The Paris Club in three-minute videos

Its main missions and principles on which it operates.

  • Here are the 70 low-income countries according to the IMF. The problem is that half of these countries are heavily indebted, even over-indebted, and can no longer repay their debts. Who do they turn to for help?

    The Paris Club. This is an informal group with international reach. It brings together 22 creditor states that have lent money to other countries, notably to facilitate their development.

    We're talking about public money here, government-to-government loans. The Paris Club creditors therefore have a dual role: 1. To ensure the borrowing country's ability to honor its debts.

    2. To verify that the taxpayers of the lending country will be repaid. The goal? To find coordinated and sustainable solutions to debt crises.

    Yes, but how?

    In order to identify countries in difficulty early on, the Club members meet monthly with the Director General of the Treasury. The Club operates according to six key principles, notably the principle of conditionality, meaning that no Club intervention is possible without financial support from the IMF and associated reforms—what is known as an IMF program. Comparability of treatment is also a founding principle.

    It ensures that non-Club creditors, both public and private, will make an effort at least as significant as that of the Club. There are four other principles: the principle of solidarity, the principle of consensus, the principle of information sharing, and the principle of case-by-case decision-making.

    Since 1956 and the creation of the Paris Club, 500 debt restructuring agreements with more than 100 countries have been concluded, totaling over $600 billion. Most often, to help a country out of financial difficulty, its debt is either canceled or rescheduled. Creditors extend the initial repayment period, sometimes by reducing the interest rate.

    How has the Paris Club evolved over time?

    For the past twenty years or so, countries have increasingly relied on private debt and emerging economies, particularly China, for financing. The Paris Club has therefore opened its doors to new G20 member creditors, such as Brazil and South Korea, which joined in 2016. China, the largest creditor of African countries, has associate member status, as does India.

    In another video, we will also discuss the creation of the Common Framework, a new coordination mechanism agreed upon with the G20.

Three pivotal moments in the Club's history

Or how the changing sovereign debt landscape following the implementation of the Heavily Indebted Poor Countries (HIPC) initiative led to the establishment of the Common Framework between the Paris Club and the G20 in 2020.

  • It is 1956, and Argentina is struggling to pay its debts. France offers to host a meeting in Paris between the country's authorities and its public creditors. The Paris Club is born.

    For over 60 years, this informal group of creditors has been essential in resolving sovereign debt crises, alongside the IMF and the World Bank. Let's look back at three key moments in the history of the Paris Club over the past two decades. The Heavily Indebted Poor Countries (HIPC) Initiative.

    In the 1990s, a massive debt crisis erupted in the poorest and most fragile countries. The major creditors of the time established the Heavily Indebted Poor Countries (HIPC) Initiative. Through this mechanism, creditors disbursed a total of $120 billion to alleviate the debt burden of 36 countries.

    With the HIPC Initiative, the debt of the poorest countries reached one of its lowest levels in 2006. The New Creditors.

    But this respite did not last. Fifteen years later, at the end of 2021, the debt of the poorest countries had tripled, reaching $372 billion. They borrowed heavily from both new and more numerous creditors.

    China thus became the largest public creditor in sub-Saharan Africa. The amount of debt held by the poorest countries by China increased from 3% to 14% of their total external debt between 2006 and 2021. Furthermore, developing countries increasingly turned to private investors, themselves attracted by attractive returns.

    These countries' debt to private actors increased tenfold between 2006 and 2021, reaching 21% of their total outstanding external debt. But this diversity of creditors poses a coordination challenge. In the event of a debt crisis, how should the burden be shared among the creditors?

    The Common Framework.

    To better coordinate debt restructurings, member and non-member countries of the Paris Club adopted a Common Framework for Debt Treatment in November 2020. In practice, Paris Club creditors and other G20 creditors sit down at the same table to negotiate. Four countries have requested debt treatment under this framework: Chad, Ethiopia, Zambia, and Ghana.

    The conclusion of an agreement with Chad in January 2023 represents a major step forward. In a final video, we will detail the steps involved in debt restructuring. See you soon!

What is a debt treatment ?

Functioning of a debt treatment negotiated by the Club and implemented by its member creditors.

  • When a country can no longer pay its debts, what happens? The creditors of the Paris Club resort to a process called debt restructuring. Here's a three-step explanation of this tool.

    Step one: the inability to repay the debt. Whether it's a high or recurring budget deficit, a depreciating exchange rate, or an external shock like a pandemic or drought, a country may, for a multitude of reasons, be unable to repay the money its creditors have lent it. Its debt is no longer sustainable.

    So, what can be done?

    Countries can request significant financing from the IMF. This is what Zambia, Ghana, and Sri Lanka have recently done. The problem is that the IMF doesn't lend money to a country if it knows it won't be able to repay it.

    The international institution therefore needs the creditors to restructure the country's debt. In exchange, the country commits to restoring a healthy economy. This is done within the framework of an IMF program.

    This term refers to financing linked to reforms agreed upon with the country in difficulty. For example, reducing public spending by reserving subsidies for vulnerable populations. Once this program is finalized, the terms of a debt restructuring must be agreed upon.

    Step two: negotiation.

    The borrowing country and its creditors meet at the negotiating table in Paris. The IMF secretariat proposes several options. Reducing the principal amount of the debt, in other words, the amount borrowed, is a debt cancellation.

    Modifying the creditors by extending the repayment period and possibly lowering the interest rate, or a combination of these two options. Whatever lever(s) are used, this requires an effort from the creditors. But note that the IMF and the World Bank are not affected by the restructurings due to their role in supporting countries in difficulty.

    In contrast, members of the Paris Club are subject to comparability treatment and ensure that other creditors, both public and private, are also subject to comparable treatment, meaning they will make an effort at least as significant as that of the Club.

    Step 3: the agreements. Following negotiations, which can last several days, the parties sign a multilateral agreement. This is then transposed into the national laws of each signatory creditor country in the form of a bilateral agreement, as was recently the case between Suriname and France.

    It is through these legally binding agreements that the debtor country commits to repaying its restructured debt.

Glossary

  • Un accord de rééchelonnement du Club de Paris est dit "actif" jusqu'à la date de la dernière échéance de remboursement due au titre de l'accord conformément à l'échéancier de remboursement prévu dans l'accord. Au-delà de cette date, les échéances dues au titre de l'accord sont, théoriquement, remboursées.

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    Debt due and not paid as of a given date. Arrears may be late payments as well as debt due a long time before.

  • Paris Club agreements define a "de minimis" amount. When the amount of the claims of a Paris Club creditor potentially covered by the debt treatment agreement is lower than this amount, this creditor participates in the meeting as an observer and does not have to apply the debt treatment to its claims. This rule aims at avoiding debt treatments that do not have a significant impact in terms of debt relief and would be costly to implement

  • Change of the terms of debt payment obligations. This can be implemented either through a change of the terms of the existing debt ("rescheduling"), or through the exchange of the debt for a new instrument (notably, through "refinancing").

  • Paris Club agreements may contain a provision enabling creditors to voluntarily engage in debt swaps. These operations may take the form of debt-for-nature, debt-for-aid, debt-for-equity or other local currency debt swaps. To ensure full transparency between creditors, debtors and creditors submit a report to the Paris Club Secretariat on the transactions conducted.

  • Sum of futures maturities of principal.

  • This term refers to
    a) official bilateral creditors (governments or their appropriate institutions), including Paris Club members
    b) multilateral creditors (international institutions such as the IMF, the World Bank or regional development banks).

  • "Official development assistance" ("ODA") credits are defined by the OECD as credits with a low interest rate and aimed at development.

  • (i) Credits granted by a bank or a supplier to a debtor country for importing goods and services. When these credits are guaranteed by an appropriate institution of a Paris Club creditor, they are included in the claims treated in the context of the Paris Club. (ii) Non-ODA credits are sometimes referred to as commercial credits.

  • When a debtor country first meets with Paris Club creditors, a "cut-off date" is defined. Credits granted after this cut-off date generally are not subject to future rescheduling. The cut-off date is designed to protect credits granted by Paris Club creditors after a rescheduling. The cut-off date therefore helps restore access to credit for debtor countries facing a liquidity crisis.

  • The reduction in net present value of the debt rescheduled by Paris Club creditors is considered as a cancellation

  • Medium and long term debt due to Paris Club creditors before the specific Paris Club agreement.

  • Debt that may be treated in the context of a Paris Club agreement.

  • Credits and loans with a maturity of more than one year, that have been concluded after the cut-off date.

  • Credits and loans with a maturity of more than one year and that have been concluded before the cut-off date.

  • Debts treated, less debt cancelled.

  • Debts consolidated pursuant to the specific Paris Club agreement.

  • A debt treatment may defer the payment of debt due immediately or in the near future to a later date. When a new long-term payment profile is defined, the treatment applied is not a deferral, but a reprofiling or a rescheduling.

  • Interest that accrues on arrears. The late interest rate usually includes the original interest rate of the credits, plus a penalty.

  • Interest rate applied on the rescheduling. The interest rate and the conditions applying to the claims of Paris Club creditor countries are defined in bilateral agreements.

  • Credits and loans with a maturity of more than one year, that have been granted before the cut-off date and that have not been rescheduled pursuant to a previous Paris Club agreement.

  • Representatives of international financial institutions or of members of the Paris Club that have no claims concerned by the debt treatment (de minimis creditors, creditors with only short term or post-cut-off date claims, that are not treated) that attend a negotiation session. They do not sign the Agreed Minutes but are referred to in it.

  • The creditor countries that sign the Agreed Minutes. They are permanent members of the Paris Club or other official creditors.

  • In the context of the Heavily Indebted Poor Countries Initiative (HIPC initiative), the international financial community commits to provide sufficient assistance for the country to achieve debt sustainability at a set date called "completion point". The timing of completion point, a decision of the Executive Boards of the IMF and World Bank, depends on the satisfactory implementation of key structural reforms agreed to at the decision point, the maintenance of macroeconomic stability, and the adoption and implementation of a Poverty Reduction Strategy Paper for at least one year.

  • In the context of the Heavily Indebted Poor Countries (HIPC) initiative, at the decision point, the Executive Boards of the IMF and World Bank formally decide on a country's eligibility, and the international community commits to provide sufficient assistance by the completion point for the country to achieve debt sustainability calculated at the decision point.

  • Credits and loans with a maturity of more than one year,that have been concluded before the cut-off date and that have been rescheduled pursuant to a previous Paris Club agreement.

  • Participating creditor countries and the debtor country sign Agreed Minutes at the end of a negotiation session. This document states the commonly agreed debt treatment in writing. This is not a legally binding document but a recommendation by the heads of delegations of Participating creditor countries and of the debtor country to their governments to sign a bilateral agreement implementing the debt treatment.

  • In the context of a concessional treatment, creditors may usually choose among a number of options to provide the required debt reduction in net present value. When the creditor chooses the "DR" option, the net present value reduction is achieved through a cancellation of part of the claims.

  • In the context of a concessional treatment, creditors may usually choose among a number of options to provide the required debt reduction in net present value. When the creditor chooses the "DSR" option, the net present value reduction is achieved through a rescheduling of the claims at an interest rate lower than the appropriate market rate.

  • (i) Consolidation, change of the terms of debt payment obligations
    (ii) when opposed to concessional treatment, non-concessional consolidation
    (iii) when opposed to deferral or reprofiling, the part of a consolidation with the longer terms of repayment (iv) when opposed to refinancing, consolidation through a change of the terms and conditions of the existing debt.

  • Sum of Capital Remaining Due (future maturities of principal) and of arrears in principal and interest.

  • Interest rate defined in bilateral agreements implementing the Paris Club Agreed Minutes, based upon standard interest rates of the currency considered, plus a management fee. This rate may be fixed or variable and does not include a country-risk premium.

  • When there are only a few creditors concerned in a debt treatment, the Paris Club agreement is not an Agreed Minute, but "terms of reference". The terms of the treatment are defined through an exchange of letters between the President of the Paris Club and the government of the debtor country.

  • In a subsequent debt reduction, granting more debt reduction on debt previously reduced under a Paris Club agreement to provide even further debt relief (e.g., when increasing the cancellation level from 33.33% of Toronto terms to 67% of Naples terms).

  • Concessionality can occur either through a cancellation of part of the claims, or through a rescheduling of the claims over a long period of time with an interest rate that is lower than the appropriate market rate. When a debt treatment results in a reduction of the net present value of the claims rescheduled, it includes concessionality.

  • Flow treatments aim to close the debtor country's financing gap identified by the IMF in the framework of its programs. The period of time to which Paris Club agreements refer is usually the one covered by the IMF program that shows a financing gap that can only be covered by debt rescheduling. This period is called the "consolidation period". Only maturities due to Paris Club creditors falling due during this period are treated. However, in some cases, arrears accumulated as of the start of the "consolidation period" are also treated.

  • Some Paris Club treatments apply not only to the payments due over a given period of time, but to the entire stock of debt. The aim of agreements covering the stock of debt is to provide a country with a final Paris Club treatment called exit treatment.

  • An exit treatment is the last debt treatment a country normally gets from the Paris Club. The aim is that the debtor country will not need any further debt treatment and will thus not come back for negotiation to the Paris Club.

  • The net present value (NPV) of debt is defined as the sum of all future debt-service obligations (interest and principal) on existing debt, discounted at the appropriate market rate. Whenever the interest rate on a loan is lower than the market rate, the resulting NPV of debt is lower than its face value

Frequently asked questions

  • The Paris Club is an informal group of official creditors whose role is to find coordinated and sustainable solutions to the payment difficulties experienced by debtor countries. Paris Club creditors agree in changing the profile of payments on debts due to them.

    The Paris Club has remained strictly informal. It can be described as a "non institution".

  • The Paris Club is a forum where official creditors meet to solve payment difficulties faced by debtor countries.

  • There are 22 permanent members of the Paris Club, and other official bilateral creditors may participate. Paris Club permanent members are: Australia, Austria, Belgium, Brazil, Canada, Denmark, Finland, France, Germany, Ireland, Israel, Italy, Japan, Korea, Netherlands, Norway, Russian Federation, Spain, Sweden, Switzerland, United Kingdom, United States of America

  • As the Paris Club is only an informal group, there is no date of creation. The first meeting with a debtor country was in 1956 when Argentina agreed to meet its public creditors in Paris.

  • The Paris Club provides debt restructuring only to debtor countries that need debt relief and that have implemented and are committed to implementing the reforms necessary to restore their economic and financial situation. This means in practice that the country must have a current program with the IMF supported by a conditional arrangement.

  • As the Paris Club is an informal group, 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 principles have been useful in securing agreement efficiently both amongst creditors and between creditor and debtor countries.

  • Paris Club creditors have found that a number of rules and principles have been useful in securing agreement efficiently both amongst creditors and between creditor and debtor countries. These rules and principles are accepted by all participants in the Paris Club and include: solidarity, consensus, information sharing, case by case, conditionality, comparability of treatment.

  • A number of organizations are compiling debt data. The types of debt data collected may vary among these organizations.

Useful links

Paris Club partners:
Issues of interest: