The Paris Club at 50: Solution to the Debt Problem or Symbol of it?

The 50th anniversary of the Paris Club, which it celebrated this July, is a suitable opportunity for rich creditor governments to acknowledge the deeply rooted ethical shortcomings of the present international debt architecture that stand in the way of justice and development.

The Paris Club is a cartel of creditor governments. Its role is to maximize the overall returns—economic, financial, and political—on creditor governments’ loans. During its tenure, the Club has proven a highly efficient tool for the restructuring and effective recuperation of loans extended through national aid agencies and, crucially, export credit agencies, whose aims and operations almost never relate to development purposes. Thus the Club has served well the politico-strategic interests of creditor governments. However, it has done almost nothing to achieve even medium-term debt sustainability or, more importantly, to guarantee a fair and transparent setting for debt crisis resolution that takes into account the concerns and needs of debtor governments and their peoples.

This “non-institution,” as the Club likes to call itself, is a stark example of non-democratic rules and procedures. The fact that it encompasses only creditors and that its decisions are taken by unanimity and are based on a minimal basis of understanding grants full veto power to the one member sticking to the least favorable terms for the debtor country. Its decisions how much debt to restructure, and on what terms, are derived from its internal (and highly secretive) calculations of a debtor’s capacity for payment, which omit considerations of development needs and the necessary resource levels to attain the Millennium Development Goals. Moreover, it treats debtors arbitrarily: for instance, the Club cancelled last fall only 60 percent of Nigeria’s debts, whereas in 2001 it cancelled 67 percent of Serbia and Montenegro’s, and in late 2004, 80 percent of Iraq’s. This despite the fact that Nigeria’s development indicators are well below those of the other two countries, and even as its debt had ballooned largely as a result not of fresh borrowing but of accruing interest during the 1990s, when the military dictatorship of Sani Abacha stopped making payments.

It is illuminating to compare the workings of the Paris Club with the domestic insolvency laws of its member states. In the interests of both social stability and an efficiently functioning economy these are designed to defuse the powerful social dynamite contained in unresolved and unbalanced debtor–creditor relations by working through consensus building. The current process between indebted Southern countries and their creditors falls far below these standards. In domestic bankruptcies, an impartial body, normally a properly constituted court, is in control of the process, and reaches a judgment to which the two, equal parties are bound. In the Paris Club, on the other hand, the creditors act as judge in their own cause, since it is they who decide how much and on what terms to grant relief. This is also why the greater part of the negotiating process is concerned with decision making among the creditors, while the debtor has almost no opportunity to really negotiate. The delegation from the debtor country is only able to play a passive role, simply being in the position to accept or decline the offer put forward by the creditors, and very rarely in the position to be assertive and actively defend its interests.

It is time to put an end to the misleading and irresponsible claim that the Club, as one of its former secretaries put it, is not a development agency and therefore cannot deal with issues other than mere debt recovery. Around the table at Bercy—the seat of the French Treasury where the Paris Club deliberates—can be found the official representatives of those very governments who have solemnly pledged to contribute to the achievement of the Millennium Development Goals by 2015. Thus it must also be that when they act as a collective body in charge of international debt management, they must necessarily fully consider the development prospects of poor countries, not just their own strategic interests, and behave accordingly.

The Paris Club is illegitimate and needs to be rethought. Indeed, this all-powerful forum presiding over the global credit architecture does not possess any of the features—transparency, accountability, and procedural fairness—needed in order to endow it with real multilateral status. Civil society organizations from the South and the North have called on governments—and in particular those from creditor nations—to provide for comprehensive, fair, impartial, and human-development-based mechanisms for resolving unsustainable debt. Creditors must abandon their role as both party to the restructuring and its ultimate judge, and accept a neutral party to evaluate their claims to repayment against the debtors’ situation and needs. Such reform is necessary for guaranteeing long-term efficiency and effectiveness as well as equity and justice in international finance. Creditors and debtors must be put on the same level, and decisions must include considerations about international agreements such as those on the achievement of the Millennium Development Goals.

As it is currently constituted the Paris Club should not survive beyond these first 50 years during which it has been unable—or rather unwilling—to provide durable or fair solutions to the debt crisis.

Francesco Oddone is Debt Policy and Advocacy Officer, European Network on Debt and Development.

About Eurodad

The European Network on Debt and Development (Eurodad) is a network of 50 nongovernmental organizations from 15 European countries working on issues related to debt, development finance, and poverty reduction. Eurodad offers a platform for exploring issues, collecting intelligence and ideas, and undertaking collective advocacy. Eurodad produces Debt-Watch, an information update providing up-to-the-minute information and analysis on debt and development finance issues. It covers new reports, campaigns, events, action alerts, and much more. Links to contacts and further information are provided. Listserves are sent out about once every two weeks.