What is the Paris Club?

The Paris Club is an informal group of official creditors whose role is to find co-ordinated and sustainable solutions to the payment difficulties experienced by debtor nations through debt rescheduling. Rescheduling is a means of providing a country with debt relief through (a) a postponement of debt service obligations, and (b) in the case of concessional rescheduling, a reduction in debt service obligations.

When was it created and why is it called the Paris Club?

The first meeting with a debtor country was in 1957 when Argentina agreed to meet its public creditors in Paris – it has been called the Paris Club ever since. Because the Paris Club considers itself as an informal group, there is no official date of creation.

Who are the members of the Paris Club?

The 19 Paris Club permanent members are governments with large claims on various other governments throughout the world. They are:

Austria Australia Belgium Canada Denmark

Finland France Germany Ireland Italy

Japan Netherlands Norway Russian Federation Spain

Sweden Switzerland United Kingdom USA

Other creditors such as the World Bank, Asian Development Bank, and International Monetary Fund can participate in rescheduling sessions.

How does it function?

The creditor countries meet 10 to 11 times a year in Paris for negotiation sessions or to discuss the situation of the external debt of debtor countries and issues about the debt of developing countries.

The Chair of the Paris Club is a senior official of the French Treasury -- usually the Head of the Treasury. Deputies to the Chair in the French Treasury serve as co-president and vice-president.

A permanent Secretariat General is maintained by a group of around 15 people in the French Treasury. The Paris Club Secretariat's address is as follows:

Secrétariat du Club de Paris
Direction du Trésor
139, rue de Bercy
Télédoc 551
75572 Paris Cedex 12
France

Does the Paris Club have statutes?

The Paris Club is an informal group, so it does not have any statutes. This situation gives Paris Club creditors the flexibility to address the specific situation of each debtor country facing debt payment difficulties. However, Paris Club creditors have found that a number of rules and principles have been useful in efficiently securing agreement amongst creditors and between creditors and debtor countries. These include:

• decisions made on a case by case basis;
  
• consensus to be reached among the participating creditor countries;
  
• conditionality that debt treatments are applied only for countries that need a rescheduling and that implement IMF reform package;
  
• conformity of creditors in implementing the terms agreed in the context of the Paris Club;
  
• that a debtor country cannot agree with another creditor a treatment less favorable for the debtor than the consensus reached in the Paris Club.

The Paris Club meets only debtors that (a) need debt relief and (b) have implemented and are committed to sustaining the reforms to improve their economic and financial situations. In practice this means that the country must have a current program with the IMF supported by a conditional arrangement such as the Stand-by, Extended Fund Facility, Poverty Reduction and Growth Facility arrangements.

A debtor country -- usually represented by the Minister of Finance and/or the Governor of the Central Bank -- will negotiate with the Paris Club for debt rescheduling. The outcome of the negotiation is not itself a legal agreement between the debtor and the individual creditor countries. Instead, creditor countries that participate in the negotiation sign an Agreed Minute, which is a recommendation to their governments to sign bilateral agreements with the debtor countries. It is these bilateral agreements that make the agreement reached in the negotiating session effective.

What are the amounts of debts treated by the Paris Club?

Since 1956, the Paris Club or ad hoc groups of Paris Club creditors have reached over 338 agreements concerning 76 debtor countries. Since 1983, the total amount of debt covered in these agreements has been USD 375 billion.

What kind of debts can be treated under the Paris Club?

Paris Club agreements only apply to medium and long-term public debts, i.e. debts owed by governments. Debts owed by private entities and guaranteed by the public sector are considered to be part of the public sector debts. In the case of loans from the U.S., for example, it includes loans and guarantees issued by the U.S. Agency for International Development, the Commodity Credit Corporation, Export-Import Bank of the United States, the Department of Defense, and the U.S. Department of Agriculture (PL-480).

What are the Paris Club's standard terms of treatment?

There are four pre-defined categories, listed below by increasing degree of concessionality:

• Classic terms: standard treatment
  
• Houston terms: for highly-indebted lower-middle-income countries
  
• Naples terms: for highly-indebted poor countries (cancellation up to 67 percent)
  
• Cologne terms: for countries eligible for the HIPC Initiative (cancellation up to 90 percent)

What do the Paris Club rescheduling terms cover?

In principle, there are four main principles of Paris Club rescheduling:

• The rescheduled arrears (i.e. debt due and not paid as of a given date) and debt service is payable over a specified period. A Paris Club rescheduling would grant the debtor 5 years grace, during which only interest would need to be paid on the rescheduled amounts, and would allow 5 years to repay the debt following the grace period. Longer grace and repayment periods are standard for lower income debtors.

• Interest is paid on all rescheduled amounts, even during the grace period, at rates no less favorable than those in the original contracts.

• Only arrears and those payments falling due during the 1-year to 3-year consolidation period are rescheduled. Payments falling due following the consolidation period remain due according to the original schedule.

• Countries may return to the Paris Club for repeated reschedulings if necessary.

Indonesia has undergone six treatments of the Paris Club since 1966.

Date of debt treatment	April 13, 2000
Amount treated	USD 5445 million
Categories of debts treated	Treatment of maturities falling due from April 01, 2000 up to March 31, 2002
Repayment profile	Houston terms
Specific provisions	Possibility to conduct debt swaps
Date of debt treatment	September 23, 1998
Amount treated	USD 4176 million
Categories of debts treated	Treatment of maturities falling due from August 6, 1998 up to March 31, 2000
Repayment profile	Ad-hoc
Specific provisions	Phases, free transferability provision, payment of non-consolidated amounts before December 30, 1998
Date of debt treatment	April 24, 1970
Amount treated	USD 2090 million
Repayment profile	Classic terms
Status of treatment	Fully paid
Date of debt treatment	October 17, 1968
Amount treated	USD 180 million
Repayment profile	Classic terms
Status of treatment	Fully paid
Date of debt treatment	October 17, 1967
Amount treated	USD 110 million
Repayment profile	Classic terms
Status of treatment	Fully paid
Date of debt treatment	December 20, 1966
Amount treated	USD 310 million
Repayment profile	Classic terms
Status of treatment	Fully paid

Why does Indonesia not want to ask for debt reduction?

Having been hit by a series of financial and political crises, Indonesia is struggling to survive economically. Its ability to survive will depend largely on international investors' confidence in the country, including its creditworthiness. The creditworthiness of a country is the estimate by potential lenders of the capacity of the country to repay its external debt. Being creditworthy makes it possible for a country to borrow larger amounts to finance growth development. Considering that the country's current budget depends largely on new foreign loans for survival, the Indonesian government prefers not to take actions that may damage the country's creditworthiness and thus reduce its ability to access more fresh money and investments. Instead Indonesia would rather be treated under Houston terms (a classification of highly-indebted lower-middle-income country) and does not seek a debt reduction from the Paris Club.

Does the Paris Club give debt reduction?

The Paris Club does give debt reduction for highly indebted poor countries (HPIC), mostly in Africa, whose external debt situation has resulted in serious impediments to economic development. For these countries, even full use of traditional mechanisms of rescheduling and debt reduction may not be sufficient to attain sustainable external debt levels within a reasonable period of time and without additional external support, including debt reduction.

Currently, 35 countries have been considered eligible for HIPC initiative but not all of them want the HIPC Initiative to be applied to their countries, partly because of the creditworthiness issues but also because the conditionalities attached to the treatment.

What are the criteria for a country to be considered a HIPC?

To be eligible for HPIC criteria, a country must:

• Be eligible only for concessional assistance from the IMF and World Bank (IDA-only);
  
• Face an unsustainable debt burden, beyond available debt-relief mechanisms such as Naples terms where low-income countries can receive a reduction of eligible external debt of 67%;
  
• Establish a track record of reform and sound policies through IMF- and World Bank- supported programs.

Indonesia is currently a blend country, which means that it receives both loans (from IBRD) and concessional credits (from IDA) from the World Bank Group. Indonesia could be an IDA-only country and may fall under HIPC criteria. However, both the Indonesian government and the creditors are reluctant to categorise Indonesia as an HIPC country. Their official stance is that despite the current economic standstill, Indonesia still has a much greater potential to develop than the typical IDA-only and/or HIPC countries.

Indonesia, debt reduction, and the Paris Club

Critics have raised concerns regarding the Paris Club's narrow interests in its effort to tackle debt repayment problems. First and foremost, Paris Club creditor countries try to ensure that their loans to indebted countries will be paid back. Creditor countries negotiating under the Paris Club have only recently noticed that countries facing debt repayment problems are usually those that have the most difficulty protecting the poor and vulnerable in their countries. Tying the debt relief efforts to strict IMF macro-economic adjustment programs has historically led to even worse conditions for the poor and vulnerable. The countries that undergo adjustment programs are forced to cut back spending for social services and promote privatisation while the required regulatory framework and safety net programs for the poor and vulnerable are not yet in place or properly implemented.

Creditors are also criticised for failing to look into the causes of debt repayment problems. In the case of Indonesia, for example, 30 percent of foreign loans were corrupted during the era of former President Soeharto, and creditor countries continuously supported his regime despite the appalling human rights and governance records. Creditors do not recognise their past contribution to the existing problems. Instead they insist that they have to be accountable to their own citizens for the repayment of the money.

Debtor governments, on the other hand, are willing to bow to creditors' pressure and prioritise short-term benefits, i.e. getting matured debt payment rescheduled and receiving IMF adjustment loans. Market liberalisation and growing dependence on foreign investment have significantly reduced debtor governments' bargaining power vis a vis creditor countries. These governments are much more concerned about their creditworthiness in the eyes of investors than their obligation to protect the majority of the people. Moreover, most governments do not have a long-term plan for dealing with debt repayment obligations, and are struggling with challenges in internal political problems, making their bargaining position even weaker when they negotiate with Paris Club creditors.

Transparency and Accountability Questions

In November 2001 Indonesia will again negotiate with the Paris Club creditor countries. It is important for the government to begin to develop public accountability towards its engagement with the Paris Club. The government must reveal the negotiating points, the strategy and implications of the negotiations, and disclose in detail the debt situation and the obligations to be negotiated in the Paris Club. It is also important that the government develop and analyse the different options in dealing with debt repayment problems and make this information public before the negotiations with the Paris Club. In this way, the country's ownership of the treatment and the attached conditionalities can be secured and public accountability can be strengthened.

Summarized from:

The Paris Club website http://www.clubdeparis.org

The Paris Club Fact Sheet, released by the Bureau of Economic and Business Affairs, U.S. Department of State, March 1, 2001

"Indonesia must go beyond Paris Club to seek larger debt relief", the Jakarta Post, August 30, 2001

"Demand for debt cuts will raise new problems", the Jakarta Post, August 30, 2001

"The HIPC Debt Relief Initiative", available at http://usinfo.state.gov/journals/ites/0201/ijee/ifis-hipc.htm