IV Comparability of Treatment
- Jorge Guzmán, and Michael Kuhn
- Published Date:
- September 1990
Paris Club negotiations have always given special consideration to the principle that the debtor country should seek comparable treatment from its various creditors, and comparability has long been a standard feature in the Paris Club Agreed Minutes. Paris Club creditors expect a debtor to obtain comparable relief from all other creditor groups to which it has significant debt-service obligations with the notable exception of the multilateral institutions, whose preferential status has long been accepted by official creditors.
The principle of equitable burden sharing among participating creditors is formally reflected in the access clause of the Agreed Minutes. This clause requires all participating creditors to report to the Chairman of the Paris Club the contents of the bilateral agreements. Agreed Minutes also invariably contain an initiative clause and a most-favored nation clause to ensure that the debtor country takes steps to obtain comparable treatment from other official and private creditors. The initiative clause commits the debtor to seek to secure from all external creditors comparable rescheduling on credits of comparable maturity and to negotiate promptly with all other creditors. The most-favored nation clause more specifically commits the debtor to accord creditors not participating in the Agreed Minute no more favorable treatment than that accorded to Paris Club creditors. The Agreed Minute also contains a provision whereby the debtor country agrees to keep the Chairman of the Paris Club informed on the contents of the agreements reached with other creditors; in most recent cases this provision also specified a deadline for the submission of this report—usually the end of (the first tranche of) the consolidation period.
Official creditors have further underscored the importance they attach to comparable treatment by including in all recent goodwill clauses a provision stipulating that the conclusion of effective arrangements with other creditors is a precondition to subsequent consolidation by the Paris Club. In practice, this provision has been interpreted flexibly, and while progress made with other creditors has influenced creditors’ attitudes in subsequent reschedulings, further meetings have not been delayed because of a lack of comparable arrangements with all other creditors. This reflected in part the fact that in recent years most of the rescheduling countries have been low-income African countries principally indebted to official bilateral creditors.
During 1989, however, with the return to the Paris Club of debtor countries that have significant—and often much larger—debts to other creditors, Paris Club creditors reaffirmed the importance they attached to comparable treatment. As one step toward achieving a more equitable burden sharing, creditors introduced into the Agreed Minute for a number of recent repeat reschedulers a provision calling for an interim written report on the progress in negotiations with other creditors. This was done precisely because arrangements with nonparticipating creditors, called for in the previous Agreed Minute, had not been reached in a timely or fully comparable manner.
Progress reports were also called for when agreement with commercial creditors had not been reached prior to Fund approval of the debtor country’s arrangement for use of Fund resources. Moreover, even though the validity of the rescheduling agreement is not affected by the failure of the debtor country to seek comparable debt relief, Paris Club creditors explicitly conditioned the extensions of multiyear consolidation periods on progress with other creditors in several cases.
Nonparticipating Official Creditors
Paris Club negotiations are open to all governments that have extended credits to the debtor country and that are prepared to accept the policies and procedures of the Club. Participants have traditionally been primarily industrial countries, but developing countries have participated as creditors in an increasing number of recent reschedulings (Chart 8). There have even been instances in recent years in which a country participated in Paris Club sessions as a debtor one day and as a creditor the next. Major official creditors that did not participate in the Paris Club, but provided debt relief on a bilateral basis, include certain previously centrally planned economies (Eastern European countries and China) and some Middle Eastern countries. Also, some developing countries that had participated as debtors in Paris Club reschedulings chose not to participate as creditors even in those cases where debt service owed to them was significant.
Chart 8.Number of Official Debt Rescheduling Agreements Signed by Creditor Countries, 1976–89
Sources: Agreed Minutes.
Paris Club creditors have also reaffirmed that the comparability provision applies to service on all types of debt, including untied concessional development assistance and loans repayable in commodities. In recognition of the diverse legal and institutional constraints faced by various creditor countries, Paris Club creditors have noted that it is not the form the restructuring takes (rescheduling versus refinancing) but rather the effective relief provided in cash-flow terms that is relevant in assessing comparable action. In particular, Paris Club creditors have emphasized that refinancing loans must provide equivalent untied cash relief over the relevant consolidation period. Thus, disbursements from tied project financing or linked directly to imports do not qualify as refinancing loans for the purpose of establishing comparable action.
Official creditors have attached special importance to the conclusion of comparable rescheduling agreements with a country’s bank creditors, as indicated by the specific references to banks in both the initiative and the goodwill clauses. Similarly, the banks have often required countries approaching them for debt rescheduling to seek cash-flow relief from official creditors. Both groups have, however, placed less emphasis on this provision in cases where debt service falling due to the other group was small. In practice, this approach had been reflected in the fact that official creditors have made considerably greater efforts for the low-income countries (including concessional reschedulings in many cases), while banks were expected to make similarly greater efforts (including new money in lieu of rescheduling interest) for those largely middle-income cases in which bank debt clearly dominates.
In the first few years following the emergence of widespread debt-servicing difficulties, the efforts by banks and official creditors to secure equitable burden sharing had been evidenced by the parallel pace of bank and official restructurings. Bank restructurings usually preceded or closely followed Paris Club reschedulings. In recent years, however, these links have loosened, especially during the implementation phase of the debt restructuring, as commercial banks in some cases did not come forward with the anticipated financing after official creditors had concluded their rescheduling agreement. In other cases, negotiations with commercial banks on appropriate financing packages proved to be protracted, thus contributing to delays in the implementation of adjustment programs that could be supported by the Fund.
In response to these difficulties and the need for debt and debt-service reduction on commercial bank debt for some debtor countries, the Fund established, in May 1989, guidelines for Fund support of market-based debt and debt-service reduction operations for countries implementing comprehensive medium-term adjustment programs. The Fund also adapted its policy on financing assurances in light of the changed financial environment and the possibility that in some cases significant time might be needed for banks and the debtor country to agree on an appropriate financing package. In such circumstances, and on a case-by-case basis, an arrangement could be approved outright before the conclusion of such negotiations, provided that prompt Fund support was judged essential for program implementation, that negotiations between the debtor country and its bank creditors had begun, and that a financing package consistent with external viability would be agreed within a reasonable period of time. The policy recognizes that an accumulation of arrears to banks may have to be tolerated where negotiations continue and a country’s financial situation does not allow them to be avoided; the situation is to be monitored closely and progress in negotiations to be reviewed quarterly. The Fund’s policy of allowing for no new arrears to official creditors during the program period remains unchanged.
The Fund has since applied the adapted guidelines on financing assurances in approving a number of arrangements. When a rescheduling from official creditors was also required, the Paris Club meeting took place as usual shortly after the date of Fund approval of the arrangement. The early regularization of relations between the debtor country and official creditors was considered an important element in the strengthened debt strategy. This procedure also allowed Paris Club creditors to have the size of their contribution established in advance of the bank financing package, but further complicated the already difficult task of assessing comparability of treatment. Bank debt renegotiations of other countries that rescheduled in 1989 have followed more traditional lines, especially for the first-time reschedulers.
Issues in the Measurement of Comparability
Differences between official and private creditors make it somewhat more difficult than in the case of nonparticipating official creditors to define what constitutes comparable treatment between these two groups and to make an assessment of whether comparability has been achieved. The difficulty arises, in part, from the different environment in which these two groups operate, which has resulted in different approaches to the provision of debt relief and new financing to debtor countries. The introduction of a menu approach by commercial banks and the recent broadening of the approach to include direct debt and debt-service reduction further complicated the task of implementing comparability between banks and official creditors.
Typically, Paris Club creditors reschedule part or all of both principal and interest falling due during the consolidation period. By contrast, banks have almost always rescheduled varying percentages of principal only. In some cases, banks have contributed to the financing of a debtor country’s adjustment program by agreeing to provide specified amounts of new credits, and creditors have considered these “new money” packages comparable to the rescheduling of interest by the Paris Club.
More generally, official creditors have been implementing a strategy of debt subordination by strictly maintaining established cutoff dates and excluding short-term debts from rescheduling, while banks have often rescheduled recently extended credits and generally included short-term credits into the base used to calculate new money packages. In most cases, however, banks had extended new credits largely in the context of new money packages, which should be compared to the rescheduling of interest on pre-cutoff date debt by official creditors rather than to new officially supported credits, Paris Club creditors have also applied a “de minimis” rule, while bank financing packages typically included all banks. In contrast to banks, however, official creditors have not restructured the stock of debt outstanding but only rescheduled debt-service payments falling due or debt service in arrears.21 Finally, while banks have begun to agree to debt and debt-service reduction operations, official creditors have not engaged in such operations except recently in the context of the menu approach for the poorest countries, and then only with respect to debt-service payments over the consolidation period. Official creditors have, however, provided substantial concessions in the form of bilateral aid to a wide range of countries.
Given the fundamental differences in approach taken by the two groups of creditors to the provision of financial support and, more specifically, to the rescheduling and refinancing of existing debts, no single quantitative indicator can capture the range of factors needed to assess comparability. Paris Club creditors have, therefore, developed a number of measures to guide their assessment, on a case-by-case basis, of what constitutes equitable burden sharing, taking into account various definitions of the relative contributions of official and private creditors.
Debt and debt-service reduction operations by commercial banks in some recent cases have complicated creditors’ assessment, partly because the precise actions taken by banks were not known at the time of the multilateral rescheduling. This raised concerns about whether banks would come forward with adequate and comparable financing in terms of cash-flow support. More generally, an evaluation of burden sharing in terms of relative cash contributions during the consolidation period does not integrate the different approaches in a medium-term framework. In principle, the analysis can be extended to evaluate the cash-flow consequences of debt and debt-service reduction operations over longer periods. The issues arising in the actual implementation of comparability, however, are becoming more complex as the resolution of debt-servicing problems is increasingly including more far-reaching debt relief.
In addition to debt owed to commercial banks, a debtor country usually has some obligations to other private creditors abroad, mainly private suppliers of goods and services not guaranteed by official creditor agencies. The amounts to these creditors tend to be small, but attention has been focused in recent years on the foreign exchange required to continue servicing nonguaranteed suppliers’ credits when such obligations have been large, and on the consequent greater burden this implied for other creditors.
In most cases there are a large number of suppliers, each holding relatively small claims, located in various countries and facing different legal and financial constraints. Moreover, available information on these obligations remains deficient for virtually all debtor countries, and the administrative costs of improving the data and establishing a framework to restructure such debt service could outweigh the potential savings in foreign exchange. For this reason most countries with Paris Club reschedulings have either remained current on some or all of these obligations or, when substantial arrears had been accumulated, settled them as part of an overall plan for the phased elimination of arrears. Available data indicate that in many cases the elimination of arrears involved substantial discounts from the face value of the obligations.