In order to adapt to a rapidly evolving macroeconomic context, a country might want to manage its debt in a dynamic fashion. Such dynamic management can involve changes in the structure of its debt: i.e. its time-structure (duration, etc.); its currency composition; and its exposure to market risk.
Actually a Paris Club debt treatment already involves such debt restructuring as it gives the country a last opportunity to adapt its debt structure (e.g. its duration) to exceptional circumstances (e.g. a shortage in short-term financing due to structural problems).
Conversely, for dynamic management purposes, a country might want to buy back its debt ahead of schedule. The main reasons for doing this are usually: to reduce one’s debt service; to reduce one’s exposure to a given currency; or to develop one’s domestic bond market or increase its liquidity, by swapping external debt for domestic debt. Most of the time, this dynamic management scheme helps to achieve beneficial outcomes for both creditor and debtor countries. The Paris Club has been implementing this option since 1997, allowing some debtor countries to prepay their debt.
Early repayment is restricted to debtor countries that have graduated from the risk of a new Paris Club rescheduling. This assessment requires the consensus of all Paris Club creditors. To preserve solidarity between Paris Club creditors, the early repayment offer has to be made on the same terms to all Paris Club creditors. The terms of the early repayment operation also have to be agreed upon by consensus of all Paris Club creditors. Participation in the early repayment operation is then voluntary. Each Paris Club creditor may decide whether or not to participate.
Early repayment operations can be realized under two frameworks:
Breakdown of eligible debt (in nominal value) covered by early repayment agreements in 2005 – 2007
- Prepayment at par: the debtor country offers to repay the debt at face value.
- Buyback at market value: the debtor country offers to repay the debt at market value. The market value is defined as the Net Present Value (NPV) of the remaining cash flows. The NPV is calculated by discounting the cash flows at a discount rate, which is the sum of a risk-free discount rate and a country-risk spread. The market value of the debt may be higher or lower than its face value.
There has been an increase in early repayment operations in the Paris Club in the last few years : Poland, Brazil, Russia, Algeria, the Former Yugoslav Republic of Macedonia, Peru, Gabon and Jordan offered early repayments of around USD 70 billion of debt in face value in 2005, 2006 and 2007.
The last early repayment operations were concluded with the following countries:
The former Yugoslav Republic of Macedonia’s offer to prepay at par its debt previously rescheduled under the Paris Club agreement concluded in 1995 was accepted on 24 January 2007. The debt eligible for the prepayment operation amounted to USD 104 million. All of Macedonia’s Paris Club creditors decided to participate in the operation.
Peru’s offer to prepay at par its debt previously rescheduled under the 1993 and 1996 Paris Club agreements and not granted under official Development Assistance was accepted on 23 May 2007. A first partial prepayment operation had been accepted by Paris Club creditors in 2005. The debt eligible for this second prepayment operation amounted to around USD 2.5 billion. Almost all of Peru’s Paris Club creditors decided to participate in the operation.
Gabon’s offer to buy back at market value its debt previously rescheduled under Paris Club agreements concluded in 1994, 1995, 2000 and 2004 and not granted under Official Development Assistance was accepted by Paris Club creditors on 18 July 2007. The debt eligible for this buyback operation amounted to around USD 2.2 billion. Almost all of Gabon’s Paris Club creditors decided to participate in the operation.
Jordan’s offer to buyback at market value its debt previously rescheduled under the 1994, 1997, 1999 and 2002 Paris Club agreements and not granted under Official Development Assistance was accepted by Paris Club creditors on 18 October 2007. The debt eligible for this buyback operation amounted to approximately USD 2.5 billion. Almost all of Jordan’s Paris Club creditors decided to participate in the operation.