Jean-Claude Trichet: Celebrating the 50th anniversary of the Paris Club
Speech by Mr Jean-Claude Trichet, President of the European Central Bank, at the celebration of the
50th anniversary of the Paris Club, Paris, 14 June 2006.
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It is a great pleasure to be here in Paris on the occasion of the 50th anniversary of the Paris Club. This
is not only because the Paris Club is an important forum that has made a major contribution in the
area of orderly debt restructuring, but also because I have of course a lot of personal memories of the
long time - from 1982 until 1993 - that I spent actively participating in its activities, together with a lot
of close friends from all over the world.
The Paris Club, which is responsible for the rescheduling of official bilateral credits to developing and
emerging market economies, has played a remarkable role as a forum for crisis management and
resolution. Embedded in the international financial system, the Paris Club has responded to the
changing international financial landscape and the various financial crises over the last few decades
by systematically adapting its modus operandi to the varying needs of the different groups of indebted
countries. In particular, once it was recognised that traditional mechanisms were not sufficient to attain
sustainable external debt levels, the Paris Club introduced increasingly concessional debt
restructuring terms and, as of the late 1980s, debt reduction mechanisms as well to address the rising
debt burdens of certain countries. During that time, the Paris Club reached its peak level of activity.
More recently, the number of countries rescheduling with Paris Club creditors has been declining,
reflecting enhanced access by middle-income countries to market financing and more comprehensive
debt stock treatment of low income countries. Since its first debt rescheduling meeting in 1956, the
Paris Club has been highly effective and has reached some 400 agreements with 81 debtor countries,
covering a total of USD 523 billion in nominal value. The success of the Paris Club is understandable
and, considering that these accomplishments were attained by what we could term a "non-institution"
(there was no international treaty or written charter to set up the Paris Club), may therefore appear to
be a paradox at first sight.
The operations of the Paris Club over the last five decades reflect both the way in which developing
and emerging market economies have benefited from economic and financial globalisation and the
challenges that they have been faced with during this process. Let me be more specific on the
substantial benefits of economic and financial globalisation and the inevitable challenges that this
poses to policy-makers and market participants.
Among the benefits of globalisation, I would mention one which appears particularly relevant for the
activities of the Paris Club. Emerging countries are becoming more and more integrated into the world
economy. They are increasingly involved in the exchange of goods and capital, and can benefit from
the transfer of know-how and technologies. The scrutiny by international investors enhances the
quality of their economic policy, thus contributing to better fundamentals. In most recent years, several
emerging countries have been providing the rest of the world with net resources in the form of current
account surpluses - a trend that would have been unthinkable just a few years ago in the midst of the
Asian crisis. Given these developments, an increasing number of emerging countries have
significantly decreased their external debt or have even turned into net creditors vis-à-vis the rest of
the world.
That said, economic success does not come without risks. Globalisation and capital mobility have
made the international system more vulnerable to changes in investor sentiment. We all remember the
severe financial crises that have occurred over the last 25 years, including the debt crises during the
1980s, starting with Poland and Mexico and spreading to Latin America, Africa, the Middle East and
the Soviet Union; the Mexican crisis in 1994; the Asian crisis starting in 1997; the Russian crisis in
1998; and the Argentinian crisis in 2001-02. All these events, irrespective of their origin or magnitude,
posed major threats to the international financial system. While the international community has
always managed to resolve such crises, they highlighted the potential vulnerabilities of the global
economy, the resilience of which cannot be taken for granted. This is true even in a period
characterised by high growth, low inflation and stability of financial markets such as the one we have
been experiencing since 2003. Past financial crises or, in a more benign way, recent increases in risk
awareness as reflected in higher asset price volatility, remind us of the relentless need to improve the
functioning of mechanisms that deal with the prevention and resolution of such events.
I will focus on two issues today. First, I would like to take this opportunity to review the important
contribution of the Paris Club to orderly sovereign debt restructuring over the last 50 years. Second, I
will make some observations on recent international developments related to crisis prevention and
resolution.
History and achievements of the Paris Club
The fact that the Paris Club has enjoyed the trust of the international financial community for half a
century now is due to its efficient way of dealing with sovereign debt restructuring by combining
pragmatism with a strict set of principles to be implemented when working out agreements on debt
restructuring.
First, making decisions on a case-by-case basis allows Paris Club creditors to tailor their actions to the
individual situation in each debtor country. Such an approach reflects a spirit of permanent adaptation
to new financial problems and difficulties faced by rescheduling countries. Second, Paris Club
treatments are agreed by consensus by all participating creditor countries. Third, creditor countries
apply the principle of conditionality, whereby debt treatments are granted to countries only if they need
debt relief and implement appropriate reforms to resolve their payment difficulties in the context of an
IMF programme. Fourth, the principle of solidarity commits every Paris Club creditor, in its conclusion
of individual bilateral agreements, to respect the terms agreed upon in the joint negotiation. Last but
not least, the Paris Club attaches great value to comparability of treatment of all creditors. By insisting
that a debtor country should not accept less favourable terms from another creditor than those agreed
by consensus within the Paris Club, it is ensured that its taxpayers' claims are not subordinated to
those of other creditors and that their financial interests are preserved. Moreover, applying such a
clause provides a guarantee that the agreed debt treatment reaches its intended goal of putting debtor
countries' debt burdens on a sustainable footing.
Keeping these principles in mind, what have been the main concrete achievements of the Paris Club?
The first Paris Club restructuring took place, as mentioned, in 1956, when Argentina and its official
creditors agreed to reschedule payments due on officially supported credits. At that time, the Club had
no formal rules or procedures and was only intended to provide pragmatic responses to specific
problems. Until 1980, Paris Club creditors on average signed no more than four agreements per year,
applying the standard "classic terms", whereby credits were rescheduled at the appropriate market
rate. During these early years of the Paris Club, negotiations and agreements were more and more
standardised, preparing this forum for the busy times that were to come.
I remember well those years of intense negotiations and the overall activities of the Club. I remember
well the members of the Club at the time and I see some of them here in this room. To you I would like
to express all my friendship and gratitude. We had intense discussions but it was always possible to
find solutions because the members of the Club had an extraordinary level of both professionalism
and mutual confidence.
I remember well the officials and members of governments of the debtor countries, officials from
Mexico, Brazil, Argentina, Poland, Egypt, Nigeria, Morocco, the Soviet Union and Russia, and so
many more. Among all those officials let me mention Angel Gurría, the present Secretary General of
the OECD, who was the first negotiator I encountered, defending the interests of Mexico with
remarkable professionalism and lucidity.
I remember well the major partners of the Club in the period from 1982-1993 in both the public and
private sectors. I would like to mention the names of Jacques de Larosière and Michel Camdessus in
the IMF, Paul Volcker, Alan Greenspan and Bill McDonnough from the Federal Reserve, Bill Rhodes
as regards the private sector rescheduling. Without all those remarkable people, without their lucidity
and tireless activity the world would not have been able to surmount difficulties of an enormous global
magnitude.
The Paris Club felt the fall-out from this crisis as its workload increased exponentially: the number of
agreements concluded rose to well above ten per annum and reached an all-time high of 24 in 1989.
Many countries negotiated multiple debt agreements with the Paris Club. They were coming from all
over the globe, the bulk from sub-Saharan Africa and Latin America, but also from Asia (the
Philippines), the Middle East (Egypt and Jordan) and central and eastern Europe (Poland, Yugoslavia
and Bulgaria).
While the Paris Club confined its mandate solely to debt rescheduling up to 1988, it changed radically
its modus operandi in the late 1980s, given the severe impact of debt crises on the poorest and most
highly indebted countries. The Paris Club adopted a completely new approach to the treatment of debt
of those countries whose debt burdens remained unsustainable. It agreed to reduce the net present
value of eligible debt, thus moving to increasingly concessional rescheduling terms, which have in fact
included a reduction of up to a third since 1988 under the Toronto terms, a half since 1991 under the
London terms, and two-thirds since 1995 under the Naples terms. On the latter occasion, the Paris
Club agreed for the first time to also consider implementing stock treatment - and not only flow relief,
as had been done until that time - to facilitate an exit from repeated reschedulings. Finally,
middleincome countries benefited from the introduction of the more favourable Houston terms in 1990.
When it became clear that even the more concessional debt rescheduling and reduction mechanisms
were still not sufficient to attain sustainable external debt levels, particularly in a number of African
low-income countries, another key policy initiative was launched in 1996 by the IMF and the World
Bank: the Heavily Indebted Poor Countries Initiative (HIPC). Under this initiative, the entire
international community, including some multilateral institutions, decided to take coordinated action to
reduce the debt burdens of eligible countries to sustainable levels. In this context, Paris Club creditors
agreed to increase the reduction in the net present value of eligible debt up to 80% under the Lyon
terms and, in 2000, up to 90% or even more under the Cologne terms. The financial implications of
these decisions were substantial: around 36% of the initiative's total cost, amounting to USD 38 billion
thus far, has been borne by Paris Club creditors. Finally, the HIPC initiative has been supplemented in
2005 by the Multilateral Debt Relief Initiative, which allows for 100% debt relief by multilateral
institutions for countries completing the HIPC process. This marked a major break with the principle of
preferred creditor status of international financial institutions.
Looking at the most recent past of the Paris Club, another development worth noting is that the
number of countries rescheduling with Paris Club creditors has been declining significantly. Besides
the more general macroeconomic developments I recalled at the beginning of this talk, this desirable
trend is also due to two more specific developments: first, the more comprehensive debt stock
treatment of low income countries; and second, a graduation from rescheduling of most middle-income
countries as a result of the implementation of economic reforms that have increased their access to
market financing and thus private creditors. Indeed, while official flows to emerging markets were
dominant in the 1980s, reaching on average over 60% of total flows, the 1990s saw a dramatic
increase in private flows, which on average accounted for around 85% in the period from 1990 until
2003. Accordingly, the Paris Club has been paying increasing attention to coordination with private
sector creditors. In particular, early discussions can be scheduled when the proportion of private
external debt is deemed significant and when comparability of treatment is an issue. Also, interaction
between Paris Club creditors and private sector representatives can be initiated if private creditors
indicate their willingness to help restore debt sustainability in good faith and if a comprehensive debt
treatment is envisaged.
As a result of the enhanced access by middle-income countries to market financing, the Paris Club
has already concluded an increasing number of prepayment agreements with debtor countries. Recent
such agreements include Poland, the Russian Federation, Peru and Brazil. In passing, let me mention
that the IMF is making a similar experience as it has been facing a considerable decline in demand for
its resources during recent years.
Let me conclude this part of my talk by responding to those who claim that the Paris Club lacks
transparency and predictability. I would argue that, quite to the contrary, the rules applied by the Paris
Club are clear, transparent and well-tailored to address different country groupings. In particular, while
the Club's classic terms are standard treatment, the Houston terms, the Naples terms and the Cologne
terms are applied respectively to highly-indebted lower-middle-income countries, highly-indebted poor
countries, and countries eligible for the HIPC initiative. Moreover, being embedded in the international
financial system, the Paris Club works closely not only with creditor and debtor countries, but also with
the IMF and market participants.
Crisis prevention and resolution
In my reflections, I have presented the Paris Club as an important forum for negotiations, both
between the creditor countries and individual debtor countries and among the creditors themselves. I
now wish to take a wider perspective and share with you some thoughts on where the international
community stands in the area of crisis prevention and resolution.
Starting with crisis prevention, I would like to underline the growing number of initiatives undertaken by
policy-makers and market participants to improve transparency and promote best practices. One of
the weaknesses identified during the financial crises of the 1990s was that there had been
considerable information asymmetries between local authorities, market participants, and the
international financial institutions. Transparency is a key precondition for well-functioning markets
since it facilitates better risk management and leads to strengthened market discipline. It is therefore
welcome that significant changes have been introduced in a number of fields. For example, the IMF
started to disclose information on its policies and to encourage increased transparency by its
membership. A large number of international standards and codes of good practice have been agreed
upon, covering such different fields as transparency in fiscal policy or monetary and financial policies,
banking supervision, corporate governance, accounting and auditing. The Paris Club has in turn also
taken steps to increase the transparency of its procedures, for instance by convening meetings with
private sector representatives and by providing comprehensive information on its website.
Turning to crisis management and resolution, I would argue that important lessons have been learnt
from past experiences. Discussions have continued on the appropriate involvement of the private
sector in solving debt crises. This is not only important because the availability of official funds is
limited, but also because there are moral hazard concerns associated with large financial assistance
provided by the official sector. Since every single crisis is different, the challenge arises again and
again to strike the right balance between the debtor country's domestic adjustment, private sector
involvement and official support. As regards the role of the official sector in the area of crisis
management, work continues at the IMF on a number of issues in the context of the strategic review of
its activities. First, an open issue is the lack of clear guidelines for involvement of the IMF in the
process of sovereign debt restructuring in the event a country faces an unsustainable debt situation.
The case of Argentina is an example of a very difficult debt restructuring process. It is crucial that
authorities cooperate closely with their creditors, while the IMF remains closely involved in the process
and takes an active role in providing information. In that context, further discussions will be needed on
how the Fund should financially support a country that is in the process of renegotiating its debt with
private creditors, i.e. the lending-into-arrears policy. Second, discussions continue on the framework
for large financial assistance programmes - the so-called exceptional access policy - that sets
guidelines in order to make Fund lending more predictable. Finally, proposals are being examined for
a possible new instrument to provide high access contingent financing. All in all, what is important in
these different discussions in my view is to increase predictability and clarity on the part of the official
sector so as to set the right incentives for all the actors involved.
While there are several issues that still need to be addressed in the context of crisis resolution,
substantial progress has been achieved on two fronts, both aimed to improve debtor-creditor relations
and define ex ante the best conditions to address possible financial crises leading to debt
restructuring. By doing so, these two initiatives are eventually also beneficial in terms of crisis
prevention.
First, following the pioneering issuance by Mexico of bonds with collective action clauses (CACs) in
February 2003, the adoption of CACs in international sovereign bonds has become much more
widespread. Practically all international sovereign bonds issued since mid-2005 contain CACs, which,
while not yet being tested, have by now become the market standard. As is confirmed by market
participants, the inclusion of CACs has not affected the pricing of international sovereign bonds, as
was initially feared. The share of outstanding bonds including CACs increased, as a result, to 60% at
the end of February 2006. This means that we are gradually moving towards a time when the entire
stock of outstanding debt will include CACs. I deem this development remarkable, in particular in view
of the rather sceptical attitude that many countries and private sector representatives had taken in the
past vis-à-vis the recommendations of the Rey report published after the 1994 Mexican crisis.
Second, I am pleased to note that the Principles for Stable Capital Flows and Fair Debt Restructuring
in Emerging
Markets, which were endorsed by the G20 in November 2004, are gaining more and more
international support. The aim of these market-based and voluntary Principles is to provide guidelines
for the behaviour of sovereign issuers and their private creditors regarding information sharing,
dialogue, and close cooperation in times of financial distress. From the outset, I have been personally
involved in the launch of the Principles since I promoted the idea that such guidelines carry the
potential to help prevent liquidity problems from turning into a deep financial crisis with serious
repercussions for all parties involved. The Principles are also likely to improve the handling of possible
future private sector debt restructurings.
Conclusion
In my view, seen over a long-term horizon, the concept of the Paris Club seems to have been in many
respects a precursor signalling some of the main features that later proved appropriate to handle the
very stimulating but complex globalised economy and finance of the world today.
First the Paris club was global from the start. It is remarkable that as early as 1956 in the case of
Argentina it appeared necessary to embark on a single concept for public credits restructuring and not
on a series of bilateral agreements. In the same way, as soon as some creditors from the emerging
world expressed the desire to participate in the activities of the group of creditors they were accepted.
Brazil was a creditor of Poland, for example.
Second, the Paris Club was and is open and transparent. It was a bold initiative at the end of the 70s
and the beginning of the 80s to invite all international institutions, in particular the IMF, the World Bank
and the Regional Development Banks, together with the United Nations UNDP and the OECD to
participate in the discussions and/or observe the rescheduling negotiations. This unseen level of
transparency would compare with the very discrete bilateral negotiations that were the norm before the
setting-up of the Club.
Third, the Paris Club was and is based on a set of principles that are applied by all parties concerned
in a purely voluntary fashion. There was no setting-up of a new institution, no new official piece of
legislation or regulation. Globalisation and global ownership, transaparency and voluntary
implementation of principles are, in my view, three of the major avenues that have proved not only
necessary but also very successful in the world today. I would particularly stress the systemic
importance of the codes of good conduct and good practices, reflected now in the "Principles", that are
agreed upon by a very large degree of global consensus, are voluntary and incorporate enhanced
transparency. This is a key to better understanding today's global trends in international economics
and finance. I feel proud, along with all those in this room I am sure, that the Paris Club may be among
the first to invent and try out what was and is so promising.
I thank you for your attention.