What is the Paris Club ?

23 May 2005 by CADTM

After the Argentine President Juan Domingo Peron was overthrown by a military coup in 1955, the new regime was eager to re-establish the good-will of the creditors. They quickly requested membership to the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
and the World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 180 members in 1997), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

http://worldbank.org
. This meant regularising their debt situation and meeting with their principal creditor countries. This meeting was held on 16 May 1956 in Paris at the invitation of the French Minister of the Economy and was the founding act of the ’Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

http://clubdeparis.org
’.

Sixty years later, the Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

http://clubdeparis.org
, along with the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
and the World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 180 members in 1997), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

http://worldbank.org
, has become a strategic instrument of the developed countries for maintaining their grip on the world’s economy. The Club still meets in the premises of the French Ministry of the Economy at Bercy in Paris, where it has its headquarters; its aim is to renegotiate the debt of the developing countries having repayment difficulties. The original eleven members have now become twenty: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Israel, Italy, Japan, the Netherlands, Norway, Russia, Spain, Sweden, Switzerland, the UK, and the USA. Other creditor countries may occasionally participate.

PNG - 56.4 kb
Les 20 pays du Club de Paris

Between 1956 and 1980, only thirty agreements were signed by the club. Before 1976, the Club would not even hear the requests from countries whose debt situation was not considered to be sufficiently serious: only Argentina, Brazil, Cambodia, Chile, Indonesia, Peru, Pakistan and Zaire were received. After the debt crisis at the beginning of the 1980s the Club’s workload was significantly increased. Between 1981 and 2008, 373 agreements were made with 83 debtor countries, the sad record being held by Senegal, which appeared 14 times, Madagascar 12 times and DRC 11 times. In all, over $500 billion were restructured or cancelled

The plenary meetings, usually monthly, border on the ritualistic. |1| The delegation from the debtor country and those from the creditor countries sit around the great conference table in alphabetical order. The international multilateral institutions (IMF, UNCTAD UNCTAD
United Nations Conference on Trade and Development
This was established in 1964, after pressure from the developing countries, to offset the GATT effects.

http://unctad.org
, World Bank, regional development banks, etc.) may also be represented. The Club’s President, often the chief administrator of the French treasury – or a close collaborator, officiates. The head of the debtor country delegation, usually the finance minister or the head of the Central Bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

ECB : http://www.bankofengland.co.uk/Pages/home.aspx
, formally presents the country’s situation and the reasons it has requested the meeting. The authorities in the country have already been discussing the case for several months and have had to accept very strict conditions before being allowed to make their case: make a formal request to the Paris Club demonstrating that continuing debt repayments has become an impossibility under the present conditions and to conclude an agreement with the IMF that is supposed to guarantee that this does not happen again. Before going before the Paris Club the country has already conceded to these demands. This situation very much reduces the country’s leeway in the negotiations.

Then, the IMF gives the details of the reforms that are to be put into place in order to get the country out of its difficulties, before the World Bank and the UNCTAD complete the picture. There follows an interrogation. The outcome of these ’negotiations’ shows how all-powerful the creditors are: the debtor delegation is invited to leave the room while the rest of the assembly discusses their own positions and decides what to do about the culprit country. Once common ground has been found the President informs the debtor country of the proposals. If they are not satisfactory the ’negotiations’ may recommence, but the power of persuasion is immense: the fact that the debtor country has asked for a conciliatory gesture from the creditors and is at the negotiating table is already a clear sign of submission. Once the agreements are signed the debtor country’s last task is to tell the media how favourable they are and to humbly thank the creditors for their benevolence.

When a country goes before the Paris Club for the first time a cut-off date is decided. Officially, only debts taken on before such date may be subject to a new repayment calendar. This is to reassure the financial markets and creditors on the guarantees Guarantees Acts that provide a creditor with security in complement to the debtor’s commitment. A distinction is made between real guarantees (lien, pledge, mortgage, prior charge) and personal guarantees (surety, aval, letter of intent, independent guarantee). covering any new loans. Madagascar, Niger and Cote d’Ivoire had their cut off date set at 1st July 1983, which drastically reduced the amount of debt that may eventually be considered for renegotiation.

The Paris club recognises two classes of debt: Official Development Assistance ODA
Official Development Assistance
Official Development Assistance is the name given to loans granted in financially favourable conditions by the public bodies of the industrialized countries. A loan has only to be agreed at a lower rate of interest than going market rates (a concessionary loan) to be considered as aid, even if it is then repaid to the last cent by the borrowing country. Tied bilateral loans (which oblige the borrowing country to buy products or services from the lending country) and debt cancellation are also counted as part of ODA. Apart from food aid, there are three main ways of using these funds: rural development, infrastructures and non-project aid (financing budget deficits or the balance of payments). The latter increases continually. This aid is made “conditional” upon reduction of the public deficit, privatization, environmental “good behaviour”, care of the very poor, democratization, etc. These conditions are laid down by the main governments of the North, the World Bank and the IMF. The aid goes through three channels: multilateral aid, bilateral aid and the NGOs.
(ODA) granted at below the market interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
that supposedly encourages development; |2| and non-ODA debts (or commercial debts) which alone will be considered for easing. Generally, Paris Club debt relief is limited to the poorest and the most indebted countries. For the great majority of countries having payment difficulties the Paris Club grants only payment rescheduling facilities, which does no more than put the problems off to a later date.

The living conditions of the poorest populations is not the Paris Club’s problem as it considers itself to be no more than a debt recovery agency. It is run by the Finance Ministry, not the Foreign Affairs Ministry or the Ministry for Development and Cooperation. The Paris Club objective is to make the debtor countries repay as much as possible: “The Paris Club Creditors seek to recover the highest possible amount of their loans. So, an immediate payment of the highest possible amount is demanded. The remaining amounts are rescheduled so that future repayments are balanced and the risk of future default and renewed requests to the Paris Club minimised.” Is it a surprise that the Paris Club and the big banks are in collusion? Jean-Pierre Jouyet left the presidency of the Paris Club in July 2005 to take the post of non-executive President of Barclays. |3| Emmanuel Moulin, General Secretary of the Club took a new position at Citibank, the World’s biggest banking group, and there are other examples.

The Paris Club describes itself as informal, a ’non-institution’. It has no statutes or judicial existence. Technically, the agreements that are the outcomes of these negotiations are simple recommendations that become effective as and when a creditor country independently applies them to the bilateral agreements, which are the pertinent legal frameworks, with the debtor country. Nevertheless, in respect of the principle of solidarity the Club’s recommendations are systematically followed. A clever way of sharing responsibilities: in fact the Club has no responsibilities because its decisions are not binding in themselves even though members do apply them strictly. What is more, the Club’s role is fundamental because it forms a creditor countries’ united front to recover payment of bilateral debts. On the other hand, each debtor country is alone and isolated, |4| its situation being examined independently, considering IMF figures which are often excessively optimistic. |5|

Quick to insist on ’good governance’ elsewhere, the club does not feel concerned itself. Meeting agendas are never made public in advance; the subjects of internal discussions and the positions of the different countries are never announced; the meetings are held behind closed doors, without the presence of independent observers. Whilst the Club is judge and party the debtors are isolated before a united front of creditors. This implies that the decisions are weighed in favour of the financial interests of the rich countries.

It is interesting to note that the Paris Club capitalises the interests on Paris Club debts that are finally added to the balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. of outstanding debt thus creating their own interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. ! |6| even if most South American Constitutions, and some European ones, such as the Italian Constitution, prohibit such practices. So, the Paris Club effectively presses Debtor Countries into violating their own constitutions!

Pressure is clearly used to discourage the forming of a “Debtors’ union”. The Paris Club website says “Creditworthiness usually takes a long time to build, as lenders tend to assess over time the capacity of the debtor to repay its debt before entering into large lending. In contrast, failure to fulfil debt obligations can rapidly damage creditworthiness. Under circumstances where debt restructuring cannot be avoided, countries that do not accumulate arrears and take preventive steps to reach a coordinated solution with their creditors, notably in the Paris Club, can restore their creditworthiness more rapidly afterwards. In contrast, debtors that declare a unilateral moratorium tend to lose access to new financing for some time.”

Finally, after the Paris Club the indebted State can then turn to negotiating its debt towards private creditors under conditions that are still more abominable surrounded by a nauseating odour of profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. by any means.

When all is said and done the Paris Club is a serious institutional anomaly, held under the sly and discrete auspices of the all powerful creditors |7| and it should simply disappear.

Translation : Mike Krolikowski and Christine Pagnoulle.

http://clubdeparis.fr/?What-is-the-Paris-Club


Footnotes

|1| See David Lawson, Le Club de Paris. Sortir de l’engrenage de la dette, L’Harmattan, 2004.

|2| That’s only theory, most often ODA funds are earmarked to finance structural adjustments that inhibit real development. Rather, they maintain and even create poverty.

|3| He only stayed a few months until the end of 2005, after which he took over the French Inspection Générale des Finances and then joined the Sarkozy government as secretary of State for European Affairs.

|4| This is why Thomas Sankara (President of Burkina-Faso 1984-1987) had hoped to create, after his speech in Addis-Abeba, on 29 July 1987, The Addis-Abeba United Front Against Deb (thttp://clubdeparis.fr/?Un-front-uni... (in French))

|5| For example, in August 1997, an IMF and World Bank report on Burkina-Faso forecast 8% annual growth in exports for the 2000-2019 period. In June 2000, after a bad cotton harvest of 1999 the figures were revised downwards to 7.6% for the period 2000-2007 and down to 5% for the period 2008-2018. After the price of cotton fell 35% in 2001, the IMF report published in 2003 shows a 14% fall in cotton exports. See Damien Millet, L’Afrique sans dette, CADTM/Syllepse, p. 175 (in French).

|6| This may be called “anatocism”.

|7| This text is based on the article “Des créanciers discrets, unis et tout-puissants”, by the same authors, that appeared in Le Monde diplomatique June 2006.

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