IV Comparability of Treatment Across Creditors
- International Monetary Fund
- Published Date:
- January 1986
Paris Club negotiations give special importance to the principle that the debtor should seek comparable treatment from its various creditors and with respect to all types of debt, and comparability provisions have long been a standard feature in Paris Club Agreed Minutes. By and large, creditors fall into one of five broad categories: multilateral lending institutions, official creditors participating in the Paris Club, nonparticipating official creditors, commercial banks, and nonguaranteed private suppliers. Paris Club creditors expect the debtor to negotiate comparable reschedulings with all other creditor groups to which it has significant debt service obligations, with the exception of multilateral lending institutions, whose preferential status has long been accepted by official creditors.
The objective of seeking equitable burden sharing among participating official creditors is at the heart of the multilateral approach of the Paris Club and is formally reflected in the access clause of Agreed Minutes. As mentioned in Section II, the Agreed Minute specifies the common rescheduling and repayment terms (with the exception of the interest rate) which the representatives of participating creditor countries agree to recommend to their governments in the negotiation of the bilateral agreements that implement the rescheduling with the debtor country. The access clause ensures participating creditor countries access to all bilateral agreements, and calls on them to report to the Chairman of the Paris Club the date of the signature of their bilateral agreements, the interest rates, and the amounts of debt involved in the rescheduling.
All recent Agreed Minutes also contain an initiative clause and a most-favored-nation clause intended to ensure comparable treatment with nonparticipating official and private creditors. The initiative clause commits the debtor to seek to secure from public and private creditors a comparable rescheduling for credits of comparable maturity. Comparability vis-à-vis non-participating creditor countries is further emphasized through the most-favored-nation clause, whereby the debtor explicitly agrees to accord creditor countries not participating in the Agreed Minute treatment no more favorable than that accorded to Paris Club creditors.
The specific formulation of the comparability provisions has changed over time, as Paris Club creditors have focused on different elements which in their view were necessary for the effective implementation of such provisions within the changing environment of international lending. Since the late 1970s the initiative clause has contained a specific reference to banks and since mid-1983 it has also become standard practice to incorporate an explicit reference to nonguaranteed suppliers. Official creditors have underscored the importance they attach to these comparability provisions by introducing into the goodwill clause a stipulation indicating that the completion of effective arrangements with other creditors will be a precondition for a subsequent rescheduling. Issues and difficulties that have arisen with respect to comparability of treatment are discussed in the following sections.
Issues vis-à-vis Nonparticipating Creditors
Nonparticipating Official Creditors
Paris Club negotiations are open to all governments that have extended credit to the debtor country. Although in the past the participants have mostly been industrial countries, more recently developing countries have participated as creditors in a small but increasing number of reschedulings (Chart 6). Through the most-favored-nation clause, Paris Club creditors have expressed, strongly and precisely, the importance they attach to the debtor obtaining comparable treatment from those official creditors not participating in the Paris Club. Paris Club creditors have also reaffirmed that these comparability provisions apply to service on all types of debt, including untied concessional development assistance and loans repayable in commodities. Failure of the debtor country to comply with these provisions has in practice influenced Paris Club creditors’ attitudes toward the terms of subsequent reschedulings.
Chart 6.Number of Official Debt Rescheduling Agreements Signed by Creditor Countries, 1976–June 1986
Source: Agreed Minutes of debt reschedulings.
It is recognized that creditor countries face diverse legal and institutional constraints. For example, certain government agencies may be bound by provisions that explicitly prohibit rescheduling. For these reasons, Paris Club creditors have noted that it is not the form the restructuring of debt service obligations takes, such as rescheduling versus refinancing, but rather the effective debt relief actually provided that is relevant for assessing comparable action. Paris Club creditors have underscored, however, that refinancing loans must provide equivalent untied cash relief within the relevant consolidation period. For this reason, disbursements from loans tied to project financing or to imports do not qualify as refinancing flows for purposes of establishing comparable action. Paris Club creditors generally continue to make such disbursements in addition to providing debt relief through rescheduling.
Banks also seek to secure comparable action from other creditors, particularly from official creditors, in the case of a country requesting debt relief or concerted financing. Efforts by both groups to ensure comparability of treatment are evidenced by the parallel pace of bank and official debt restructurings. During the last year and a half, each instance of official rescheduling has been preceded or followed by discussions on a bank debt restructuring, except in cases where external debt owed to banks was negligible or where banks had previously provided a comprehensive rescheduling agreement covering an extended consolidation period. Similarly, banks restructured debts for some countries that had only small obligations to official creditors and did not intend to seek a Paris Club agreement. Banks also rescheduled without a parallel Paris Club agreement in some cases where the country did not have a Fund-supported program.
A key difficulty in the implementation of comparability of treatment between bank and official creditors lies in defining what does or should constitute equitable burden sharing. Banks and official creditors have focused on different indicators to assess comparable action, but it is generally recognized that standardized ratios or formulas cannot capture the broad range of factors that need to be taken into account in any assessment of equitable burden sharing. Official creditors and banks operate in different environments, which result in a different approach to the provision of financial assistance to a debtor country. Typically, Paris Club creditors reschedule part of both principal and interest falling due during the consolidation period. By contrast, banks have almost without exception rescheduled varying percentages of principal only. Banks have, however, in many cases contributed to the financing of a debtor’s adjustment program by agreeing to provide specified amounts of new credits; official creditors consider that such “new money” constitutes action comparable to the rescheduling of interest by the Paris Club. The increased willingness of official creditors to provide new export credits and cover for countries that have rescheduled their debts and are undertaking successful adjustment efforts is a development which, as discussed further below, has implications for the assessment of comparability of treatment.
In addition to debt owed to commercial banks and official creditors, a debtor country usually also has obligations to nonbank creditors abroad, comprising mainly private suppliers of goods and services, without the guarantee of official creditor agencies. The amounts owed to these creditors tend to be small, both in relation to amounts owed to the other main creditor groups and in relation to the debtor’s overall financing needs. However, as debt-servicing difficulties became more acute after mid-1982, attention was focused on the foreign exchange required to continue servicing nonguaranteed suppliers credits in cases where such obligations were large, and on the consequent greater burden this implied for other creditors. In particular, Paris Club creditors have in recent years emphasized the importance they attach to the debtor’s seeking comparable action from nonguaranteed suppliers and, as mentioned above, since 1983 the initiative and the goodwill clauses have incorporated an explicit reference to this effect.
The available country experience has demonstrated that the achievement of comparability of treatment with nonguaranteed suppliers raises complex practical issues. In most cases, the number of suppliers is large, each holding relatively small claims, located in various countries and facing different legal and financial constraints. Moreover, available information on these obligations is considered deficient for virtually all of the debtor countries, and the administrative costs of setting up a framework to restructure such debt service could be so high as to outweigh the potential savings in foreign exchange. For these reasons, the majority of countries that have had Paris Club reschedulings have opted either to remain current on these obligations or, when substantial arrears had accumulated, to settle them as part of an overall plan for the phased elimination of arrears.11 However, for a few debtor countries where such obligations were large, a systematic restructuring of nonguaranteed suppliers credits was considered to be a necessary step in the regularization of the country’s external payments position.
In marked contrast to reschedulings with banks or with official creditors, which have an established framework or set of procedures for rescheduling debt service, reschedulings of nonguaranteed suppliers credits have taken a variety of forms. During the last year and a half, the rescheduling of nonguaranteed suppliers credits was sought by four debtor countries that had Paris Club reschedulings. In three of these cases a multilateral approach was taken, while in one case such debt was rescheduled unilaterally. In all three cases repayment terms were negotiated with only a small number of suppliers which had accepted the invitation to take part in the negotiations and who had a negotiating mandate. In one case where a multilateral rescheduling was sought simultaneously with non-guaranteed suppliers, banks not participating in the broader-based commercial bank rescheduling (London Club), and one official creditor not participating in the Paris Club, only 6 out of a total of 20 creditors involved attended the multilateral negotiation and only 3 had a negotiating mandate. A similar poor attendance of creditors with negotiating mandate was evidenced in the other cases.
Concerning comparability of terms with other creditor groups, generalizations cannot be made since available information is confined to the terms officially offered. In one case, creditors were offered a choice of accepting the terms multilaterally agreed with foreign commercial banks or proposing an alternative involving a shorter grace and maturity and, in exchange, a lower interest rate. In another, minimum grace, maturity, and rescheduling coefficients were established representing ex ante a somewhat more favorable treatment for the creditor than what was agreed with the Paris Club, but no guidelines were set with regard to interest rates. In the one case of unilateral rescheduling, the authorities offered non-guaranteed suppliers the same rescheduling terms as agreed upon with foreign commercial banks for the rescheduling of similar maturities.
There have been two recent developments regarding comparability of treatment. First, Paris Club creditors have established new procedures to help determine ex post if the debtor has succeeded in securing debt relief from other creditors and, if so, whether the rescheduling terms accorded to other creditors constitute comparable action. In particular, in recent cases where creditors have expressed their agreement in principle to a future rescheduling of debt service payments for the debtor country, they have established as a precondition for that meeting to take place that the debtor report in writing to the Chairman of the Paris Club on the content of all bilateral agreements concluded with other creditors. This condition was first introduced in early 1985 and was subsequently applied to 10 of the 15 countries whose agreements contained a goodwill clause.
Second, there have been developments with respect to officially supported export credits that would need to be taken into account in a full assessment of comparable action as between official and bank creditors. As discussed in an earlier study, the recent tendency to closer alignment of export credit and cover policy with progress in adjustment by the debtor country should result in increased credit flows to selected rescheduling countries.12 While recognizing that no individual export credit agency can project the volume of demand it will face for credits and cover for a particular debtor country, let alone target specific export credit amounts, greater transparency in cover policies, taken together with an assessment of possible demand for export credits given the level and composition of imports projected during a financial program, could facilitate the estimation at the aggregate level of projected export credit flows. Also, improvements now underway in various statistical series on export credits will permit a better ex post analysis of the volume of officially supported export credit flows. These developments can open new options with regard to assessing official creditors’ contribution to the solution of the debtors’ external payments difficulties. This would, in turn, allow official creditors to consider from a broader perspective the more suitable form of financial assistance for a given debtor country and, in particular, the mix between rescheduling and new export credits which would appear appropriate for each case.
A discussion of the different approaches adopted by debtor countries to deal with nonguaranteed suppliers credits and a review of recent country experiences is provided in Appendix III to Occasional Paper No. 40, cited in footnote 1.
Eduard Brau, K. Burke Dillon, Chanpen Puckahtikom, and Miranda Xafa, Export Credits: Developments and Prospects, World Economic and Financial Surveys (Washington, International Monetary Fund, July 1986).