The multilateral frameworks available
for debt restructuring are:
(i) The Paris Club
for restructuring the official debt of developing countries.
(ii) The London Club
for restructuring the commercial debt of developing and emerging
market countries.
In addition, there are two initiatives that
help countries in debt relief. They are:
(i) The HIPC Initiative
to provide debt relief for low income countries.
(ii) The Multilateral
Debt Relief Initiative.
Paris Club
The four basic principles that underpin
the operations of the Paris Club are:
(i) the threat of imminent default arising
from an unfilled financing gap in the balance of payments after
taking corrective action;
(ii) appropriate conditionality embodied
in an economic reform program to respond to the balance of payments
difficulties;
(iii) creditor countries must provide
debt relief commensurate with their financial exposure to the
debtor country to ensure equitable burden sharing; and
(iv) consensus requiring all creditor
governments to accept the terms of the rescheduling agreement.
The Agreed Minute signed at the conclusion
of the negotiations sets out the parameters for rescheduling except
the moratorium rate of interest which has to be negotiated bilaterally.
Affected Debt or the debt covered, the Cut-Off Date after which
the debt is not included in the rescheduling agreement and the
consolidation period during which the debt service payments due
are rescheduled are covered in the Minute.
London Club
The participants in the London Club are
the sovereign debtor and a Bank Advisory Committee consisting
of 10-15 representatives of the creditors. It would typically
be chaired by the largest creditor and contain a cross section
of creditors from across different tax and regulatory regimes.
The negotiating process begins with the
announcement by the debtor of its inability to meet debt service
obligations and that payments will not be made after a stipulated
date. The debtor starts discussions with the creditors through
the committee structure that is established. The final agreement
is drafted in two stages. First, the Heads of Terms or the term
sheet identifying the clauses to be included and the main points
to be addressed in the final agreement will be drafted. This
is used by the Committee to consult non-member creditors to
assess the impact of the agreement on their outstanding credits.
The complete agreement is drafted next based on the Heads of
Terms. The debtor and the BAC will then conduct a "road show"
to sell the agreement to the remaining creditors.
HIPC Initiative
The HIPC Initiative was
launched in 1996 and enhanced in 1999 to address the debt problems
of the world's poorest countries. The basic premise underlying
this was that these countries would benefit from a reduction in
the debt outstanding to sustainable levels. It builds on the existing
debt relief mechanisms of the Paris Club and includes all the
concerned creditors. The preferred status of the multilateral
creditors is maintained. The goal of the Initiative is to ensure
that eligible countries are able to achieve sustainable debt levels
and exit from repeated rescheduling.
The two milestones
for the Initiative are the Decision and Completion Points. The
former is reached when a country is judged to be eligible to
receive assistance following a good three year record of reform
programs and economic performance with support from the IMF
and World Bank. During this period, the country receives assistance
from the traditional bilateral and multilateral donors and debt
relief from the Paris Club. At the Decision Point, the amount
of debt relief necessary to bring the external DOD to XGS ratio
to 150 percent at the Completion Point is estimated and will
be made available. The Completion Point is reached following
a further period of implementing IMF and World Bank monitored
programs. In small economies that are highly open which are
making a strong fiscal effort, an alternative debt sustainability
target of 250 percent was set for the ratio of external DOD
to government revenue.
Multilateral
Debt Relief Initiative
A Multilateral Debt
Relief Initiative was approved in 2005 to enable the African
Development Fund, IDA and IMF to cancel all the debt outstanding
to them at the end of 2004 from countries that have reached
or will reach the Completion Point of the HIPC Initiative. The
MDRI provides full debt relief from these three institutions
and does not require parallel debt relief from other creditors.
Non-HIPC countries with a per capita income of $380 or less
are also eligible provided they were current in their obligations
to the IMF and demonstrated satisfactory performance in macroeconomic
policies, implementation of a poverty reduction strategy and
public expenditure management.
