- Jorge Guzmán, and Michael Kuhn
- Published Date:
- September 1990
Multilateral official debt renegotiations deal with the rescheduling of debt-service payments on loans extended by, or guaranteed by, the governments or the official agencies of the participating creditor countries. They are normally, though not exclusively, undertaken under the aegis of the Paris Club. The Club has neither a fixed membership nor an institutional structure; rather it represents a set of practices and procedures that has evolved since the first ad hoc meeting for Argentina in 1956. Meetings are open to all official creditors that accept those practices and procedures.
The rescheduling exercise is initiated by the debtor country sending a formal request for a meeting to the Chairman of the Paris Club (who, by tradition, is an official of the French Treasury). The debtor supplies a breakdown of external debt-service payments, by creditor; on this basis the Chairman, in consultation with the debtor, sends invitations for a meeting to individual creditor countries. The Fund, the World Bank, the United Nations Conference on Trade and Development, and, where relevant, the regional development bank concerned are invited to make presentations at the meeting. Official creditors meet with the debtor to negotiate an agreement (the Agreed Minute) that is then signed ad referendum by all creditor countries attending the meeting, unless the amounts to be covered by the rescheduling agreement are less than the de minimis level, in which case creditor countries do not reschedule but may attend as observers.
The Agreed Minute sets out the broad terms of rescheduling that the participants recommend for the subsequent bilateral agreements between the debtor and each creditor country. These bilateral agreements form the legal basis for the debt rescheduling and establish the interest rates on the debt rescheduled. The date by which such agreements are to be signed is specified in the Minute.
Official creditors require two preconditions for the initiation of a debt renegotiation. They must be convinced, first, that the debtor country will be unable to meet its external payments obligations unless it receives debt relief and, second, that the debtor country will take the steps necessary to eliminate the causes of its payments difficulties and to achieve a durable improvement in its external payments position. Creditors rely on the Fund to help member countries design appropriate adjustment measures and generally require that an upper credit tranche arrangement with the Fund be in place before debt renegotiations are initiated.
Since early 1987, Paris Club creditors have also accepted arrangements under the structural adjustment facility (SAF) and the enhanced structural adjustment facility (ESAF) as evidence of appropriate adjustment policies being undertaken. Through end-1989, Paris Club creditors made 13 reschedulings conditional upon arrangements under the SAF and 5 reschedulings conditional upon arrangements under the ESAF.
The serial rescheduling agreements concluded in 1985 and 1986 with some debtor countries represent an exception to the requirement of an upper credit tranche arrangement with the Fund throughout the consolidation period. In those cases it was agreed that, provided the debtor had already achieved significant adjustment with the support of upper credit tranche arrangements, some or all of the stages of the serial rescheduling would be conditional on the satisfactory implementation of an economic program within the framework of enhanced surveillance. This latter procedure had been developed by the Fund to assist the restoration of normal market relations between creditors and debtor countries. The six multiyear rescheduling agreements concluded in 1989 and 1990, however, were all based on multiyear Fund arrangements: two under the extended facility, one under the SAF, and three under the ESAF.
Official debt reschedulings typically cover both principal and interest payments on medium- and long-term debt falling due during a given period (the consolidation period); where necessary, creditors also covered payments already in arrears at the beginning of the consolidation period, especially when countries were undertaking reschedulings with official creditors for the first time. During the past decade an important factor determining Paris Club practices on coverage has been the increasing recognition by both debtors and creditors of the link between Paris Club reschedulings and the stance of cover policies of export credit agencies. As noted in Section II, creditors have implemented a strategy of subordination aimed at minimizing the effects of reschedulings on new financial assistance from official creditors. The most important element in this strategy has been the firm maintenance since May 1984 of established cutoff dates in the rescheduling agreements with Fund member countries seeking successive reschedulings. Creditors also have a long standing policy to exclude debt service on short-term debt from reschedulings, and debtor countries have increasingly requested the exclusion of debts contracted by the private sector of the rescheduling countries.
Paris Club agreements have also excluded all debts contracted by binational or multinational entities or guaranteed by a third party, for example, a nonresident corporation or a government other than that of the debtor or creditor. Rental and lease payments are excluded as well. Apart from these, Paris Club principles do not permit the exclusion of any other types of bilateral debt from the rescheduling agreement. In the past, some debtor countries have requested other exclusions but, primarily for reasons of precedent and intercreditor equity, official creditors have refused to accede to such requests. In particular, creditors have reaffirmed that secured debts, debts repayable in commodities, and debts covered by special payment mechanisms (such as escrow accounts) are subject to the provisions of the Agreed Minute and that no distinction is to be made between buyers’ and suppliers’ credits.
Implementation of Agreed Minute
While the Agreed Minute sets out the general terms of the debt restructuring, except with regard to interest rates, the bilateral agreements concluded between the debtor country and each creditor country are the legal basis implementing the restructuring. Some creditor countries require, in addition to a framework bilateral agreement, that the debtor country conclude individual agreements implementing that bilateral with various national lending agencies involved in the rescheduling.
Under the provisions contained in the Agreed Minute, the debtor country is expected to conclude the bilateral agreements with each creditor country without undue delay and, in any case, by the bilateral deadline. The period between the date of the Agreed Minute and the bilateral deadline has averaged close to seven months in recent years. Official creditors will normally not agree to a meeting on a new rescheduling until the bilateral agreements implementing the previous Agreed Minute have been signed. For a variety of reasons debtor countries have often failed to conclude bilateral agreements by the deadline specified in the Agreed Minute. Sometimes administrative problems have arisen in setting a mutually convenient schedule for bilateral negotiations, particularly when a relatively large number of creditors are involved. In other instances some major creditor countries have participated in over fifty Paris Club reschedulings in the past three years and have had to negotiate a corresponding number of bilateral agreements. In addition, difficult technical and legal issues have sometimes arisen in the compilation and verification of the relevant data and claims. This has been a particular problem in the case of the first rescheduling and where questions related to long-standing arrears had to be resolved. The reconciliation of data on short-term trade arrears has been particularly difficult. Also, in some cases, there have been protracted negotiations on the interest rates to be applied to rescheduled amounts.
On occasion, despite the best efforts of the debtor country in negotiating with creditors, delays in the completion of a few of the bilateral agreements have occurred; in these instances, the official creditors concerned have generally been willing to proceed with a new consolidation. In such instances, the effectiveness of the new Agreed Minute may be conditional upon the conclusion of outstanding bilateral agreements under the previous Agreed Minute.
Since interest rates are not determined until bilateral agreements are negotiated, the debtor typically does not begin to make moratorium interest payments until then. This results in a bunching of interest payments that otherwise would have been spread over the consolidation period. When obligations on the rescheduled debt accumulated to a point where the debtor was unable to make the required payments following the signature of the bilateral agreements, this bunching has created problems. In some instances this may have reflected unforeseen external factors, but in other cases it was due to policy slippages in the implementation of the adjustment programs. Moreover, the emergence of new external payments arrears had serious implications under the Fund arrangement. To facilitate the implementation of the Agreed Minute, certain debtor countries have, therefore, agreed to establish a special account with a central bank of one of the participating creditor countries into which monthly deposits would be placed. The overall amount is calculated to approximate the amounts payable to all participating creditors during the consolidation period. While regular servicing of a special account can send a positive signal to official creditors, the establishment of a special account alone has not ensured the full implementation of the Agreed Minute, as some debtor countries have failed to make the required monthly deposits.
All Paris Club Agreed Minutes include provisions that govern the payment of non rescheduled debts to Paris Club creditors. The provisions stipulate that nonrescheduled amounts should be paid as scheduled but no later than a specified date. This date has generally been set about three months after the date of the Agreed Minute, but has been extended significantly in some cases. Nonrescheduled amounts include, notably, post-cutoff date debt and debt to creditors that are de minimis as well as debts not covered by the Agreed Minute.
—The terms agreed upon in the multilateral rescheduling meeting are embodied in an Agreed Minute. The Minute normally specifies the coverage of debt-service payments to be consolidated, the cutoff date, the consolidation period, the proportion of payments to be rescheduled, the provisions regarding the down payment, and the repayment schedule for both the rescheduled and deferred debt. Delegates to the meeting undertake to recommend to their governments the incorporation of these terms in the bilateral agreements that implement the rescheduling.
—unpaid amounts that fell due before the beginning of the consolidation period.
—Agreements reached bilaterally between the debtor country and agencies in each of the participating creditor countries; these establish the legal basis of the debt restructuring set forth in the Agreed Minute. Bilateral agreements specify the interest rate on amounts deferred or rescheduled (moratorium interest), which is agreed bilaterally between the debtor and each creditor.
—the date by which all bilateral agreements must be concluded. The period for concluding bilateral agreements is now generally six to seven months from the date of the Agreed Minute.
—See below, “options approach.”
—See below, “multiyear rescheduling agreement.”
—the period in which debt-service payments to be consolidated or rescheduled under the terms applicable to current maturities have fallen or will fall due. The beginning of the consolidation period may precede, coincide with, or come after the date of the Agreed Minute.
—principal and interest payments falling due within the consolidation period.
—the date before which loans must have been contracted in order for their debt service to be covered by the rescheduling. Decisions about whether to include in an agreement debt service due under previous multilateral official reschedulings are made independently of whether those previous agreements were before or after the cutoff date.
—the number of months between the cutoff date and the beginning of the consolidation period.
—the provision whereby creditor countries whose claims are less than a specified minimum amount are excluded from the rescheduling agreement. In the past, the de minimis amount was set at around SDR 1 million, but since 1983 about one half of the agreements have provided limits of SDR 500,000 or SDR 250,000. In the case of the two multiyear rescheduling agreements (MYRAs) granted as of June 1986, the de minimis amount for the three-year consolidation period was SDR 1.5 million. The debtor is expected to pay all claims excluded by this clause. Overdue claims are to be paid as soon as possible, and in any case by a date specified in the Agreed Minute.
—those debt-service obligations not rescheduled under the terms of the Agreed Minute but postponed until after the end of the consolidation period.
—In this paper, down payment refers to payments falling due within the consolidation period on debts covered by the agreement.
—the proportion of total payments covered by the rescheduling agreement that are rescheduled or otherwise deferred until after the end of the consolidation period.
—refers to creditors’ willingness as expressed in the Agreed Minute to meet to consider a further debt rescheduling in the future, subject to fulfillment by the debtor country of certain specified conditions.
—Paris Club Agreed Minutes specify the first and last payment dates, but do not refer to the length of the grace period or to the maturity. In this paper, grace periods and maturity on rescheduled current maturities are counted from the end of the consolidation period. In the case of the rescheduling of arrears and late interest on arrears, they are measured from the beginning of the consolidation period.
—the standard undertaking in the Agreed Minute that the debtor country will seek to restructure debts owed to other creditors on terms comparable to those outlined in the Agreed Minute. This clause appears as one of the general recommendations and reads:
In order to secure comparable treatment of public and private external creditors on their debts, the Delegation of [debtor country] stated that their Government will seek to secure from external creditors, including banks and suppliers, rescheduling or refinancing arrangements on terms comparable to those set forth in this Agreed Minute for credits of comparable maturity, making sure to avoid inequity between different categories of creditors.
—interest accrued on principal and interest in arrears.
—refers to a provision in the Agreed Minute (normally in cases where private debt is rescheduled) whereby the debtor country undertakes to establish or extend the necessary mechanisms to ensure that debtors other than the Government can make into the central bank or other appropriate institutions the local currency counterpart payments corresponding on the due dates.
—grace period plus repayment period.
—see “bilateral agreements” above.
—the standard undertaking in the Agreed Minute whereby the debtor country agrees not to accord to creditor countries that did not participate in the multilateral agreement repayment terms more favorable than those accorded to the participating creditor countries for the consolidation of debts of comparable term.
—agreements, granted by official creditors, that cover consolidation periods of two or more years. They are implemented through a succession of shorter consolidations (serial reschedulings) that automatically come into effect after certain conditions are satisfied. To this effect, the Agreed Minute includes a “conditional further rescheduling” provision that sets forth the payments due in specified future periods, and the conditions for such a rescheduling to become effective without a further Paris Club meeting. The implementation of each stage requires only a decision by creditors that the relevant conditions have been met.
—refers to the exceptional rescheduling terms granted, since October 1988, to the poorest and most heavily indebted countries. Under this approach, creditors choose one of three options (or a combination of options). Under Option A (partial cancellation), one third of debt-service obligations consolidated is canceled and the remaining two thirds is rescheduled on the basis of the appropriate market rate over 14 years, including a grace period of 8 years. Under Option B (extended maturities), debt-service obligations consolidated are rescheduled on the basis of the appropriate market rate over 25 years, including a grace period of 14 years. Under Option C (concessional interest rates), debt-service obligations consolidated are rescheduled over 14 years, including a grace period of 8 years on the basis of the appropriate market rate reduced by 3.5 percentage points, or 50 percent if 50 percent is less than 3.5 percentage points. The option approach also includes a provision for ODA debts that specifies that these debts are rescheduled over 25 years, including a grace period of 14 years with interest rates at least as favorable as the concessional rates applying to these debts. The terms are often referred to as “Toronto terms.”
—see “multiyear rescheduling agreement.”
—an account established under some Agreed Minutes by the debtor country with the central bank of a participating creditor country into which monthly deposits of an agreed amount are made. The total amount deposited usually approximates the amounts estimated to be payable to all participating creditors during the year; the debtor country draws on the account as bilateral implementing agreements are signed and specific payments under these agreements became due.
—a provision in the Agreed Minute that commits the debtor government to guarantee the immediate and unrestricted transfer of foreign exchange in all cases where the private sector pays the local currency counterpart for servicing its debt to Paris Club creditors.
—See “options approach” above.
Multilateral official debt renegotiations that took place in previous years are described in the following earlier studies: Bahram Nowzad and Richard C. Williams, External Indebtedness of Developing Countries, IMF Occasional Paper No. 3 (Washington: International Monetary Fund, May 1981); Eduard Brau and Richard C. Williams, Recent Multilateral Debt Restructurings with Official and Bank Creditors, IMF Occasional Paper No. 25 (Washington: International Monetary Fund, December 1983); K. Burke Dillon, C. Maxwell Watson, G. Russell Kincaid, and Chanpen Puckahtikom, Recent Developments in External Debt Restructuring, IMF Occasional Paper No. 40 (Washington: International Monetary Fund, October 1985); K. Burke Dillon and Gumersindo Oliveros, Recent Experience with Multilateral Official Debt Re-scheduling. World Economic and Financial Surveys (Washington: International Monetary Fund, February 1987); and Peter M. Keller with Nissanke E. Weerasinghe, Multilateral Official Debt Rescheduling: Recent Experience, World Economic and Financial Surveys (Washington: International Monetary Fund, May 1988). References in this paper to multilateral official debt reschedulings exclude renegotiations conducted under the auspices of aid consortia as well as reschedulings that involved non-Fund members. Reschedulings with Poland signed prior to its date of membership in the Fund (June 12, 1986) are included.
This menu of options had been endorsed by the creditor governments participating in the Toronto summit meeting in June 1988, and the Paris Club rescheduling terms accorded under the menu approach are often referred to as “Toronto terms.”
The starting date of 1976 is to some extent arbitrary, since multilateral official debt reschedulings through the Paris Club date back to 1956, though the pattern of reschedulings has changed considerably. The ten debtor countries that concluded multilateral reschedulings with official creditors (including reschedulings under the auspices of aid consortia) during 1956–75 all resumed normal debtor-creditor relations after a brief series of reschedulings. The only country to reschedule in 1976, however, has since remained in a rescheduling situation almost without interruption, as have most of the other countries that have rescheduled since then. Both creditor and debtor countries thus frequently refer to specific rescheduling exercises by numbers as indicated in Table 1.
Chile, The Gambia, Malawi, Romania, and Turkey.
The eleven Paris Club rescheduling agreements concluded in the first seven months of 1990 are listed in Table 1.
Angola had not yet officially joined the Fund at the time of the rescheduling agreement in July 1989.
The five largest rescheduling countries (and their percentage shares in total cumulative amounts consolidated through end-1989) are: Poland (21), Brazil (11), Nigeria (11), Egypt (6), and Zaïre (6).
As noted in G. G. Johnson, Matthew Fisher, and Elliott Harris, Officially Supported Export Credits: Developments and Prospects, World Economic and Financial Surveys (Washington: International Monetary Fund, May 1990), export credit agencies and their guardian authorities were unanimous in their view that cutoff dates must remain fixed, and that any change in the cutoff date would have a large immediate impact on cover policy, not just for the country concerned, but for a wide range of countries.
The importance creditors attach to the continued maintenance of cutoff dates is made explicit by the reference to an unchanged cutoff date, which has been included in all goodwill clauses in recent years.
Current short-term maturities were also included in one exceptional case where it was thought that there were few, if any, such debts, and creditors considered that inclusion would simplify the process of data reconciliation.
When private sector debt is excluded from the rescheduling, the Agreed Minute contained a “transfer clause.”
Exceptions were also made in the reschedulings for Côte d’Ivoire in December 1989 and Poland in February 1990; these provided for an overall maturity of 14 years, including a grace period of 8 years.
Three more multiyear rescheduling agreements were concluded in the first seven months of 1990.
The multiyear rescheduling agreements (MYRAs) concluded in 1985 and 1986 had not been based on multiyear Fund arrangements. Experience with these agreements had been disappointing, as none was fully implemented.
In the first seven months of 1990, another three low-income countries obtained rescheduling agreements that incorporated the options approach.
The seven reschedulings on Toronto terms in 1990 consolidated another $2 billion.
These estimates allow for the fact that interest rates on rescheduled ODA debts are not reduced further (except for the effect of the cancellation of one third of ODA debts consolidated under Option A). Including the seven consolidations in 1990, the cancellation of debt service amounted to some $0.5 billion and the savings in moratorium interest to $70 million.
The calculation of the grant element used the relevant market rates as discount rates. This method is similar to that employed by the OECD Consensus. The OECD’s Development Assistance Committee defines concessionality in terms of a minimum grant element of 25 percent based on a discount factor of 10 percent.
Two reschedulings in 1990 covered only previously rescheduled debt, because service on previously not rescheduled pre-cutoff date debt was very small.
The reschedulings with Indonesia in 1970 and Ghana in 1974 (under the auspices of an aid consortium) are the only two cases of multilateral official debt reschedulings over the past 30 years in which the consolidation period was extended to final maturity of the debts covered.