The Paris Club in three-minute videos

Its main missions and principles on which it operates.

  • There are 70 low-income countries according to the IMF. Today, half of these countries are highly indebted, some to the point that they can no longer repay their debt. 

    When that happens, who can they turn to for help?

    The Paris Club!

    It is an informal group that operates internationally, bringing together 22 creditor countries which made loans to developing countries in need. We're talking about public money lent state-to-state. The Paris Club creditors therefore have a dual role:

    A. To ensure that the indebted country is able to honor its debts.
    B. To ensure that taxpayers and creditor countries are reimbursed. 

    The goal is to achieve coordinated and sustainable solutions in response to debt crises. 

    Ok, but how exactly?

    In order to identify countries struggling to repay their debt at an early stage, the Director General of the French Treasury holds a meeting every month with all Paris Club members. There are six key principles underlying the Paris Club activity:

    • The conditionality principle: No intervention by the Club is possible without the financial support of the IMF and its package of reforms, known as an IMF program. 
    • The comparability of treatment is also a core principle: It ensures that non-Paris Club members, both public and private, will make an effort at least as important as the Paris Club members. 
    • The four other principles are solidarity, consensus, information sharing, and case-by-case decision-making.

    Since the founding of the Paris Club in 1956, 500 restructuring agreements have been reached with over 100 countries, amounting to over $600 billion. In order to help a country out of financial deadlock, its debt is usually either canceled or rescheduled, meaning that creditors extend the repayment period and sometimes reduce the interest rate.

    How has the Paris Club evolved over time?

    Over the past twenty years low-income countries have relied increasingly on private financing and loans from major emerging countries like China. As a result, the Paris Club welcomed new G20 creditors, such as Brazil and South Korea, in 2016. China, which is the main creditor of African countries, has a status of associate member of the Club as does India.

    In our next video, we will talk about the creation of the Common Framework, a new coordination method with the G20 creditors.

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.

  • In 1956, Argentina found itself in a difficult position to repay its debts. France offered to host a meeting in Paris between Argentina and its public creditors. The Paris Club was born.

    For over 60 years, this informal group of creditors has been instrumental in resolving debt sovereign 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.

    1. The Heavily Indebted Poor Countries Initiative

    In the 1990s, a major sovereign debt crisis emerged in the poorest and most fragile countries. In response, the major creditors set up the Heavily Indebted Poor Countries Initiative. With this plan, creditors agreed to relieve the debt burden of 36 countries, amounting to $120 billion.

    Thanks to the HIPC Initiative, debt levels of the poorest countries dropped to levels similar to the early 1990’s.

    2. The New Creditors

    However, this improvement did not last. Fifteen years later, at the end of 2021, the debt levels of these countries tripled to reach $372 billion. A debt which was contracted with more creditors, some of which were completely new.

    Amongst them, China became the largest creditor in sub-Saharan Africa in just a few years. The debt level of poor countries held by China reached 14% of their total external debt stock in 2021, from just 3% back in 2006. Developing countries also increasingly turned to private investors who were drawn by lucrative returns.

    The debt level held by these private investors increased tenfold between 2006 and 2021, reaching 21% of the external debt stock of poor countries. Such creditor diversity raises a coordination challenge: in the event of a debt crisis, how can the restructuring effort be equally shared between creditors?

    3. The Common Framework

    In order to better coordinate debt restructurings, member of the Paris Club and non-member created 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 requested a debt treatment under this framework: Chad, Ethiopia, Zambia and Ghana.

    In January 2023, an agreement was concluded with Chad, which represents a major breakthrough. In our next and final video, we will go through the different steps of a 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.

  • What happens when a country cannot repay its debt? The Paris Club creditors use a process called “debt restructuring”. There are three phases to this process:

    Phase 1: The country’s inability to repay its debt

    High and recurring budget deficits, exchange rate depreciations, external shocks such as pandemics or droughts… There are many reasons why a country might not be able to repay the money it has borrowed. In that case its debt becomes unsustainable. So, what can be done?

    Countries may ask for financial help from the IMF, which is what Zambia, Ghana and Sri Lanka have done recently. However, the IMF does not lend money to a country unless it is able to pay it back. It therefore requires the creditors of the highly indebted country in question to restructure its debt. In exchange, the indebted country commits to building back a healthy economy. This is made possible through an IMF program. This term refers to a package comprising financial assistance and reforms decided with the country in need. Such reforms might include, for example, reducing public spending while maintaining support for the most vulnerable. Once the program is set, the country and its creditors need to agree on the terms of a debt restructuring.

    Phase 2: Negotiations

    The debtor country and its creditors meet at the negotiating table in Paris. The Paris Club presents several options: First, reducing the principal amount of the debt to be repaid. It is also called a debt cancellation or haircut. Second, changing the repayment schedule, by extending the repayment period, and possibly reducing the interest rate. Third, a mix of these two options. Whichever option is used, it requires an effort on the creditors’ part. The IMF and the World Bank on their end, are not affected by these restructurings, due to their primary role in supporting countries in need.

    Paris Club creditors however will need to participate in the debt treatment. They will want to make sure that other creditors, both public and private, are subject to “comparability of treatment”. This means that other creditors will need to make an effort at least as important as the Paris Club members.

    Phase 3: Agreements 

    Following the Paris Club negotiations, which may last several days, the parties involved sign a multilateral agreement. This agreement is then transposed into the legislation system of each signing creditor country via a bilateral agreement with the borrower. It was recently the case for France with Suriname for example. Through these legally binding agreements, 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: