Exceptional treatments in case of crisis

When certain external shocks occur, debt-service obligations can increase the vulnerability of economies. Political conflicts, economic crises, natural disasters, and public health emergencies can significantly raise the financing needs of affected countries in the short and medium term by reducing tax revenues and increasing unavoidable expenditures. In the most severe cases, these events can lead to significant liquidity pressures and may even result in debt distress or over-indebtedness.

The Paris Club’s Response to Exceptional Events

In line with the commitments made under the Monterrey Consensus in 2002, the Paris Club’s focus on the debt sustainability of borrowing countries has gradually expanded beyond its standard debt-treatment terms. In response to exceptional circumstances and on a case-by-case basis, temporary debt-service relief measures (covering principal and/or interest payments) have been offered to debtor countries, enabling them to create the fiscal space needed to implement an appropriate policy response:

  • Following natural disasters: Paris Club creditors granted a three-year deferral of all debt-service payments due from Honduras and Nicaragua, which were affected by Hurricane Mitch in 1998, and a one-year deferral for Indonesia and Sri Lanka, which were hit by the 2004 Indian Ocean tsunami. For countries affected by prolonged internal political conflicts, the Paris Club also decided to go beyond its standard treatment terms by granting, for example, a three-year deferral of all debt-service payments due from Liberia in April 2008. 

  • In response to the sharp increase in food and oil prices: Paris Club creditors applied exceptional terms in June 2008 (a three-year deferral of all debt-service payments in addition to the standard Naples terms) to assist Togo, one of the five countries most severely affected by the resulting terms-of-trade shock, in coping with the situation. 

  • In response to health crises: Paris Club creditors agreed to suspend approximately US$4.6 billion in debt-service payments owed by 42 low-income countries to help them address the COVID-19 pandemic (This measure, known as the Debt Service Suspension Initiative (DSSI), is described in greater detail here).

Climate Resilient Debt Clauses

Against a backdrop of increasingly frequent and severe climate-related crises, more systematic mechanisms have gradually emerged to further strengthen the resilience of debtor countries. Alongside exceptional debt treatments granted on a case-by-case basis, Climate Resilient Debt Clauses (CRDCs) are being incorporated with increasing frequency into the lending instruments of external creditors (including bilateral official creditors, multilateral development banks, and certain commercial lenders). These clauses allow a debtor country affected by a natural disaster to temporarily suspend debt-service payments, thereby creating fiscal space to respond to the crisis.
Because they are contractual, voluntary, and bilateral in nature, these clauses enhance predictability and speed of implementation while minimizing reputational risks for the beneficiary country by reducing the likelihood of default. They also help preserve continued access to external sources of financing. When activated, the rescheduling of payments is designed to be net present value (NPV)-neutral, with suspended payments typically capitalized and repaid either over the remaining life of the debt instrument (once payments resume) or at maturity.

For the first time, in 2015, during the restructuring of Grenada’s debt, the Paris Club incorporated such a provision. On a bilateral basis, these clauses have since become increasingly common in debt contracts held by Paris Club members. They may be linked to climate-related events or, depending on the specific arrangement, other types of triggering events such as food insecurity or pandemics.