Paris Club Seizes Pandemic Opportunity to Reclaim Lost Influence

LAGOS (Capital Markets in Africa) — Like clockwork through the 1990s, Sufian Beker trekked to Paris to plead for cuts in Ethiopia’s soaring debt. As the war-torn country’s finance minister from 1996 to 2015, Beker had few options other than what’s known as the Paris Club, an informal group of wealthy nations that has bailed out governments from Argentina to Zambia. In 2004 he found himself again in the monumental French Treasury building towering over the Seine—where supplicants typically sought forgiveness for their loans—and walked away with a pledge for $1.3 billion in debt relief. It was the last time Beker made such a trip.

In the years since, China has become the top lender to developing countries, eclipsing the nations of the Paris Club. Once the primary government creditors to the developing world, Paris Club members now account for a bit more than half of what China has lent, according to the Kiel Institute for the World Economy. “The club is not the only forum to solve debt problems anymore,” Beker says.

A new plan to defuse a debt blowout in the wake of the pandemic gives the Paris Club a chance to reclaim its influence. At a minimum, its members see the opportunity to persuade Beijing to adhere to their rules on resolving debt problems. Last year the club helped draft a temporary payment suspension for the world’s poorest countries, and it dusted off an old plan urging creditors to use its model in restructuring. The adoption of this so-called Common Framework by the Group of 20 leading economies marked a big step in fulfilling a long-held ambition of the Paris Club:

Bring China to the table.
Before that deal, China—a G-20 member on track to overtake the U.S. as the world’s No. 1 economy this decade—had been reluctant to play by foreign rules. Although its foreign ministry says China backs the framework and will work with others to alleviate the debts of developing economies, the Chinese remain wary. While its financial firepower has grown, the country is still developing, and leaders there say that gives it deeper insights into debtor nations than the Paris Club could ever have. “China has shown it has its own understanding of how best to promote development,” says Tang Xiaoyang, deputy director of the Carnegie-Tsinghua Center for Global Policy in Beijing. “The results have often been better.”

Few finance officials from established industrial economies would agree. A big concern is that China typically demands greater confidentiality than other lenders, raising suspicions that developing countries’ debt to China is bigger than officially estimated. After reviewing 100 deals between Chinese state-owned lenders and governments, a group of U.S. and European researchers cautioned that the opacity, and clauses that bar debtors from restructuring in coordination with the Paris Club, could derail multilateral debt relief efforts.

Before the Paris Club, international debt collection was a messy, sometimes violent business. In 1861, French troops invaded Mexico over an unpaid loan. Although the French lost the first major battle, on May 5, 1862—memorialized in the Cinco de Mayo holiday—a year later they defeated the Mexican army. France imposed an Austrian archduke as Mexico’s emperor, but the money was never repaid. And in 1912, U.S. Marines invaded Nicaragua to ensure repayment of U.S. loans—an occupation that lasted more than two decades.

The Paris Club was created in 1956 to avoid that sort of gunboat diplomacy as Western governments sought to collect loans lavished on developing countries early in the Cold War. Staffed largely by French Treasury bureaucrats, the club has no legally binding power, but for generations it’s helped big creditor nations impose their will on many borrowers. The system was designed to project an image of strength, with a veneer of sophistication. Representatives of debtor nations recall hours spent waiting in a small room at the French Treasury while creditors decided on the terms of any relief. Their ennui was eased by vintage bottles drawn from the well-stocked wine cellar. “It was an instrument of economic and financial influence for France,” says Jean-Pierre Jouyet, the club’s chair from 2000 to 2005.

The organization had a slow start, averaging a deal a year in its first two decades. In the 1980s the pace picked up in response to defaults in Latin America, with two dozen agreements signed in 1989 alone. Those workouts cemented the club’s reputation as a tough negotiator that preferred delayed payments over wholesale forgiveness, though that image softened as it adopted a development role. In the ’90s it joined a drive to relieve poor countries of more than $100 billion in loans, and in 2016 emerging creditors Brazil and South Korea became members. “We always try to make sure that the Paris Club remains agile and flexible to provide solutions that are appropriate,” says Emmanuel Moulin, the club’s chairman and head of the French Treasury. He says that if successful, the Common Framework may pave the way for China to officially join the club.

One risk for the club-led framework is that it’s tied to International Monetary Fund lending, which has imposed harsh austerity measures in exchange for relief. “If the club insists on squeezing countries to the max to pay old creditors, like it did in the past, you will have several lost decades after the pandemic,” says Peter Doyle, a former IMF economist who resigned in 2012 after criticizing the fund for its role in the global financial crisis. So far that prospect has dampened enthusiasm for the program: Of the 73 countries eligible, only three— Chad, Ethiopia, and Zambia—have said they’ll participate.

Another challenge will be persuading private creditors to renegotiate payments. The framework requires debtors to ask bankers and bondholders for the same relief granted by government lenders, but Ethiopia has signaled it won’t do that for fear of alienating the global banking community. China’s foreign ministry, by contrast, has called on commercial bondholders to take part in any deal.

Yet the Common Framework may be in China’s interest, because its bilateral efforts don’t always deliver lasting results, says Thomas Lambert, the club’s deputy secretary general from 2004 to 2006 and now managing director of Lazard Sovereign Advisory Group. Just don’t, he cautions, call it the Paris Club. “They don’t want to be part of a club that ties them to the domination of the West,” he says. “But in reality, the Common Framework is the beginning of rebuilding a broader Paris Club with the same principles.”
 
Source: Bloomberg Businessweek