The Paris Club is Dead. Long Live the Paris Club?

In the often messy world of sovereign debt restructuring, the Paris Club offers a useful forum for coordination. Modernizing the Club’s membership and practices to better reflect today’s global economic order, will allow it to perform this role more effectively and credibly.

Established in 1953, the Paris Club is the informal group of creditor countries that negotiates the terms of restructuring for a debtor country’s official bilateral debt. Although historically central to the international sovereign debt restructuring “system”, its role appears to have waned in recent years. It is not involved in discussions on the Greek debt restructuring, although this includes over $50 billion in official bilateral debt. The IMF recently amended its lending framework to reduce reliance on the Paris Club’s protocols.

Nevertheless, the Club continues to play a useful role, particularly for low-income countries that remain dependent on official bilateral financing and often have limited resources to coordinate a debt restructuring. To preserve and bolster this role, the Paris Club needs to modernize its membership and practices. Whilst steps have been taken in the right direction, more work is needed. Two areas require particular attention:

• Enhancing the representation of emerging market creditor countries.
• Updating the Club’s restructuring principles and rules to reflect the new modalities of international sovereign finance.

On representation, the Club’s membership was recently expanded to include South Korea and Brazil as permanent members (although they have frequently participated as ad hoc members in the past). Behind the scenes, diplomats are working hard to bring China on board. For the Paris Club to provide credible inter-creditor coordination and equity, it is essential that this trend continues — with not only China, but also India, South Africa, Saudi Arabia and other major official bilateral lenders joining the permanent membership. Representation will also be enhanced by diversifying the currently French-dominated Secretariat.

On restructuring rules and principles, greater access to capital markets has brought new sources of finance for many sovereigns. Where non-Paris Club debt (bilateral, multilateral and/or commercial) outweighs the Paris Club’s share, the application of the Club’s “comparability of treatment” principle becomes counter-intuitive, and challenging to enforce. In future restructurings, it would be appropriate to encourage comparability of treatment only where Paris Club creditors (including ad hocparticipants) represent the majority of debt being restructured.

Relatedly, the scope of debt covered by Paris Club restructurings (“public external debt” owed to “official bilateral creditors”) would benefit from clearer definition. For example, does this include sovereign bonds purchased by central banks for monetary policy purposes? And what about credit extended through a country’s sovereign wealth fund? Uniformity of understanding should be reached amongst relevant institutions, especially the IMF, to avoid the sort of confusion seen with Ukraine’s debt restructuring.