What does comparability of treatment mean?
The Paris Club Agreed Minutes include a “comparability of treatment” clause, which aims to ensure balanced treatment of the debtor country's debt by all external creditors. In accordance with this clause, the debtor country undertakes to seek from non-multilateral creditors, in particular other official bilateral creditor countries that are not members of the Paris Club and private creditors (mainly banks, bondholders and suppliers), a treatment on comparable terms to those granted in the Agreed Minutes.
Paris Club creditors do not expect the debtor's agreements with its other creditors to exactly match the terms of the Paris Club's own agreement. Instead, given the diversity of other possible creditors, they require that the debtor seek terms “comparable” to the Paris Club's agreement. They also require the debtor to share with the Paris Club the results of its negotiations with other creditors. In practice, Paris Club creditors take a broad-based approach in their assessment of whether a debtor has met the comparability of treatment requirement. Factors for assessing comparability include, for each type of creditor, changes in nominal debt service, net present value and duration of the restructured debt. No kind of debt instrument is inherently protected from treatment. However, Paris Club creditors do consider on a case-by-case basis whether mitigating factors argue against demanding comparable treatment from a particular creditor or on a particular debt instrument. They can make exceptions, for example, when the debt only represents a small proportion of the country's debt burden and when restructuring would unduly interfere with the smooth running of trade. Short-term trade finance is generally excluded from Paris Club rescheduling.
Non-Paris Club official bilateral creditors grant medium- or long-term loans generally similar to those provided by Paris Club creditors. Consequently, non-Paris Club official bilateral creditors often restructure on terms very similar to those agreed within the Paris Club. These creditors may also participate in Paris Club treatments and, under these circumstances, apply exactly the same treatment as that applied by Paris Club creditors.
In contrast, debtors' relations with external private creditors are more complex. There is a long track record of international banks rescheduling their exposures to sovereign borrowers, often through the so-called “London Club” or ad-hoc creditors committees. The Paris Club's experience is that it can be more difficult to make a direct comparison between the efforts of creditors that choose to reschedule flows and those that restructure their stocks of debt. For example, in recent cases where debtors have sought financial relief from bondholders, the debtors have offered new bonds in exchange for the existing instruments. As a general rule, comparability of treatment is assessed on the basis of the effect of private treatments compared to the effect of Paris Club treatments (in terms of duration, net present value and flow relief).
Insisting on fulfillment of the comparability of treatment clause is designed to ensure that Paris Club countries' taxpayers' claims are not subordinated to those of other creditors and that their financial interests are preserved. Moreover, applying such a clause helps ensure that the agreed debt treatment reaches its intended goal of putting debtor countries' debt burdens on a sustainable path.