Nikita Aggarwal
Visiting Research Fellow at Queen Mary University of London
In the often messy
world of sovereign debt restructuring, the Paris Club offers a useful
forum for coordination. Modernizing the Club’s membership and practices
to better reflect today’s global economic order, will allow it to
perform this role more effectively and credibly.
Established in 1953, the Paris Club is the informal group of creditor countries that negotiates the terms of restructuring for a debtor country’s official bilateral debt. Although historically central to the international sovereign debt restructuring “system”, its role appears to have waned in recent years. It is not involved in discussions on the Greek debt restructuring, although this includes over $50 billion in official bilateral debt. The IMF recently amended its lending framework to reduce reliance on the Paris Club’s protocols.
Nevertheless, the Club continues to play a useful role, particularly for low-income countries that remain dependent on official bilateral financing and often have limited resources to coordinate a debt restructuring. To preserve and bolster this role, the Paris Club needs to modernize its membership and practices. Whilst steps have been taken in the right direction, more work is needed. Two areas require particular attention:
On restructuring rules and principles, greater access to capital markets has brought new sources of finance for many sovereigns. Where non-Paris Club debt (bilateral, multilateral and/or commercial) outweighs the Paris Club’s share, the application of the Club’s “comparability of treatment” principle becomes counter-intuitive, and challenging to enforce. In future restructurings, it would be appropriate to encourage comparability of treatment only where Paris Club creditors (including ad hoc participants) represent the majority of debt being restructured.
Relatedly, the scope of debt covered by Paris Club restructurings (“public external debt” owed to “official bilateral creditors”) would benefit from clearer definition. For example, does this include sovereign bonds purchased by central banks for monetary policy purposes? And what about credit extended through a country’s sovereign wealth fund? Uniformity of understanding should be reached amongst relevant institutions, especially the IMF, to avoid the sort of confusion seen with Ukraine’s debt restructuring.
Established in 1953, the Paris Club is the informal group of creditor countries that negotiates the terms of restructuring for a debtor country’s official bilateral debt. Although historically central to the international sovereign debt restructuring “system”, its role appears to have waned in recent years. It is not involved in discussions on the Greek debt restructuring, although this includes over $50 billion in official bilateral debt. The IMF recently amended its lending framework to reduce reliance on the Paris Club’s protocols.
Nevertheless, the Club continues to play a useful role, particularly for low-income countries that remain dependent on official bilateral financing and often have limited resources to coordinate a debt restructuring. To preserve and bolster this role, the Paris Club needs to modernize its membership and practices. Whilst steps have been taken in the right direction, more work is needed. Two areas require particular attention:
- Enhancing the representation of emerging market creditor countries.
- Updating the Club’s restructuring principles and rules to reflect the new modalities of international sovereign finance.
On restructuring rules and principles, greater access to capital markets has brought new sources of finance for many sovereigns. Where non-Paris Club debt (bilateral, multilateral and/or commercial) outweighs the Paris Club’s share, the application of the Club’s “comparability of treatment” principle becomes counter-intuitive, and challenging to enforce. In future restructurings, it would be appropriate to encourage comparability of treatment only where Paris Club creditors (including ad hoc participants) represent the majority of debt being restructured.
Relatedly, the scope of debt covered by Paris Club restructurings (“public external debt” owed to “official bilateral creditors”) would benefit from clearer definition. For example, does this include sovereign bonds purchased by central banks for monetary policy purposes? And what about credit extended through a country’s sovereign wealth fund? Uniformity of understanding should be reached amongst relevant institutions, especially the IMF, to avoid the sort of confusion seen with Ukraine’s debt restructuring.
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