The practical implementation of these principles has led to a number of rules and conventions, which assist the conclusion of negotiations.
1/ Debts treated
Among the different types of debt, Paris Club agreements generally only apply:
- to the debts of the public sector, as the agreement is signed with governments of the debtor countries unable to meet their external obligations. Debts owed by private entities and guaranteed by the public sector are considered to be part of the public sector.
- to medium and long term debts. Short term debt (debt with a maturity of one year or less) is excluded from the treatments, as their restructuring can create a significant disruption of the capacity of the debtor country to participate in international trade.
- to credits granted before the "cut off date". When a debtor country first meets with Paris Club creditors, the "cut off date" is defined and is not changed in subsequent Paris Club treatments and credits granted after this cut off date are not subject to future rescheduling. Thus, the cut off date helps restore access to credit for debtor countries facing payment difficulties.
From the creditor side, the debts treated are credits and loans granted, or commercial credits guaranteed by the Governments or appropriate institutions of Paris Club creditors. Claims of other creditors are divided in two parts : (i) multilateral claims are not rescheduled (ii) other claims are treated by the debtor country in a manner comparable to the Paris Club agreement (for further details, see comparability of treatment).
Debt that was already treated in the context of a previous Paris Club agreement is normally not treated again, except for those countries where the financing gap is large or where all pre-cutoff-date debt was already rescheduled. When previously rescheduled debt is treated again, the earlier debt treatments are conducted before the later ones.
2/ Flow and stock treatments
2.1. Flow treatments
A standard Paris Club agreement provides a way of tiding a debtor country through temporary balance of payments difficulties. This is described as flow relief and works in the following way:
- the period of time to which the agreement refers is usually the period when the IMF programme shows a financing gap that can only be covered by debt rescheduling. This period is called the "consolidation period";
- payments falling due to Paris Club creditors in this period and covered by the Paris Club agreement are then "consolidated" and the payment of these debts is then made on a new schedule ("rescheduling"). The typical terms of a rescheduling are described in section 3 below ;
The standard consolidation period is one year. However, creditor countries have accepted to reschedule the debt falling over two or three years, corresponding with a multiyear arrangement with the IMF that shows a financing gap (arrangement under an Extended Arrangement, arrangement under the Poverty Reduction and Growth Facility).
2.2. Stock treatments
Some Paris Club treatments apply not only to the payments falling due in a particular period of time, but to the entire stock of debt from which those payments fall due. The intention of any agreement which deals with the stock of debt in this way is to provide a country with a final treatment by the Paris Club called an exit rescheduling. These agreements are implemented in two sets of circumstances:
- in the context of the HIPC initiative, Paris Club creditors provide their share of the effort defined in the context of the initiative through a Cologne terms stock treatment at completion point;
- in other cases, stock treatments may be implemented, on a case-by-case basis, for countries having established a satisfactory track record with both the Paris Club and the IMF and for which there is sufficient confidence in their ability to respect the debt agreement.
Stock treatments generate interest on the consolidation that are larger than the ones resulting from flow treatments. As a consequence, stock treatments provide long-term debt relief, but debt service relief is smaller in the short-term than for a flow treatment.
3/ Payment terms resulting from Paris Club agreements
Throughout its existence, the Paris Club has aimed to produce agreements which lead to levels of payments which are sustainable for the debtor. Over time practice and theory have developed and two trends have emerged in the terms of Paris Club agreements :
- Longer repayment periods have been considered. In early Paris Club agreements, repayment terms did not exceed ten years including a grace period (in which only payments of interest on the consolidation are due). For poorer countries, these terms have been constantly extended that the maximum repayment period is now 23 years (including 6 years of grace) for commercial loans with up to 40 years for official development aid loans (including 16 years of grace).
- Debt cancellation has been increasingly used. In December 1994, the Paris Club agreed to implement a new concessional treatment on the debt of the poorest and most indebted countries, called "Naples terms", raising the level of cancellation up to 67%. In November 1996, the cancellation effort of the creditors was raised up to 80% (Lyon terms) for the countries eligible to the initiative for "Heavily Indebted Poor Countries" (HIPC). In November 1999, following the approval by the international financial community of the enhanced HIPC initiative, Paris Club creditors accepted to raise the level of cancellation up to 90% (Cologne terms) or more when necessary to reach debt sustainability.
4/ Debt swap provision
Paris Club agreements may contain a provision which makes it possible for creditors to voluntarily undertake debt swaps. These operations may be debt for nature, debt for aid, debt for equity swaps or other local currency debt swaps. These swaps often involve the sale of the debt by the creditor government to an investor who in turn sells the debt to the debtor government in return for shares in a local company or for local currency to be used in projects in the country.
In order to preserve comparability of treatment and solidarity among creditors, the amounts of debt swaps that can be conducted are capped at a certain percentage of the stock of the claims of each individual creditor.
The terms under which these operations can take place are contained in the standard terms of treatment. To ensure full transparency between creditors, debtors and creditors submit a report to the Paris Club Secretariat informing about transactions undertaken.
