Appendix I Framework of Multilateral Official Debt Renegotiations

International Monetary Fund
Published Date:
January 1994
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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), the enhanced structural adjustment facility (ESAF), and rights accumulation program (RAP) as evidence of appropriate adjustment policies being undertaken.

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 with countries 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. 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’ credit.

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 is involved. In other instances, some major creditor countries have participated in a large number of Paris Club reschedulings in the past several years and have had to negotiate a correspondingly large 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 problem for first reschedulings, in particular, in cases with long-standing arrears. 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 by 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 nonrescheduled debts to Paris Club creditors. The provisions stipulate that nonrescheduled amounts should be paid as scheduled but no later than by 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. Non-rescheduled 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.

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