Clubbing in Paris: Is debt sustainability an illusion?
Benu Schneider, Chief of the International Finance, Debt and Systemic Issues Unit, UN Department of Economic and Social Affairs
Lauren Phillips, Research Fellow, International Economic Development Group (IEDG), ODI
Adrian Hewitt, Research Fellow, International Economic Development Group (IEDG), ODI
Adrian Hewitt (ODI), chair, began the meeting by welcoming the audience and saying that it was appropriate to discuss the achievements, failures and future Paris Club given that it was the organisation's 50th anniversary this month. He provided a brief introduction of both Ms Schneider and Dr Phillips.
Lauren Phillips (ODI) provided a second welcome and mentioned that this meeting was the first in a short series of meetings on the sovereign debt regime. The second meeting would look at private debt dynamics (6 July) and the third on the HIPC and MDRI initiatives (11 July).
Benu Schneider (UNDESA) began her presentation by saying that we are no where near the end of achieving debt relief, especially as the highly indebted poor country (HIPC) programme only addresses the debt burdens of a relatively small number of countries. The Paris Club is a bit of a 'black box,' with little transparency and an unclear relationship to the IMF. In fact, the Club is performing a number of functions which they are not mandated to do nor capable of. Thus, her presentation would address three things: what is the role of the Paris Club; what is its relationship to the IMF; and how can a framework for determining debt sustainability be generated.
What is the role of the Paris Club? Ms Schneider highlighted three challenges in restructuring debt: maintaining contractual obligations, servicing debt according to sustainability and maintaining growth. She said that the financial architecture to achieve this was missing, and that the Paris Club was an ad hoc and highly political body. Also, the Paris Club usually addressed flows of debt rather than stocks of debt in part because the initial role of the organisation was to provide short term debt relief and not to look at debt from a development perspective. Today, the organisation addresses liquidity, solvency and development financing problems without a clear methodology of distinguishing between these types of problems, resulting in a number of countries undertaking 'serial rescheduling.' The Club has extended its remit to deal with HIPC countries, but reduced its role vis-à-vis middle income countries, where it has asked the private sector has asked to play a bigger role in burden sharing.
What is its relationship to the IMF? Ms Schneider argued that the IMF had been using the Paris Club to finance Fund programmes via debt relief. Additionally, the two organisations are linked by the fact that the IMF provides estimates of debt sustainability used by the Paris Club, despite the fact that it cannot be an 'honest gatekeeper' because it is also a creditor. She also mentioned a number of problems in the way that HIPC has been managed by the IMF and other multilateral bodies in this context.
How can a framework for determining debt sustainability be generated? The lack of clear debt sustainability framework has led to a number of countries being rescheduling debt numerous times. Sustainability is inadequately determined: based on forecasts for growth and other variables by the Fund which tend to be over-optimistic. Debt in turn 'snowballs.' Additionally, there is too strong a focus on debt dynamics (sensitivity analysis) and not enough on the optimal composition and level of debt to meet a country's development objectives. Ms Schneider suggested that liquidity problems should be addressed by the IMF, whereas mid to long-term solvency issues by addressed by the Paris Club or a structured debt workout system. To some extent, the Evian approach has attempted to do this, but more work needs to be done on generating a comprehensive framework for assessing debt sustainability and organising orderly workouts when any country (low or middle income) faces a debt problem.
Dr Phillips then provided some comments on the institution of the Paris Club given the weaknesses that Ms Schneider had mentioned. She reminded the audience that the Club had treated $500 billion of debt in its 50 year history, and yet debt sustainability was no closer. Thus, it was time to look at the institutional design. She suggested that the legalisation of the organisation needed to be reassessed as it is currently ad hoc but operating on a set of understood norms. This could result in collapsing the organisation into another body or formalising currently informal norms - each option would have to be evaluated from a development standpoint.
On the topic of legitimacy, she said that Paris Club faced three problems. First was its declining share of total sovereign debt - Only 30% of Iraqi debt, for example, was lent by the Paris Club. Additionally, there are new sources of debt which are outside the Paris Club, namely from other developing countries. Finally, the politics of the organisation remained to be a problem, but not a surprising one: as bilateral debt issuance is political in the first place, it is not surprising that bilateral debt forgiveness is political. On accountability, she highlighted that the organisation had been most successful when working on HIPC with the IFIs. Transparency also remained an issue as there were no clear criteria on who is eligible, how much forgiveness they should receive and on what terms. Also the negotiation process is not transparent. Finally, she highlighted three new challenges and trends for the Paris Club: new southern lenders, 'market-based' approaches such as the recent Nigerian buy back and early repayments such as were recently undertaken in Nigeria.
Mr Hewitt then opened the floor for questions. There was some critique of the characterisation of the IMF's efforts which, it was suggested, amounted to the maximum possible debt cancellation. The problem was instead in internal debt dynamics and fiscal management. Ms Schneider disagreed with this characterisation, stressing that HIPC was for a very limited number of countries. There was also an intervention that suggested that the Paris Club was based on recovery export credits, and that its evolution towards a development body that was interested in debt forgiveness had been rapid and recent. Thus, it must be evaluated in this light. There was a further question about the way that odious debt is treated, and some discussion on recent attempts to generate a human-rights based approach to determining debt sustainability. Ms Schneider said that there were ongoing attempts to construct a broad ranging debt workout mechanism designed through a multi-stakeholder process.
This event explored issues around bilateral public debt negotiated through the Paris Club.