Evian Approach

The representatives of the creditor countries usually taking part in Paris Club negotiations met in Paris on October 8, 2003 and agreed on a new approach to deal with non-HIPC countries. In this context, the Paris Club aims to take into account debt sustainability considerations, to adapt its response to the financial situation of the debtor countries, and to make a contribution to the current efforts to make the resolution of crises more orderly, timely and predictable.

Paris Club creditors agreed to adopt a more tailored response to ensure that debt restructuring:

     -     is granted only in case of imminent default and is not considered by debtor countries as an alternative to more expensive sources of financing;

     -     provides debtor countries with a debt treatment that reflects their financial needs and the objective of ensuring long lasting debt sustainability.

General frame of the Evian approach

When a country approaches the Paris Club, the sustainability of its debt would be examined, before the financing assurances are requested, in coordination with the IMF according to its standard debt sustainability analysis to see whether there might be a sustainability concern in addition to financing needs. Specific attention would be paid to the evolution of debt ratios over time as well as to the debtor country's economic potential; its efforts to adjust fiscal policy; the existence, durability and magnitude of an external shock; the assumptions and variables underlying the IMF baseline scenario; the debtor's previous recourse to Paris Club and the likelihood of future recourse. If a sustainability issue is identified, Paris Club creditors will develop their own view on the debt sustainability analysis in close coordination with the IMF.

For countries who face a liquidity problem but are considered to have sustainable debt going forward, the Paris Club would design debt treatments on the basis of the existing terms. However, Paris Club creditors agreed that the rationale for the eligibility to these terms would be carefully examined, and that all the range built-into the terms including through shorter grace period and maturities, would be used to adapt the debt treatment to the financial situation of the debtor country. Countries with the most serious debt problems will be dealt with more effectively under the new options for debt treatments. For other countries, the most generous implementation of existing terms would only be used when justified.

For countries whose debt has been agreed by the IMF and the Paris Club creditor countries to be unsustainable, who are committed to policies that will secure an exit from the Paris Club in the framework of their IMF arrangements, and who will seek comparable treatment from their other external creditors, including the private sector, Paris Club creditors agreed that they would participate in a comprehensive debt treatment. However, according to usual Paris Club practices, eligibility to a comprehensive debt treatment is to be decided on a case-by-case basis.

In such cases, debt treatment would be delivered according to a specific process designed to maintain a strong link with economic performance and public debt management. The process could have three stages. In the first stage, the country would have a first IMF arrangement and the Paris Club would grant a flow treatment. This stage, whose length could range from one to three years according to the past performance of the debtor country, would enable the debtor country to establish a satisfactory track record in implementing an IMF program and in paying Paris Club creditors. In the second stage, the country would have a second arrangement with the IMF and could receive the first phase of an exit treatment granted by the Paris Club. In the third stage, the Paris Club could complete the exit treatment based on the full implementation of the successor IMF program and a satisfactory payment record with the Paris Club. The country would thus only fully benefit from the exit treatment if it maintains its track record over time.

In this context, coordination between official and other creditors, notably private creditors, would be particularly important. The Paris Club has taken a number of steps to increase transparency of its procedures over the past years, notably through meetings with private sector representatives and the information provided on its web site, and will continue to explore ways to enhance its transparency. In addition, the dialogue should continue and could take the form of early discussions with the private sector on the issue of the comparability of treatment of their respective claims. Such early discussions could take place when the share of private external debt is considered as significant, comparability of treatment constitutes an issue, when private creditors indicate their willingness to participate in the restoration of debt sustainability in good faith and when a comprehensive debt treatment is envisaged.

Options for debt treatments for countries with unsustainable debt under the Evian approach

When the Paris Club is ready to grant a comprehensive debt treatment for countries with unsustainable debt under the Evian approach to facilitate the return to debt sustainability, there will be no standard terms. Paris Club creditors will tailor the treatment to the individual debtor's financial situation. For that purpose, they will draw on a wide range of options used in the past, or to be developed under the Evian approach.

The comprehensive debt treatment could take various forms depending on the results of the debt sustainability analysis: flow treatment, stock reprofiling, stock reduction. Debt reduction, either through principal or NPV reduction, will continue to be considered only in exceptional cases and when the need is clearly demonstrated in the debt sustainability analysis. In such cases, the staged approach would give the Paris Club the opportunity to review after a certain time period, the necessity and the amount of debt reduction required. Different types of flexible instruments such as debt buybacks, swaps, and contingency clauses could be included within the debt treatment in order to facilitate its tailoring to the evolution of the economic situation of the debtor country over time. Thanks to these instruments, Paris Club creditors would benefit from an unexpected improvement in the debtor's situation and the debtor could employ a more active debt management policy. Careful consideration must be given to avoiding moral hazard, and to creating appropriate incentives and disincentives.

To ensure that the debt treatment captures the relevant scope of the debt and to facilitate new bilateral lending, the adjustment of the "cut-off date" would be actively considered. To this end, the guiding principle should be the ambition to seek debt sustainability while not undermining access to future credits. The issue of the cut-off date would therefore be raised, and assessed according to a series of criteria, among which specific attention should be paid to the "age" of the date and also to the consistency between the cut-off date and the financial crisis cycle, the share of post cut-off date debt, the age of this post-cut off debt and burden-sharing among creditors.