IV Comparability of Treatment

International Monetary Fund
Published Date:
January 1987
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Paris Club negotiations have given special consideration 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 four broad categories: multilateral lending institutions, official creditors participating in the Paris Club, nonparticipating official creditors, and private creditors, including commercial banks and nonguaranteed 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.

Nonparticipating Official Creditors

Paris Club negotiations are open to all governments that have extended or guaranteed credits to the debtor country. Although traditionally the participants have mostly been industrial countries, developing countries have participated as creditors in an increasing number of reschedulings (Chart 8). There were even instances in recent years where a country attended a Paris Club session as debtor one day and as creditor the next. Through the most-favored-nation clause, Paris Club creditors have expressed precisely the strong 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 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. To assess compliance, most recently concluded Agreed Minutes stipulated the submission of written reports on the progress made in securing relief from other creditors; in one case even an interim report was called for.

Chart 8.Number of Official Debt Rescheduling Agreements Signed by Creditor Countries, 1976–87

Sources: 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, for example, 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 reschedulings.

The failure of a debtor country to conclude rescheduling agreements with creditors not participating in the Paris Club can have implications for its performance under a Fund arrangement. The Fund regards the conclusion of the multilateral Agreed Minute of the Paris Club as a satisfactory basis for determining, with respect to the financing of a program, that the debt relief from official creditors has been obtained, and any associated payments arrears eliminated.9 In the case where some official creditors decide not to be represented in the Paris Club, the Fund takes into account that such creditors could seek a bilateral agreement on the same terms, and within the same time limit (the bilateral deadline), as specified in the Paris Club Agreed Minute. The Fund would normally regard the failure to conclude by the stipulated date bilateral agreements with Paris Club creditors as well as with official creditors not participating in the Paris Club as entailing payments arrears. A debtor’s right to make further purchases would not, however, be interrupted in the event that the debtor country was making best efforts to comply with the bilateral deadline. Therefore, while the enforcement of the principle of comparable treatment is a matter among creditors, the Fund takes into account the actions of all creditors when assessing the viability of, and progress under, a Fund-supported program. Also, debtor countries, in formulating their requests to various creditors, have found it to be important that those requests be consistent with the principle of comparable treatment.

Private Creditors

Commercial Banks

Following the emergence of widespread debt-servicing difficulties in 1982, the approach initially taken in assessing comparable treatment was a fairly mechanical one of contrasting the banks’ rescheduling agreements plus new money packages with debt relief from the official creditors. For several reasons, including the emergence of the menu approach in bank financing packages, it has become increasingly necessary to take a broader approach to assessing the contribution of official creditors versus bank creditors, both in specific countries and overall.

Efforts by banks and by official creditors to secure equitable burden sharing in the provision of debt relief or concerted financing are evidenced by the parallel pace of bank and official restructurings. During the period under review, bank debt restructurings preceded or followed closely Paris Club reschedulings except when external debt owed to banks was negligible or when banks had previously agreed to comprehensive rescheduling agreements covering an extended consolidation period. Banks have also restructured debts for some countries that had only small obligations to official creditors and thus did not seek a Paris Club rescheduling or where the country had no Fund-supported program and thus no basis acceptable to official creditors for a Paris Club restructuring. There has been recently, however, a tendency for banks to link debt relief or new financing to actions by official (and other) creditors, even in instances where the potential for debt relief from official creditors was quite limited or where official creditors were already providing significant new financing through other channels.

In contrast, official creditors generally did not explicitly condition the effectiveness of debt relief on the completion of a parallel agreement with commercial banks. Although the debtor country undertakes in the Agreed Minute to seek comparable relief from banks and other creditors, failure to secure comparable relief from other creditors will not affect the validity of the Paris Club agreement but could have a bearing on the attitudes of official creditors in future consolidations.

Implementation of comparability of treatment between banks and official creditors is a difficult task, in part as these creditor groups operate in different environments, which results in different approaches to provision of debt relief and new financing to a debtor country. Typically, Paris Club creditors reschedule part or all of both principal and interest falling due during the consolidation period. By contrast, banks have (mainly for regulatory reasons) almost always rescheduled varying percentages of principal only. Banks have in some cases contributed to the financing of a debtor country’s adjustment program by agreeing to provide specified amounts of new credits; official creditors consider such “new money packages” comparable to the rescheduling of interest by the Paris Club. While official creditors have attached great importance to the maintenance of the cutoff date, banks have occasionally rescheduled recently extended credits, including concerted new financing. As noted above, Paris Club creditors have not in recent years rescheduled short-term debt unless in arrears. Banks generally have excluded short-term debt from restructurings but have in some instances adopted maintenance of exposure agreements or “trade facilities.” In addition, short-term credits have been included in some cases in the base for calculating contributions to new money packages. Also unlike official creditors, banks generally have not distinguished between previously rescheduled debts and those not previously consolidated. Another important distinction in the approach taken is that official creditors do not restructure the stock of debt outstanding but only debt service payments due or overdue (arrears). Also, comparability considerations have been made more difficult as banks have sometimes rescheduled with significantly longer maturities than the Paris Club.

The recent development of the menu approach for banks’ participation in financing packages and new techniques such as exit bonds, debt equity swaps, buybacks, etc., will make it increasingly difficult to assess equitable burden sharing between banks and official creditors. The increased willingness of official creditors to provide bilateral aid and new export credits and cover for countries that are adhering to rescheduling agreements and are successfully undertaking adjustment efforts needs also to be taken into account in the assessment of comparability of treatment. In summary, there is no uniform approach to the assessment of comparability, and standardized ratios or formulas cannot capture the broad range of factors that need to be taken into account.

Nonguaranteed Suppliers

In addition to debt owed to commercial banks and official creditors, a debtor country usually has some obligations to nonbank creditors abroad comprising mainly private suppliers of goods and services, without the guarantee of official creditor agencies. The amounts owed tend to be small, both in relation to amounts owed to the main creditor groups and in relation to the debtor’s overall financing needs. Attention has been focused, however, in recent years 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 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 these reasons, most countries that have had Paris Club reschedulings have continued to opt either to remain current on some or all of these obligations or, when substantial arrears had accumulated, to settle them as part of an overall plan for the phased elimination of arrears.

In contrast to restructuring with banks or with official creditors, which have an established framework or set of procedures for rescheduling debt service payments, rescheduling of nonguaranteed suppliers’ credits does not follow firmly established practices. During the last year and a half, the rescheduling of nonguaranteed suppliers’ credits was sought by only three debtor countries that had Paris Club reschedulings. Available information indicates that there are serious problems in organizing nonguaranteed creditor groups and in maintaining their cohesion.

For purposes of Fund jurisdiction under Articles VIII and XIV, however, the restriction entailed in the payments arrears continues until eliminated pursuant to final agreement between the interested parties.

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