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1/ History
In October, 1988, Paris Club creditors agreed to implement a new treatment on the debt of the poorest countries. This new treatment called " Toronto terms " implements for the first time a reduction of part of the debt of poor countries. The level of reduction was defined as 33.33%.
20 countries benefited from Toronto terms between 1988 and 1991, when these terms were replaced by London terms.
2/ Description
2.1. Non-ODA credits were cancelled to a 33.33% level (after possible topping-up). Creditors chose to implement the terms through one of the three following options:
- "debt reduction option" ("DR"): 33.33% of the claims treated were cancelled, the outstanding part being rescheduled at the appropriate market rate with a 14-year repayment period including 8-year grace.
- "debt service reduction option" ("DSR"): the claims treated are rescheduled at a reduced interest rate with a 14-year repayment period including 8-year grace.
- "commercial option": the claims treated were restructured at the appropriate market rate over a longer period (25-year repayment period including 14-year grace). This was a non-concessional option.
2.2. Concerning ODA credits, they were rescheduled at an interest rate at least as favourable as the original concessional interest rate applying to these loans, with a 25-year repayment period including 14-year grace. This rescheduling usually resulted in a reduction of the net present value of the claims, as the original concessional rate was lower than the appropriate market rate. The reduction in the net present value varied on a case-by-case basis, depending on the original interest rate of the claims of each creditor on each debtor country. By contrast, the Paris Club rescheduling has a positive effect on the expected value of the ODA claims, as the creditors salvage value relative to the recovery of otherwise defaulted amounts.
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