World Bank Document

Box 2.4 The changing nature of debt renegotiations
There are two main institutional arrangements for debt that are willing to take steps to address their problems.
relief: the Paris Club for debts to or guaranteed by gov- The Paris Club has worked best, however, for counernments;
and ad hoc consortia of commercial banks tries where temporary liquidity difficulties were due
(sometimes called the London Club) for uninsured debts principally to a bunching of debt service payments. The
to financial institutions.
Paris Club has been less successful in resolving the difficulties
of countries, such as those in sub-Saharan Africa,
The Paris Club
where debt service difficulties are related to structural
The Paris Club was born in 1956 when a group of creditor economic problems. When prospects for restoring norcountries
met in Paris to renegotiate Argentine debt mal debt service are dim for many years, successive
owed to export credit guarantee institutions, which had annual reschedulings of payments for a decade often has
reimbursed private creditors following delays in Argenti- served only to postpone the problem. The flexibility that
na's debt service to them. Although the club has no writ- the Paris Club has demonstrated provides the basis for
ten rules, it has evolved a standard approach based on expecting that it will adapt its practices to address these
experience and precedent, one objective being equitable problems as well.
treatment of all creditors.
The scope of the club's debt relief covers service on all Commercial bank debt
bilateral official loans, including concessional credits and By contrast to the Paris Club, arrangements for renegotiofficially
guaranteed export credits. Consolidation peri- ating debt owed to commercial banks have developed
ods are normally for one year, but successive agreements only since the late 1970s (see Box figure 2.4A). Since
are common: debt relief has been extended more or less much of this debt consists of syndicated loans, as well as
continuously during the past decade to Liberia, Senegal, uninsured trade or project finance, and the number of
Sudan, Togo, and Zaire. Previously rescheduled debt creditor banks may be in the hundreds, the banks are
has been consolidated when circumstances required. represented by an "advisory" committee that negotiates
Debt relief is normally restricted to current maturities. with the government of the debtor country. An agree-
The proportion typically rescheduled varies from 80 to ment, when reached, must be approved by each creditor
100 percent. This consolidated portion is repaid over bank. The process has become increasingly streamlined
eight to ten years, with a grace period of four to five in the 1970s, with small advisory committees now the
years. For countries with severe balance of payments rule and with coordinated actions to seek rapid agreeproblems,
the nonconsolidated portion may be repaid ment from all participating banks.
over the grace period; in such cases, debt relief ap- Commercial banks reschedule mainly current maturiproaches
100 percent of eligible maturities. Arrears are ties of long-term debts, and occasionally arrears of prinoccasionally
rescheduled, but they are normally repaid at cipal as well. They do not reschedule interest; any
a faster rate.
arrears of interest must be settled before rescheduling
The Paris Club arrangements help restore normal trade agreements become effective. Some agreements have
and project finance to debtor countries. When the debtor consolidated short-term debts. In many recent reschecountries
experience severe international liquidity diffi- dulings, fresh long-term loans and trade credit facilities
culties resulting in a breakdown in relationships with have been extended as part of a debt relief package, in
their creditors, a Paris Club agreement sets the frame- effect offsetting interest payments. The negotiations
work for rescheduling arrears to official creditors and have been flexible; some have arranged year to year
clears the way for direct or guaranteed new credits. It is deferments of debt while comprehensive longer-term
followed by bilateral agreements with each of the partici- agreements were still being discussed. Repayment of
pants in the Paris Club meeting within the agreed frame- consolidated debt typically ranges from six to nine years,
work. After bilateral agreements are concluded (some- including two to four years of grace. Interest charges
times a lengthy process), each agency concerned restores vary from a margin of one and seven-eighths to two and
export credit cover to the rescheduling countries. one-half points over LIBOR. Debt rescheduling is nor-
Indeed, debtor countries can approach the Paris Club mally accompanied by a commission charge of 11/4 to 11/2
even before encountering liquidity problems that would percent.
lead to the cessation of trade finance; ideally, they Year to year rescheduling has effectively overcome
should do so. The Paris Club requires that debtor coun- immediate debt-servicing difficulties, but it leaves uncertries
take prompt and effective measures to address their tainty over the debtor's future position, which can preunderlying
economic problems; an IMF-supported vent its returning to normal market financing. In Mexiadjustment
program that will give a country access to the co's case, the commercial banks signed an agreement in
upper credit tranches is, typically, a prerequisite to a March 1985 to consolidate public sector debt falling due
Paris Club agreement. The Paris Club, while still consid- in 1985-90 and to accept repayment over fourteen years,
ering debt relief mainly in the context of short-term with lower spreads for the early years of the repayment
liquidity problems, has shown flexibility in its response period and no restructuring fees. Recently a multiyear
to the debt-servicing problems of developing countries (continued)
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