What is the Paris Club?

What is the Paris Club?

What is the Paris Club?

Answers to your questions about the news.
May 5 2003 5:56 PM

What Is the Paris Club?

Illustration by Mark Alan Stamaty

The Paris Club, which bills itself as "an informal group of official creditors," is studying ways to reduce Iraq's debt load. What's the Paris Club, and who's on the membership list?

The club traces its roots back nearly half a century, to an Argentinean financial crisis during the "Peronist Unrest" of 1956. Teetering on the brink of default, the troubled country met with several of its sovereign creditors in Paris to arrange a rescheduling of its debt payments. The negotiations helped stave off an economic catastrophe and convinced the creditor nations that—with multilateral cooperation—they could prevent future Third World implosions. By meeting to come up with less onerous payment plans, which would typically include at least partial debt forgiveness, creditor nations could ensure that everyone got paid in a timely fashion. (If only a few creditors played nice, the debtors would have to pay off the less forgiving nations first, and there might be nothing left for the reschedulers.)

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Thus was born the Paris Club, which meets every six weeks at France's Ministry of the Economy, Finance, and Industry. The meetings are chaired by "a senior official of the French Treasury" (currently this guy) and attended by financial pooh-bahs from 19 of the world's wealthiest nations. (The United States sends representatives from the Department of the Treasury.) Behind closed doors, they consider appeals from the desperate, especially countries whose debt quagmires may stem from military conflict or brutal dictatorship. These debtors are often recommended by the International Monetary Fund, and only after they've already tried austerity plans and other reforms. A Paris Club debt rescheduling or debt cancellation is often viewed as a last resort before default.

Aside from "an informal group," the club also calls itself a "non-institution," since its decisions are not legally binding. The club provides the rescheduling framework, but each member is left to negotiate the particulars bilaterally with the debtor in question; the honor system compels the members to abide by the club's terms. One of the core principles of the club is that no creditor can profit from a rescheduling; the terms they reach with Moldova, Nigeria, Mauritania, or other supplicants must involve at least some modicum of financial sacrifice.

Among the club's recent handiwork was a deal last April to reschedule $5.4 billion worth of Indonesia's debt, and a 2001 decision to reschedule $12.5 billion in Pakistani debt over a 38-year stretch. Also in 2001, the club canceled $3 billion of Yugoslavia's debt, recognizing that nearly a decade's worth of war had sapped the country's ability to pay.

The Paris Club isn't always so accommodating when it comes to dealing with crises. In 1999, a club delegation was sent to Cuba, to stress the group's grave concern over the $11.2 billion tab Fidel Castro had run up. (Cuba's debt, however, was not rescheduled by the club.) And when Russia was late with its rescheduled payments the following year, the club sent a grim note warning of "unfortunate damage to Russia's hopes for improved access to capital markets" should the dithering continue.

Bonus Explainer: There's also a London Club, made up primarily of commercial banks. Founded in the 1970s and modeled on the Paris Club, the British version shoots for the same goal—preferring reduced payments to defaults. The London Club is even more informal than its Gallic elder, however; it meets solely on an ad hoc basis, whenever a debtor country requests relief.

Explainer thanks Keith Savard of the Institute of International Finance.