Le Club De Paris

Via Brad, I notice that what appears to have happened is that Iraq’s debt, so far from being forgiven by the French and Germans (shame really, just when I was looking forward to chastising American rightwingers for not giving credit where it was due), has been chucked into the Paris Club process. The what? Time for a mug’s guide, I think.

The Paris Club, as well as possessing a URL that a nightclub operator would kill for, is the informal body which deals with the restructuring of defaulted government-to-government debts. This is as opposed to the London Club, which doesn’t have a website at all, but is the informal body which deals with the restructuring of defaulted bank loans to governments. There is no informal body at all to deal with the restructuring of defaulted government debts in the form of bonds, although this is not for the wanting of wanting on the part of the official sector (the original reference on this, and still the best, is “Crisis? What Crisis?” by Richard Portes and I’m not just saying that because I was a research asssistant on it. Here’s an outline of Portes’ views and here’s a G10 report on the same subject which practically defines the phrase “dull but worthy”. Oh and another good Portes piece. There).

Anyway, the defining characteristic of Paris Club workouts is that they are slooooow. There are a number of reasons for this; the chief one is obviously that there is no urgency on the part of the creditors because it isn’t their crisis, but there are also institutional constraints. To understand the institutional constraints, it’s worth taking a look at the Paris Club principles

There’s five of them:

1) Debts are dealt with on a case-by-case basis, dependent on the individual circumstances of each debtor
2) The Paris Club works by consensus; no decision is taken unless there is unanimous agreement
3) Debts are only rescheduled given sufficient conditionality on domestic policy to ensure that the restructuring actually improves the prospects of the debtor. This usually means an IMF program.
4) Sounds obvious but isn’t; there is a principle of solidarity which ensures that members agree to actually implement the decisions of their Club representatives.
5) The Paris club has a comparable treatment principle; it only works on the basis that the debtor will not give any creditors a better deal than it agreed with the Paris Club. This is in order to ensure that the money put in by government creditors doesn’t just go straight out the door to some other class of creditor.

There are lots of other rules and conventions but these are the important ones. Of these, number 1 is a good thing; there are no hard and fast rules to get things stuck on a technicality, and it is considered bad form to make decisions based on possible precedent-setting. Number 4 is a good thing because its practical impact is that the people round the table in Paris actually have the power to get things done; there’s no dicky ratification process back home (democracy shmemocracy). Number 3 is a real pain in the arse because a) it ties countries into IMF programs which are often really badly designed for their purpose and b) it gives the IMF more negotiating leverage, because the IMF can hold out the prospect of scuppering the Paris Club talks in order to get a bit more cooperation.

Numbers 2 and 5 are the main reason that things take forever. The permanent members of the Paris Club are Austria, Australia, Belgium, Canada, Denmark, Finaland, France, Germany, Ireland, Italy, Japan, the Netherlands, Norway, Russia[1], Spain, Sweden, Switzerland, the Brits and the USA. Try getting unanimous agreement out of that little lot in a hurry. Furthermore, the debtor for its own part has a dicey game in negotiating because it knows that principle 5 means that the Paris Club agreement sets the tone for the whole debt workout; if you get the Paris Club terms wrong in either direction, it means that you’re going to end up with an unworkable debt reduction proposal and go back to square one.

Principle 5 also makes the specific case of Iraq more complicated because it’s not just a matter of James Baker going round the world saying come on you stingy bastards and Chirac saying oh go on then. Now that the debt’s entered the Paris Club process, it’s no longer really an option for France or Germany to unilaterally forgive a chunk of debt (that’s presumably why they did it). The Paris Club is a good process for making sure that the eventual restructuring is a genuinely workable plan, and for minimising free-riding by creditors, but it’s more or less completely incompatible with the piecemeal, quick-win style approach which Baker appears to be taking.

Matters are complicated by the fact that any credible debt restructuring for Iraq has to include the Kuwaiti war reparations and the Saudi Arabian loans. That means that these two countries will probably need to be invited to come along as ad hoc members of the Club, adding yet another political unknown to the business. Principle 5 means that it doesn’t matter so much whether they’re in or out as anything the Paris Club agrees will have to be a deal that would also be acceptable to Kuwait and Saudi, but the fact is that they’re in, and everything the Kuwaitis in particular have indicated suggests that they are really quite averse to the idea of generous debt forgiveness.

It looks to me as if Iraqi debt forgiveness is going to be a really slow and difficult process if it continues along the Paris Club lines. I must say I’d really prefer it not to have gone the Paris Club route, because any damage done to the Paris Club in the political fallout from the Iraqi restructuring will tend to hurt poor nations in future. I don’t know who to blame for this latest development (I suspect Chirac), but I really wish they hadn’t done it.

[1] Russia a creditor country? WTF? Yeh, it’s basically to do with old Comecon debts.