Comparability of Treatment

1. Comparability of treatment (CoT) is a fundamental principle underlying Paris Club debt treatment. According to this principle, a borrowing country that signs an agreement with Paris Club creditors should not accept from its non-Paris Club bilateral or commercial creditors terms of treatment less favourable to the debtor (hence more favourable to the creditor) than those agreed with the Paris Club. This principle has been adopted by the G20 Common Framework for debt treatments, which has also been endorsed by the Paris Club. By setting the minimum standards for other restructuring agreements, the CoT serves three purposes:

• Firstly, it mitigates the risk of moral hazard, reducing the incentive for each group of creditors to wait for other creditors to restructure the country’s debt. With the CoT clause, public creditors can proactively move forward and agree on a debt treatment necessary for the IMF Board to approve a program, or disburse new financing associated with a program review, without the concern that they will bear an undue burden compared to other creditors, and in effect subsidize through their efforts a smaller effort from other creditors.
• Additionally, CoT significantly helps the borrowing country in its negotiation with its other creditors by setting an expected benchmark of effort required by those creditors, provided that the IMF Lending Into Arrears (LIA) policy applies. Indeed, the borrowing country’s third-party creditors will remain in arrears as long as they do not reach a debt restructuring agreement with the debtor country. Third-party creditors remaining in arrears does not impede the progress of an IMF program (including ongoing IMF disbursements), so long as the debtor continues to negotiate in good faith with those creditors. The CoT does not interfere in the debtor’s sovereign strategy towards each specific creditor group, as long as the overall creditor effort complies with the IMF program parameters. 
• Finally, combined with the fact that debt treatments should be consistent with the parameters of an IMF-supported program, the CoT plays a vital role in restoring a country's financial and economic situation. It ensures that all debt restructurings, taken together, align with the parameters of the IMF program.

The definition, implementation, and enforcement of the CoT are therefore integral to achieving a successful debt restructuring.

2. The Paris Club assesses the CoT based on three criteria:

• Change in net present value (NPV), which captures the time value of the debt service payments before and after the restructuring. To measure the change in NPV, the Paris Club compares the NPV of restructured claims with the NPV of existing old claims. Certain stakeholders have suggested an alternative methodology, comparing the NPV of restructured claims against the face value of the original outstanding claims. Such an approach would favour creditors with low interest concessional loans, particularly the official sector. However, it is not the approach adopted by the Paris Club which judges that the NPV of restructured claims over the NPV of existing old claims is more coherent with the IMF-WBG DSA methodology.

• Change in duration before and after the treatment, where duration is measured as the weighted average time for all cash flows to be received.
• Change in nominal debt service before and after the treatment, where the change is measured over the IMF program period associated with the restructuring.

NPV and duration calculations are affected by the choice of the discount rate, which captures the time value (or opportunity cost) of providing and receiving funds in the future. From the debtor perspective, the discount rate represents the cost of capital, reflecting the opportunity cost of investing the funds rather than paying debt service. From the creditor perspective, the discount rate reflects the investor’s cost of capital and therefore the expected rate of return on the investment, which depends on the risk and the probability of repayment associated with the loan. [1]. For low-income countries (LIC), the Paris Club uses a 5% discount rate to calculate NPV and duration. This choice is consistent with the IMF Debt Sustainability Framework for LICs (LIC-DSF), which also relies on a 5% discount rate to estimate the present value of debt, reflecting the concessionality of the loans to LICs. For market-access countries (MACs), the Paris Club performs a sensitivity analysis by using different discount rates, evenly applied to official bilateral and private creditors.

3. This assessment includes a certain degree of flexibility, as CoT does not imply strict equivalence, but rather an overall effort assessed as at least as significant (or not). It acknowledges that a creditor may opt for a greater effort on one parameter to mitigate a lesser effort on another, based on its preferences and time horizon. It also acknowledges that the official sector will not make a higher effort than the private sector, given that the official sector provides new financing through International Financial Institutions (IFIs), is not-for-profit oriented, and generally provides  concessional lending.

For example, some private creditors have a preference for earlier repayments (smaller efforts in debt service during the IMF program and in duration) but, in return, are willing to accept a higher NPV debt reduction through a nominal haircut. The earlier repayments can then be reinvested in assets with returns equal or higher than a full nominal repayment over a longer time horizon. Other creditors, often official, are willing to significantly reduce the debt service during the IMF program period and to accept long maturity extensions (and the risk associated of with a later repayment) resulting in a higher effort in duration, but tend to avoid a nominal loss (the latter reducing the effort in NPV terms) – although sometimes nominal loss may be necessary. Providing long maturity extensions also creates space for private creditors to be reimbursed earlier, including during the IMF program period, which is often the most constraining in terms of cashflows to creditors while being the period when the probability of repayment is the highest.

This is also why, even though the efforts in terms of duration and reduction of debt service over the IMF program period are to some extent reflected in the calculation of the NPV, it is important to carry out the CoT assessment based on the full combination of the three criteria. The three criteria together allow for a reflection of the preferences of the various types of creditors, as well as giving those creditors the incentive to provide the debt relief needed to meet the various IMF targets (usually stock and flow), especially during the program period. In addition to those financial provisions, other non-financial provisions can impact the CoT assessment if they can alter the agreed debt treatment.

4. The implementation of the CoT usually relies on a commitment by debtor countries and a monitoring of debt treatments provided by other creditors. Over the course of the Paris Club’s history, specific clauses have been incorporated into debt restructuring agreements to enforce the CoT. These clauses serve to safeguard the Paris Club creditors’ financial interests, and assist the debtor in negotiations with other creditors. These enforcement clauses generally take the form of a commitment from the debtor country to promptly seek from its other creditors a debt treatment on terms at least as favourable to the debtor as those reached with its bilateral creditors, thereby ensuring the adherence to the CoT. Such clauses may also outline clear expectations and consequences for the debtor country – such as the inclusion of a claw-back clause stipulating that if the CoT is found to be violated, the agreement will be rendered ineffective, and the total amount of debt treated will become immediately due and payable.

The public disclosure of the progress made by creditors on the debt restructuring, as well as the debtor’s commitment to data and information sharing, also play a crucial role. Sharing content of  other creditors’ agreement help to monitor the full implementation of CoT. This transparency helps hold all parties accountable and fosters trust among creditors, promoting a more effective implementation of the CoT. It also empowers the borrowing country to negotiate the best terms possible with its other creditors. The Paris Club usually publishes on its website the main features of the agreement, except the interest rates, to help the debtor to negotiate the best deal possible with the other creditors.

[1] IMF Policy Discussion Paper, Julie Kozack, December 2005 – Consideration in the choice of the appropriate discount rate for evaluating sovereign debt restructurings