Abstract

The history of official multilateral debt renegotiations dates back to 1956 when a number of European countries met in Paris to reschedule Argentina’s foreign debt. Between 1975 and early October 1983 (the period reviewed in this section), there were 37 official multilateral debt reschedulings involving 19 debtor countries that are members of the Fund (Table 7). These countries were all non-oil developing countries, including 11 classified as low income. While basically all geographic areas were represented in the group, by far the largest group consisted of African countries. The amount of debt relief provided amounted to less than US$500 million for all countries, except Mexico, Romania, Sudan, Turkey, and Zaïre.

Institutional Arrangements

The history of official multilateral debt renegotiations dates back to 1956 when a number of European countries met in Paris to reschedule Argentina’s foreign debt. Between 1975 and early October 1983 (the period reviewed in this section), there were 37 official multilateral debt reschedulings involving 19 debtor countries that are members of the Fund (Table 7). These countries were all non-oil developing countries, including 11 classified as low income. While basically all geographic areas were represented in the group, by far the largest group consisted of African countries. The amount of debt relief provided amounted to less than US$500 million for all countries, except Mexico, Romania, Sudan, Turkey, and Zaïre.

Table 7.

Official Multilateral Debt Renegotiations Involving Fund Members, 1975–831,2

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Source: Agreed Minutes of debt rescheduling.

Situation as of October 21, 1983; official debt renegotiations for Malawi and Morocco were scheduled to take place late in October 1983.

Excludes debt renegotiations which were conducted under the auspices of aid consortia (India on three occasions during 1975–77 and Pakistan in 1981). Official debt reschedulings which involved non member countries of the Fund during this period were Poland in 1981 (US$2,200 million rescheduled) and Cuba in 1983.

A notable recent development has been a sharp increase in the frequency of multilateral reschedulings. Seven agreements were signed in 1981, six in 1982, and nine during the first nine months of 1983. This compares with between one and four agreements each year during 1975 through 1980. However, of the total 22 reschedulings between 1981 and September 1983, only 10 involved countries that had not previously sought debt relief. The Paris Club creditors have agreed to consider rescheduling requests by Morocco and Malawi late in October 1983. In addition, Brazil requested a rescheduling of debt service on medium- and long-term debt owed to official creditors and due in the period August 1983 to December 1984. The debt relief sought would be in support of Brazil’s adjustment program and form part of a total financing package also involving contributions by commercial banks and official export credit agencies. Before initiating debt renegotiations with a country that is a member of the Fund, official creditors required that the member had adopted an economic adjustment program supported by the use of the Fund’s resources subject to upper credit tranche conditionality.

Most of the reschedulings were undertaken within the framework of the Paris Club, which meets in Paris under the chairmanship of a senior official of the French Treasury. Debt relief was also provided through other multilateral forums such as aid consortia,11 the OECD, and special creditor groups. However, irrespective of the auspices, the framework for the negotiations has essentially been the same. The practices and procedures of the Paris Club (and other creditor clubs) have evolved on a pragmatic basis within an informal framework. There is no fixed membership for creditor countries and there are no written operating rules. All reschedulings are dealt with on a case-by-case basis and, while due regard is accorded to precedent, the approach has remained flexible and adaptable. As a consequence, there has been some diversity in the scale and terms of the relief granted, largely reflecting differences in the severity of the balance of payments difficulties facing the debtor countries.

Multilateral official debt renegotiations are only convened at the request of the government of a debtor country. The participating creditors in the renegotiations usually have been members of the OECD with large claims on the debtor (Chart 1). It should be noted, however, that the Paris Club has encouraged and welcomed the participation of all official creditors with claims on the country seeking debt relief. The number of participating creditor countries was generally between 10 and 15, although it has been as few as 4 and as many as 20. In addition to the debtor and participating creditors, the rescheduling meetings are also attended by observers from a number of international institutions, including the Fund, the World Bank, the United Nations Conference on Trade and Development, the OECD, and the Commission of European Communities. At a Paris Club meeting, the debtor country makes a presentation in support of its request for debt relief. The representatives from the international institutions are normally invited to make a statement. At the meeting, the creditors and the debtor reach an understanding between themselves on the general terms of the rescheduling that are described in the Agreed Minutes. These terms form the basis for the bilateral rescheduling agreements between the debtor and each creditor country. The exercise is complete when the bilateral agreements have been concluded.

Chart 1.
Chart 1.

Official Multilateral Debt Renegotiations, 1975–83: Participating Creditors

Source: Agreed Minutes of debt renegotiations.

The Paris Club approach has reflected the creditors’ view that debt relief should not be provided as a vehicle for concessional development finance but should be designed to assist the debtor bridge temporary foreign exchange difficulties. This approach has been reflected in the terms of the restructuring agreements negotiated within the Paris Club framework. Those countries that have experienced acute debt difficulties and have had Fund-supported adjustment programs in place have successfully sought concessional assistance from other quarters. In these cases, Paris Club reschedulings were also accompanied by a meeting of donor countries normally conducted under the auspices of the World Bank and designed to provide additional aid flows on concessional terms.12

Framework of Renegotiations

Official multilateral debt renegotiations deal with the rescheduling of payments on debt incurred by the public and private sectors of the debtor country and owed to, or guaranteed by, the government or the appropriate agencies of the participating countries. The Agreed Minutes of the debt rescheduling meeting specify the maturity of the debt to be consolidated and the date by which the debt to be consolidated must be contracted (“cut-off date”). They also stipulate the terms of the consolidation, i.e., the period in which payments to be rescheduled must fall due (“consolidation period”), whether interest as well as principal is to be consolidated, the amounts to be rescheduled as a proportion of total repayments, and the repayment schedule for the consolidated debt. The rescheduling agreement generally excludes creditors whose eligible claims for rescheduling are less than a specified amount (“de minimis threshold”). Payments in arrears are consolidated, if creditors believe this to be appropriate.

As regards provisions for future reschedulings, the agreement sometimes provided for an extension of the consolidation period, subject to the fulfillment by the debtor country of specified conditions (“conditional further rescheduling”). However, the Minutes may only express the creditors’ willingness to consider a future meeting to reschedule payments falling due beyond the consolidation period, provided that certain conditions are met (“goodwill clause”).

It has been a long-standing principle of the Paris Club that the participation of a particular creditor in the rescheduling exercise does not imply any judgment by the Paris Club on the validity of individual claims of the creditor, including those that may be in legal dispute. The validity of any claim disputed by the debtor country is a matter to be resolved bilaterally.

The Agreed Minutes generally contain two other important provisions. First, in order to ensure that the debts to nonparticipating creditors are not repaid on more favorable terms, the debtor government expresses its general intention to seek rescheduling with other creditors, including banks and suppliers, on comparable terms. Also, the participating creditors require that the debtor country (i) does not agree to any renegotiation that would result in more favorable treatment being accorded to nonparticipating creditors (“most-favored-creditor clause”), and (ii) seeks renegotiation of other debt on terms comparable with those outlined in the Agreed Minutes (“initiative clause”). Second, the Agreed Minutes stipulate that the debt relief may take the form of either rescheduling (i.e., a stretching out of the original repayment schedule) or refinancing (i.e., the provision of new funds in an amount equal to the value of consolidated payments). However, the economic implications of these two forms of debt relief are identical for the debtor.

While the Agreed Minutes specify the terms of the debt rescheduling, the legal basis of the rescheduling is not established until the bilateral agreements between the debtor and each creditor country are concluded. The interest rate on rescheduled debt service payments (the moratorium rate) is also set on a bilateral basis, although the Agreed Minutes usually make a reference to the market rate and sometimes stipulate that each creditor country should make the maximum effort to keep the rate of interest as low as market conditions and legal considerations permit. There have often been considerable delays in concluding bilateral agreements and, recently, the Minutes have specified a date (usually during the consolidation period) by which the agreement should be signed.

Terms of Rescheduling

Coverage of Debt Consolidated

During the period under review, the official multilateral negotiations rescheduled payments relating to (a) commercial credits guaranteed or insured by the government or the official agencies of the participating creditor countries, and (b) loans extended directly by governmental entities. In no instance has debt service on loans from multilateral development institutions been subject to rescheduling in the Paris Club. In general, the reschedulings covered liabilities incurred by both public and private debtors. However, in several debt restructurings, only debt owed by or guaranteed by the government or official entities of the debtor country was included in the consolidation,13 while in others the rescheduling applied only to private sector debt that was not covered by a debtor government guarantee. In rescheduling private debt not guaranteed by the debtor country government, creditors maintain all conditions contained in the original loan contract. If a private sector borrower did not have local currency to service its debt on the original due date as a consequence of commercial liquidity or solvency problems, the debtor government would not take over the responsibility to repay the debt. When the bilateral agreements are negotiated, the debtor and creditor governments identify which private borrowers are incapable of repaying their debts in local currency. Private debt determined to be in commercial default at the time of the conclusion of the bilateral agreement is not subject to rescheduling. Otherwise, the debtor government will normally be responsible for the repayments according to the schedule stipulated in the Agreed Minutes.

The renegotiation agreements usually covered both principal and interest payments falling due on eligible debt including, where applicable, debt service payments in arrears. However, a limited number of agreements excluded current interest payments falling due during the consolidation period, while in one case only principal payments in arrears were rescheduled.

The debts covered by the rescheduling agreement included all eligible debt with an original maturity of more than one year, although in one case the rescheduling was limited to debt with an original maturity of 1–40 years. An important general principle governing official multilateral negotiations has been the exclusion of short-term debt with an original maturity of one year or less in order to avoid impeding the flow of trade financing, particularly that guaranteed by official export credit insurance agencies. There have, however, been several exceptions to this principle during the review period. Arrears on principal, as well as interest payments on short-term debt, were consolidated on seven occasions (involving four countries), while in a further two instances the rescheduling covered maturities on short-term debt falling due during the consolidation period.

Official creditors have also been extremely reticent in rescheduling previously consolidated debt. The four occasions when this principle was not strictly followed involved countries facing particularly severe debt servicing difficulties. In one rescheduling the amount involved was small and the period of deferral short. In the second, the rescheduling, which was conducted outside the framework of the Paris Club, applied to 90 percent of unpaid principal and interest on previous consolidations. In the third, 80 percent of maturing principal payments on previously rescheduled debt was restructured but not interest. In the fourth, a very exceptional case, all due principal and interest payments on previously consolidated debt were restructured over a longer-than-normal repayment period, but on overall terms explicitly designed to avoid the provision of assistance on concessional terms as defined by the Development Assistance Committee (DAC) of the OECD.14

Creditors with claims eligible for rescheduling that are less than a specified amount are excluded from the rescheduling agreement under the de minimis clause. During 1975–80, the de minimis amount was set at about SDR 1 million, but since then two thirds of the agreements have provided for limits of SDR 500,000 or less. The debtor is required to pay all claims covered by this clause on the due dates.

Cutoff Date

The cutoff date (i.e., the date by which debt to be consolidated must be contracted) is a factor determining the extent of the debt relief provided. The closer this date is to the beginning of the consolidation period the greater will be the amount of debt that is eligible for consolidation. In virtually all reschedulings during 1975–80, the cutoff date was between 5 and 18 months before the date of agreement and between 0 and 12 months before the beginning of the consolidation period. However, between 1981 and September 1983, the cutoff date was set within a range of 3–9 months before the date of agreement for almost all cases15 and, in the majority, the date was fixed so as to include all loans contracted up until the beginning of the consolidation. As a principle, the cutoff date remains unchanged for successive reschedulings.

Consolidation Period and Goodwill Clause

The length of the consolidation period is an additional factor determining the scale of debt relief. In about half of the rescheduling agreements reached during the period under review, the length of the consolidation period was 12 months. However, a rescheduling of payments falling due over a period in excess of 18 months was not uncommon, particularly for several countries that faced especially acute debt servicing difficulties. The official rescheduling that involved the longest consolidation period (36 months) was held outside the framework of the Paris Club. All but one of the reschedulings where the consolidation period was longer than 18 months involved conditional further rescheduling. This provision allows for an extension of the consolidation period if certain conditions are met. These conditions generally include the adoption of a Fund-supported program or continued eligibility to draw under a Fund program.

Traditionally, the creditor groups have responded to a request from the debtor country for a consolidation of maturities over a period in excess of 12–18 months by agreeing, in principle, to consider the restructuring of debt service payments falling due in a specified time after the consolidation period (goodwill clause). While a goodwill clause was rarely included in the Agreed Minutes during 1975–80, it was a feature of all subsequent reschedulings, except when the debtor had obtained debt relief on at least one occasion in the preceding one to two years. Implementation of the goodwill clause has been subject to fulfillment by the debtor country of the conditions that it has (a) obtained debt relief from nonparticipating creditors on comparable terms, and (b) agreed with the Fund on a new financial arrangement subject to upper credit tranche conditionality. It may be noted, however, that the creditors, on occasion, have agreed to further debt relief, irrespective of whether a goodwill clause existed in a previous agreement when the debtor country was experiencing intense balance of payments pressures and had a Fund-supported adjustment program in place. Overall, during the review period, 19 countries undertook debt renegotiations on successive occasions and the cumulative consolidation period for these countries ranged from 24 months to as long as 60 months.

Structure of Repayment Schedule

The restructuring (or stretching out) of an original schedule of debt repayments is divided into three parts: (a) an amount that is to be repaid during the consolidation period on the original due dates (the downpayment); (b) an unconsolidated, but postponed, portion that usually carries a maturity of about 1 to 2 years and a short grace period; and (c) a formally rescheduled portion, the maturity of which is generally between 5 and 10 years, with a grace period of 3–4 years (the repayment period depends in part on whether it relates to the restructuring of current payments or arrears). The amount of debt that is effectively rescheduled therefore corresponds to the total amount due less the downpayment.

In most of the cases reviewed, the repayment terms for rescheduled arrears were considerably more stringent than for rescheduled current payments. For example, the average downpayment associated with the consolidation of arrears was 10 percent between 1975 and early October 1983, compared with only 6 percent for current payments. In three instances, the downpayment on rescheduled arrears represented over one third of the total amount due.

On average, therefore, the proportion of debt effectively rescheduled was higher for current payments than for arrears. Chart 2 shows that the proportion of agreements that involved a rescheduling of 95 percent to 99 percent or more of the total amount due was noticeably greater for current payments. A more obvious difference in the repayment terms between the two types of debt is evident in Chart 3, which shows the average repayment schedule for current payments and arrears in the years following the consolidations.16 On average, half of the amount of the arrears covered by the restructurings were to be repaid within four years, whereas the repayment of rescheduled current payments was longer, with half of the total repayment not due until six years after the consolidation. It is also worthwhile noting that, since 1981, a “back-loaded” repayment scheme (i.e., where the bulk of the repayments fall due during the second half of the repayment period) has been used with increasing frequency.

Chart 2.
Chart 2.

Official Multilateral Debt Renegotiations, 1978–83: Proportion of Payments Rescheduled

Source: Agreed Minutes of debt renegotiations.
Chart 3.
Chart 3.

Official Multilateral Debt Renegotiations, 1975–83: Average Repayment Schedule

Source: Agreed Minutes of debt renegotiation.1 Excludes one exceptional case, involving the rescheduling of debt, including that previously rescheduled, over a considerably longer-than-normal repayment period.

As is clear from Chart 3, however, the scale of debt relief as measured by the proportion of payments rescheduled was by no means uniform for all countries. Generally, where 100 percent of payments was rescheduled countries were involved that would have found it very difficult to make any downpayment during the consolidation period because of the acuteness of their balance of payments problems. Similarly, there were significant differences between countries as regards the maturity of the consolidated debt. Again, those debtors whose foreign exchange position was considered particularly grave generally obtained a rescheduling of current payments over a period of up to nine or ten years, while, where the balance of payments problems were regarded as less pressing, debt was consolidated over a period of seven years or less. The repayment terms for rescheduled arrears were even more varied. About one third of such reschedulings carried a maturity of five years or less, while, in two fifths of the cases, repayments were stretched over a period of eight years or more.

Nondiscrimination Clauses

In order to ensure that debt owed to nonparticipating creditors is not repaid on terms more favorable than those for the participating creditors, the Agreed Minutes incorporated two provisions to avoid discriminatory treatment of different groups of creditors. These provisions, the “most-favored-creditor clause” and the “initiative clause” (see page 17 above), were included in all agreements during the review period, with the exception of three restructurings that took place outside the framework of the Paris Club.

Since 1979 most multilateral commercial bank debt renegotiations have been initiated and/or concluded at about the time of the official rescheduling. Where there has not been a parallel commercial bank rescheduling, countries whose indebtedness to banks is comparatively small have generally been involved. In a few instances, the nondiscriminatory clauses also applied to a rescheduling of private nonguaranteed debt owed to suppliers and would not be covered by a commercial bank rescheduling. On occasion, greater emphasis was placed on the need for equitable treatment by explicitly specifying a date in the Agreed Minutes by which rescheduling agreements with nonofficial creditors had to be concluded.

Linkage with Economic Adjustment Programs

External debt problems are generally symptomatic of underlying balance of payments difficulties arising, in part, from the adoption of inappropriate economic and financial policies by the debtor country. When the Fund’s resources are made available to a country facing balance of payments problems, policies to constrain debt service payments within appropriate bounds constitute an integral element in the overall framework of economic policies designed to restore external viability. For example, Fund-supported adjustment programs include under-takings by the member to strengthen its external debt management policies, including ceilings directly limiting the growth in the member’s external indebtedness.

The importance of a Fund-supported program as a complement to the provision of debt relief has been recognized by the various official creditor groups and this is reflected in the structure of rescheduling agreements. As a precondition for the consideration by official creditors of a request for debt relief by a Fund member country, the debtor country is required to have reached agreement with the Fund involving the use of the Fund’s resources in the upper credit tranches. There have been no exceptions to this practice since 1977. Also, implementation of the goodwill clause has been made conditional on the debtor country having an upper credit tranche program agreed with the Fund at the time a further rescheduling is to be considered.17

Balance of Payments Measures of Scale of Debt Relief

In the reschedulings concluded during the period under review, the amount of official debt relief provided varied widely from US$13 million for the Central African Republic (1983) to US$3 billion for Turkey (1980). The importance of debt relief can be measured in a number of ways, for example, in relation to export earnings, the current account deficit, external debt service payments, and the stock of outstanding debt.

For most of the debt reschedulings, the amount of relief extended was quite substantial relative to both export earnings and the current account deficit (Chart 4). In about 40 percent of the agreements surveyed, debt relief represented more than 20 percent of exports of goods and services in the year of the rescheduling and, for one country, the amount of debt relief provided was greater than the value of its export earnings. The impact of debt relief was even more pronounced relative to the size of the current account deficit. Debt relief amounted to more than 50 percent of the current account deficit in over one third of all debt restructurings, and exceeded it in one fifth.

Chart 4.
Chart 4.

Official Multilateral Debt Renegotiations, 1975–83: Measures of the Scale of Debt Relief

Source: Agreed Minutes of debt rescheduling.1 Countries reporting current account surpluses.2 After incorporating the effects of rescheduling.3 At end of calendar year preceding consolidation period.

In agreements concluded in 1982, the scale of debt relief relative to both export earnings and the current account deficit fell significantly. This was largely attributable to the fact that four of the six debtor countries involved in restructuring agreements had had debt rescheduled on previous occasions and such debt was not eligible for further rescheduling. However, from January to early October 1983 two agreements involved the consolidation of previously rescheduled debt, thus increasing the amount of effective debt relief.

A particularly important measure of the scale of official debt relief is the ratio of the amount rescheduled to total debt service payments (after debt relief) due to official, multilateral, and private creditors in the year of the rescheduling. This ratio was generally less than 30 percent when only current maturities were rescheduled. On the other hand, the extent of debt relief was quite substantial when the rescheduling covered arrears as well as current maturities; debt relief was equivalent to 100–200 percent of actual debt service payments in about one fifth of the cases surveyed and more than 200 percent in a further one fourth. However, relative to the outstanding stock of total external debt, the scale of official debt relief was in general rather limited, as, for a number of countries, indebtedness to official creditors represented a relatively low proportion of their total foreign debt and the consolidation periods were normally limited to 12–18 months. In about 60 percent of the reschedulings during 1975 to early October 1983, debt relief was equivalent to less than 10 percent of total debt outstanding. In all but 2 of the 15 cases involved where this ratio exceeded 10 percent, the rescheduling agreements covered arrears as well as current payments.

The rescheduling of payments falling due during any given period provided real savings in foreign exchange if the debtor country otherwise had fulfilled its maturing commitments. Quite often, however, because of acute foreign exchange difficulties these payments might not have been made and external arrears would have been accumulated. In this sense, the regularization of debt service payments for the debtor country reduced the unfavorable impact on its international credit standing that arose from inability to service obligations on a timely basis. Debt relief, therefore, can provide important balance of payments assistance by facilitating a continuation of capital inflows at a critical phase in the debtor country’s economic adjustment process.

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    Official Multilateral Debt Renegotiations, 1975–83: Participating Creditors

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    Official Multilateral Debt Renegotiations, 1978–83: Proportion of Payments Rescheduled

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    Official Multilateral Debt Renegotiations, 1975–83: Average Repayment Schedule

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    Official Multilateral Debt Renegotiations, 1975–83: Measures of the Scale of Debt Relief