
What kind of precedents are we going to see over summer, when critical countries like Iraq, Ecuador, Nigeria and early next year Indonesia are to be treated without the inadequate but at least clear-cut benchmarks of Houston and other Terms?
What incentive should Ecuador, as a country scheduled to negotiate in June have, to receive a useless rescheduling under the anachronistic Houston Terms? Ecuador would be the first country, for which it would pay off to gain some time, in order to benefit from the new rules – or rather: non-rules.

Jürgen Kaiser, erlassjahr.de, May 17^th 2003