London Terms

1/ History

In December 1991, Paris Club creditors agreed to implement a new treatment on the debt of the poorest countries. This new treatment called " London terms " raise the level of debt cancellation from the 33.33% as defined in Toronto terms to 50%.

23 countries benefited from London terms between 1991 and 1994, when these terms were replaced by Naples terms.

2/ Description

2.1. Non-ODA credits were cancelled to a 50% level (after possible topping-up). Creditors chose to implement the terms through one of the four following options:

- "debt reduction option" ("DR"): 50% of the claims treated were cancelled (after possible topping-up), the outstanding part being rescheduled at the appropriate market rate according to standard table "A" (23 years repayment period including 6-year grace and progressive payments).

- "debt service reduction option" ("DSR"): the claims treated were rescheduled at a reduced interest rate according to standard table "B1" (23 years repayment period with progressive payments).

- "moratorium interest capitalisation option" ("MIC"): the claims treated were rescheduled at a reduced interest rate according to standard table "C1" (23-year repayment period including 6-year grace and progressive payments).

- "commercial option": the claims treated were restructured at the appropriate market rate over a longer period (25-year repayment period including 14-year grace). This was a non-concessional option.

2.2. Concerning ODA credits, they were rescheduled at an interest rate at least as favourable as the original concessional interest rate applying to these loans, according to standard table "D" (30-year repayment period including 12-year grace and progressive repayment). This rescheduling usually resulted in a reduction of the net present value of the claims, as the original concessional rate was lower than the appropriate market rate. The reduction in the net present value varied on a case-by-case basis, depending on the original interest rate of the claims of each creditor on each debtor country. By contrast, the Paris Club rescheduling has a positive effect on the expected value of the ODA claims, as the creditors salvage value relative to the recovery of otherwise defaulted amounts.

2.3. London terms also included the possibility for creditor countries to conduct, on a bilateral and voluntary basis, debt swaps with the debtor country. These swap operations in principle could be carried out without limit on official development aid loans, and up to 20% of the outstanding amount or 15 up to 30 million SDR for non-ODA credits.

Paris Club Creditors and debtors regularly conduct a reporting to the Paris Club Secretariat of the debt swaps conducted.