Debt Restructuring Experience: the Paris Club Thomas Lambert Director, Lazard Sovereign Advisory Group

D E C E M B E R 2 0 1 1 T H E M I S S I N G L I N K I N T H E I N T E R N A T I O N A L F I N A N C I A L A R C H I T E C T U R E : S O V E R E I G N D E B T R E S T R U C T U R I N G Debt Restructuring Experience: the Paris Club Thomas Lambert Director, Lazard Sovereign Advisory Group

Table of Contents I INTRODUCTION 1 II PARIS CLUB PRINCIPLES AND RULES 2 III THE PARIS CLUB CONTRIBUTION TO PAST SOVEREIGN DEBT RESTRUCTURING 7 IV CASE STUDIES 14 V WHAT FUTURE FOR THE PARIS CLUB? 19

I Introduction

I I N T R O D U C T I O N Introduction The Paris Club of Sovereign Creditors gathered for the first time in 1956 and has remained an informal forum The Paris Club is an informal forum composed of the largest sovereign creditors that gathered for the first time in 1956 with the aim of coordinating sovereign creditors contribution to the resolution of external payment problems of sovereign debtors The first Paris Club meeting took place in 1956 to deal with Argentina s external payment problems and has never ceased functioning The Paris Club is mainly a coordination body for an homogeneous group of sovereign creditors The Paris Club has 19 permanent members, all members of OECD agreeing on the main principles and rules of the Club It remains an informal non institution, a small team playing the role of general secretariat at the French Treasury For more than 50 years, the Paris Club has played a critical role in the resolution of debt crisis in developing and emerging countries Principles and rules established at the occasion of various debt treatment negotiations proved remarkably efficient in contributing to the resolution of different types of debt crisis Flexibility and pragmatism appear as key features of the Paris Club past activity, decisions being influenced by both technical and political criteria The Paris Club activity has significantly decreased in recent years, notably because of the large improvement in developing and emerging countries capacity to access private capital markets For some commentators, the Paris Club is now history as sovereign creditors only hold a residual share of emerging debtors debt However, Paris Club rules and principles could remain a useful textbook for the resolution of future sovereign debt crisis Besides, its members expect large emerging countries, which are now significant external creditors, to join the Club 1

II Paris Club Principles and Rules

I I P A R I S C L U B P R I N C I P L E S A N D R U L E S The Paris Club Key Principles The Paris Club functioning relies on 5 key principles Case by case debt treatment The Paris Club makes decisions on a case-by-case basis in order to tailor its action to each debtor country s individual situation. Consensus Paris Club decisions cannot be taken without a consensus among the involved creditor countries Conditionality The Paris Club only negotiates debt restructurings with debtor countries that: need debt relief; debtor countries are expected to provide a precise description of their economic and financial situation, have implemented and are committed to implementing reforms to restore their economic and financial situation, and have a demonstrated track record of implementing reforms under an IMF program This means in practice that the country must have a current program supported by an appropriate arrangement with the IMF (Stand-By, Extended Fund Facility, Extended Credit Facility, Policy Support Instrument). The level of the debt treatment is based on the financing gap identified by the IMF program. Solidarity All members of the Paris Club agree to act as a group in their dealings with a given debtor country; they also agree to be careful with the impact that the management of their particular claims may have on other members claims Comparability of treatment A debtor country that signs an agreement with its Paris Club creditors should not accept from its non-paris Club creditors terms of treatment of its debt less favorable to the debtor than those agreed with the Paris Club 2

I I P A R I S C L U B P R I N C I P L E S A N D R U L E S The Critical Importance of the Comparability of Treatment Principle The Paris Club expects other sovereign creditors and private creditors to provide debtor countries with a debt treatment at comparable terms In accordance with this principle, 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 by Paris Club members Insisting on the fulfillment of the comparability of treatment clause ensures that Paris Club countries' taxpayers claims are not subordinated to those of other creditors and that their financial interests are preserved Applying such a clause helps to guarantee that the agreed debt treatment reaches its intended goal: putting debtor countries debt burdens back on a sustainable path However, 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 Given the diversity of other possible creditors, they require that the debtor seek comparable terms to the Paris Club's agreement 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, but some claims can be excluded on a case by case basis 3

I I P A R I S C L U B P R I N C I P L E S A N D R U L E S The Critical Importance of the Comparability of Treatment Principle (cont d) The implementation of the comparability of treatment principle was facilitated by the gathering of London Club meetings Non-Paris Club official bilateral creditors grant medium- or long-term loans generally similar to those provided by Paris Club creditors In contrast, debtors relations with external private creditors are more complex but were facilitated by the gathering of London Club creditors committees The Paris Club s experience shows 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 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 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) One sensitive issue from the private sector s point of view is that Paris Club creditors do not recognize the validity of the reverse comparability principle when the private sector agrees on a NPV haircut with sovereign debtor, public creditor consider that they are not bound by this agreement The main justification of this position comes from the fact that public creditors lend at the risk free rate, contrary to private creditors. Consequently, an effort made by private creditors cannot be a benchmark for the public sector effort 4

I I P A R I S C L U B P R I N C I P L E S A N D R U L E S Key Rules for Paris Club Debt Treatments Paris Club creditors deal with external public debts and consider debt relief for debts contracted before a cut off date Among the different types of debt, Paris Club agreements generally concern only: Public debts, as the agreement is signed with the government of the debtor country unable to meet its external obligations Debts owed by private entities and guaranteed by the public sector are considered to be part of the public debts Creditors make a difference between ODA and non-oda debts (ODA debts being granted at the most favorable terms) Medium- and long-term debts Short-term debts (debts with a maturity of one year or less) are usually excluded from treatment, as their restructuring can significantly undermine the debtor country s capacity to participate in international trade Debts granted before the initial date set when the debtor country meets with the Paris Club, also known as the cut-off date The definition of a cut-off date aims at preserving future access to credit for the debtor country Post-COD debts are subject to a Paris Club treatment only on a very exceptional basis when a pre-cod debt treatment is not sufficient to restore the payment capacity of the country Paris Club creditors grant flow or stock treatment, depending on the debtor country s needs and efforts: Flow treatments aim at closing the debtor country s financing gap identified by IMF programs Only maturities owed to Paris Club creditors and falling due during the consolidation period are treated. In some cases, arrears accumulated as of the start of the consolidation period are also treated Stock treatments are granted when the treatment applies not only to the payments due over a given period of time, but to the entire stock of debt The aim of stock treatments is to provide a country with a final Paris Club treatment called an exit treatment 5

I I P A R I S C L U B P R I N C I P L E S A N D R U L E S The Practical Functioning of the Paris Club The Paris Club still functions on an informal basis in close cooperation with the international financial institutions There are 19 permanent members and 13 creditors countries participating as associated members The 19 permanent members are OECD countries from the G8 and other European economies (US, Canada, France, UK, Germany, Italy, Japan, Russia, Spain, Switzerland, Belgium, the Netherlands, Ireland, Norway, Sweden, Finland, Denmark, Austria, Australia) Associated countries gather other OECD countries and emerging countries, some of them member of G20 (Portugal, Israel, New Zealand, Brazil, Turkey, Korea, Argentina, South Africa, Abu Dhabi, Koweit, Morocco, Trinidad & Tobago) Those countries have signed, at least one time in the past, Paris Club Agreed Minutes Paris Club meetings are scheduled on a monthly basis Each monthly session includes a one-day meeting called a Tour d Horizon during which Paris Club creditors discuss among themselves the external debt situation of debtor countries, or methodological issues regarding the debt of developing countries Debt treatment sessions are organized in close cooperation with the IMF A debtor country is invited to a negotiation meeting with its Paris Club creditors when it has concluded an appropriate programme with the International Monetary Fund (IMF) that demonstrates that the country is not able to meet its external debt obligations and thus needs a new payment arrangement with its external creditors (conditionality principle) Paris Club creditors link the debt restructuring to the IMF program because the economic policy reforms are intended to restore a sound macroeconomic framework that will lower the probability of future financial difficulties Representatives of international institutions, notably the IMF, the World Bank and the relevant regional development bank also attend the meeting as observers The negotiation is chaired by the president of the Paris Club or the co/vice-president, who are senior officials from the French Treasury. A general secretariat, staffed with 10 members of the French Treasury, prepare the negotiation and proposes the terms of the debt treatment (the Secretariat also prepares the monthly tour d horizon ) 6

III The Paris Club Contribution to Past Sovereign Debt Restructuring

I I I T H E P A R I S C L U B C O N T R I B U T I O N T O P A S T S O V E R E I G N D E B T R E S T R U C T U R I N G Historical Perspective of the Paris Club The Paris Club celebrated its 50th anniversary in 2006 Milestones 1956 (May 16): First Paris Club Agreement (Argentina) 1966: First Paris Club Agreement with an Asian country (Indonesia) 1976: First Paris Club Agreement with an African country (Zaire) 1981: First Paris Club Agreement with a European country (Poland) 1982: The Mexican crisis triggers the debt crisis of the 1980s. 1987: First Paris Club Agreement under the Venice terms (Mauritania) 1988: First Paris Club Agreement implementing the Toronto terms (Mali) 1990: First Paris Club Agreement implementing the Houston terms (Morocco). First debt swap clause in a debt treatment agreement 1991: Exceptional exit treatments granted to Poland and Egypt. First Paris Club Agreement implementing the London terms (Nicaragua) 1992: First Paris Club Agreement with Russia (deferral) 1995: First Paris Club Agreement implementing the Naples terms (Cambodia) 1996: Heavily Indebted Poor Countries Initiative (HIPC) 1997: Russia joins the Paris Club. First early repayment operation (Argentina) 1998: First Paris Club Agreement implementing the Lyon terms under the HIPC initiative (Uganda) 1999: Enhanced HIPC Initiative. First Paris Club Agreement implementing the Cologne terms under the HIPC initiative (Mozambique) 2000: Uganda is the first HIPC-eligible country to reach the Enhanced HIPC Initiative Completion Point 2001: Exceptional debt treatments granted to the Former Republic of Yugoslavia 2003: Paris Club creditors approve the Evian Approach 2004: First debt treatment under the Evian Approach (Kenya). Phased exit treatment granted to Iraq 2005: Exceptional treatment granted to countries hit by the tsunami (Indonesia and Sri Lanka). Exit treatment granted to Nigeria 2006: 50th anniversary of the Paris Club 2007: First buyback operations at market value below par (Gabon, Jordan) Total amount of agreements 422 Total amount of debtor countries 88 Total amount of debt 553 Billion $ Total amount of countries in "Classic Terms" 59 Total amount of countries in "Houston Terms" 21 Total amount of countries in "Naples Terms" 36 Total amount of countries in "Cologne Terms" 33 7

I I I T H E P A R I S C L U B C O N T R I B U T I O N T O P A S T S O V E R E I G N D E B T R E S T R U C T U R I N G Historical Perspective of The Paris Club (cont d) From 1956 to 1980, Paris Club activity was quite limited The creation of the Paris Club participated in the construction of the post WWII cooperative international system In 1956, there was a strong willingness for international cooperation in the Western world and, when Argentina expressed the need to meet its sovereign creditors to prevent a default, France offered to host an exceptional three-day meeting in Paris that took place from May 14 th to May 16 th 2006 The Early Years (1956-1980) From 1956 to 1980, the Paris Club s activity level was low. The number of agreements signed with debtor countries never exceeded four per year Few countries were granted debt treatments. They were mainly located in Latin America (Argentina, Brazil, Chile and Peru) and in Asia (Indonesia, Pakistan, Turkey and Cambodia). The first African country to conclude a debt treatment agreement with the Paris Club was Zaire (now Democratic Republic of Congo) in 1976 During these early years, Paris Club agreements were fairly simple. They were based on standard Classic terms which were the sole terms of treatment used by creditors from 1956 to 1987 Under Classic terms, debtor countries were granted a rescheduling of credits (whether ODA or non-oda) at the appropriate market rate with a repayment profile negotiated on a case-by-case basis (generally a ten-year repayment period including a threeyear grace period) The Paris Club offered non-concessional flow relief to support IMF adjustment programs. In many cases, several Paris Club debt treatments were necessary in a short period of time to help the debtor country exit the cycle of rescheduling. 8

I I I T H E P A R I S C L U B C O N T R I B U T I O N T O P A S T S O V E R E I G N D E B T R E S T R U C T U R I N G Dealing with the Debt Crisis of the 1980s The Paris Club was instrumental in resolving the debt crisis of the 1980s Following the outbreak of the Latin America debt crisis in 1982, the number of agreements concluded per year rose to more than 10 with a peak at 24 in 1989 From 1981 to 1987, creditors continued to apply the same rules despite the growing number of countries facing payment difficulties. Classic terms, designed for dealing with temporary liquidity problems, were systematically used for debt treatment. In the mid-1980s, growing concerns about the ability of poor countries to repay their debts led creditors to consider new terms of treatment. In 1987, Paris Club creditors adopted Venice terms (non-concessional terms that provide debtor countries with longer deferral and repayment periods) In October 1988, Paris Club creditors agreed to implement Toronto terms, which introduced for the first time a partial cancellation (33%) of the debt of the poorest and most heavily indebted countries In September 1990, the Paris Club creditors decided to adopt new debt treatment rules for some of middle-income countries non eligible to Toronto terms facing high indebtedness and a stock of official bilateral debt totaling at least 150% of their private debt. These new treatment terms were called "Houston terms" Given the lasting impact of the debt crisis on the poorest and most heavily indebted countries, the Paris Club creditors agreed in December 1991 to raise the level of debt cancellation to 50% (London terms) The adoption of Naples terms in December 1994 made two substantial improvements to London terms. The level of debt cancellation was raised to at least 50% and a maximum of 67% of eligible non-oda credits. Secondly, the Paris Club made the ground-breaking decision that stock treatments could be implemented on a case-by-case basis for countries with a satisfactory track record with both the Paris Club and the IMF 9 The adoption of Naples Terms marked a major turning point in Paris Club history. For the first time, Paris Club creditors agreed to consider major levels of debt reduction and to grant stock treatments. This development reflected a growing understanding within both the official and private creditor community that the poorest countries debt burdens were unsustainable

I I I T H E P A R I S C L U B C O N T R I B U T I O N T O P A S T S O V E R E I G N D E B T R E S T R U C T U R I N G Implementing the HIPC Initiative after 1996 The HIPC Initiative contributed to canceling the vast majority of debts owed by heavily indebted poor countries In 1996, the international financial community realized that the external debt situation of a large number of African lowincome countries had become extremely difficult. This was the starting point of the Heavily Indebted Poor Countries (HIPC) Initiative 40 countries were initially considered as potentially eligible for the HIPC initiative by the IMF and the World Bank. This list has been revised after a process of ring-fencing of potential beneficiaries of the initiative As of 1st January 2011, 32 countries have reached completion point, 4 countries are in an interim period (Cote d Ivoire, Chad, Guinea, Comoros), and 3 countries are potentially eligible but have not yet reached decision point (Somalia, Sudan, Eritrea). Zimbabwe could become eligible to HIPC as well. Kyrgyz Republic refused to benefit from the initiative. After an interim period where a flow treatment is granted under the Cologne term (up to 90% cancellation of pre COD maturities falling due), the rest of the debt relief, defined at the decision point, is provided at completion point A reduction in the stock of eligible debt is granted by the Paris Club, subject to fair burden sharing, with at least comparable debt treatments by other creditors Bilateral and multilateral creditors generally provide beyond HIPC debt relief: All Paris Club creditors have announced that they will also provide debt forgiveness over and above HIPC Initiative assistance, particularly on ODA debt Multilateral creditor grant a 100% debt relief after completion point under the 2005 Multilateral Debt Relief Initiative According to IMF figures, the debt burden of post Completion point countries has been alleviated by more than 90% (from 89 billions USD to 7,1 billions USD in 2008 NPV terms) 10

I I I T H E P A R I S C L U B C O N T R I B U T I O N T O P A S T S O V E R E I G N D E B T R E S T R U C T U R I N G Implementing the Evian Approach for non-hipc Countries The Evian Approach: a more tailored approach to debt restructuring In October 2003, Paris Club creditors adopted a new approach to non-hipcs: the Evian Approach The Paris Club aimed at taking into account debt sustainability considerations, to adapt its response to the financial situation of the debtor countries, and to make a contribution to the current efforts in order to make the resolution of crises more orderly, timely and predictable Paris Club creditors agreed to adopt a more tailored response to ensure that debt restructuring: is granted only in case of imminent default and is not considered by debtor countries as an alternative to more expensive sources of financing ; provides debtor countries with a debt treatment that reflects their financial needs and the objective of ensuring long lasting debt sustainability When a country approaches the Paris Club, the sustainability of its debt would be examined in coordination with the IMF accordingly to its standard debt sustainability analysis Specific attention would be paid on the evolution of debt ratios over time as well as on the debtor country's economic potential; its efforts to adjust fiscal policy; the existence, durability and magnitude of an external shock; the assumptions and variables underlying the IMF baseline scenario; the debtor's previous recourse to Paris Club and the likelihood of future recourse For countries who face a liquidity problem but are considered to be on a sustainable debt path, the Paris Club would design debt treatments on the basis of the existing terms Paris Club creditors agreed that all the range of options built-into the terms, including through shorter grace period and maturities, would be used to adapt the debt treatment to the financial situation of the debtor country. Cases of countries with the most serious debt problems will be dealt more effectively under the new options for debt treatments. For other countries, the most generous implementation of existing terms would only be used when justified 11

I I I T H E P A R I S C L U B C O N T R I B U T I O N T O P A S T S O V E R E I G N D E B T R E S T R U C T U R I N G Implementing the Evian Approach for non-hipc Countries (cont d) The Evian Approach allows for debt stock treatments for non-hipc countries For countries whose debt has been assessed by the IMF and the Paris Club creditor countries as unsustainable, Paris Club creditors agreed that they would participate in a comprehensive debt treatment According to usual Paris Club practices, eligibility to a comprehensive debt treatment is to be decided on a case-by-case basis In such cases, debt treatment would be delivered according to a specific process designed to maintain a strong link with economic performance and public debt management (2 or 3 stages) In this context, coordination between official and other creditors, notably private creditors, is particularly important The Paris Club has taken a number of steps to increase transparency of its procedures over the past years, notably through meetings with private sector representatives and better information provided on its web site; it will continue to explore ways to enhance its transparency In addition, the dialogue should continue and could take the form of early discussions with the private sector on the issue of the comparability of treatment of their respective claims From 2003 to 2011, 10 countries have benefited from debt treatments under the Evian Approach The debt treatment granted to Iraq in November 2004 remains the landmark deal Other deals: Kenya (2004), Georgia (2004), Kyrgyz Republic (2005), Dominican Republic (2005), Grenada (2006), Moldova (2006), Djibouti (2008), Seychelles (2009), Antigua & Barbuda (2010) 12

I I I T H E P A R I S C L U B C O N T R I B U T I O N T O P A S T S O V E R E I G N D E B T R E S T R U C T U R I N G The Paris Club Debt Swap and Early Repayment Policies The Evian Approach allows for debt stock treatments for non-hipc countries Paris Club agreements may contain a provision enabling creditors to voluntarily engage in debt swaps These operations may take the form of debt-for-nature, debt-for-aid, debt-for-equity or other local currency debt swaps. In order to preserve comparability of treatment and solidarity among creditors, debt swap amounts for non-oda claims are capped at a certain percentage of each individual Paris Club creditor's stock of claims. There are no restrictions regarding debt swaps on ODA claims For dynamic management purposes, a country might want to buy back its debt ahead of schedule 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 To preserve solidarity between Paris Club creditors, the early repayment offer has to be made on the same terms to all Paris Club creditors Participation in the early repayment operation is then voluntary Early repayment operations can be realized under two frameworks: 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 There has been an increase in early repayment operations in the Paris Club: 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 13

IV Case Studies D E B T R E S T R U C T U R I N G E X P E R I E N C E : T H E P A R I S C L U B

I V C A S E S T U D I E S Cote d Ivoire (2011): a typical flow treatment under the HIPC initiative The last Paris Club negotiation with Cote d Ivoire was a good example of the technicalities of a Paris Club flow treatment Cote d Ivoire reached the decision point of the HIPC Initiative in 2009 but the 2011 post election crisis derailed the implementation of the IMF program On Nov. 4, 2011, the IMF Board approved a new 3 years ECF Program with Cote d Ivoire aiming at accompanying the country until it reaches the HIPC completion point (expected date: September 2012) On November 15, 2011 Cote d Ivoire was invited to the Paris Club to discuss a new flow treatment under the HIPC initiative The Paris Club Secretariat established a capacity of payment based on the IMF macro framework The Secretariat computed the amounts available for the payment of external creditors once the multilateral institutions are fully paid on contractual maturities (multilateral institutions are paid in priority) The Secretariat proposed a treatment of arrears as of July 1, 2011 and of maturities falling due over the period July 2011-July 2014 in order to fill the financing gap The treatment is based on the Paris Club Cologne terms for HIPC countries (pre cut-off date debts are fully restructured, post cut-off debt is not cancelled by deferred in order to alleviate debt service over the 3 years period) The treatment is based on the hypothesis that the comparability of treatment principle will be fully applied by other bilateral public creditors and by private creditors The outcome of the negotiation was quite straightforward, Paris Club creditors being bound by their rules and principles The main issue discussed was the burden sharing between private and public creditors, Cote d Ivoire asking for the full payment of the coupon due in 2012 to its private bondholders 14

I V C A S E S T U D I E S Iraq (2004): a highly sensitive political negotiation In November 2004, Paris Club creditors agreed on a stock treatment of the Iraqi debt that led to a 80% debt reduction As of January 1, 2004, the public external debt of Iraq was estimated to US$ 120,2 billion by the IMF, a clearly unsustainable level (560% of GDP at end-2004) Iraq had accumulated arrears towards external creditors since the 1980s under the rule of Saddam Hussein Paris Club held 34% of total debt (Us$ 36 billion, US$ 21 billion in arrears and US$ 15 billion late interests), non Paris Club countries (mainly Gulf countries) 54% (US$ 67 billion) and private creditors 12% In 2003, the US seriously considered the case for dealing with a debt treatment for Iraq outside of the Paris Club, but the decision was finally taken to negotiate an agreement under the Paris Club rules and the Evian Approach In its book «Global Financial Warriors», John B. Taylor, at that time Treasury under Secretary for international affairs, tells the story of the US approach to debt relief for Iraq After several month of intense negotiation, Paris Club creditors agreed on November 24 on a comprehensive debt treatment for Iraq The Evian Approach principles were applied : a DSA from the IMF demonstrated the need for a level of cancellation France and Russia asked for 50% cancellation (i.e. the terms granted to Poland and Egypt in the 199Os), the US asked for 95% The agreement was concluded on a 80% cancellation (i.e. US$ 29.7 billion) The conditionality principle was respected with a phased agreement 30% immediate reduction after the agreement with the IMF on an EPCA program (post conflict) 30% on Dec. 23 th, 2005 after the agreement on a SBA program 20% on Dec 22 th, 2008 after the completion of the IMF program The remaining debts (US$ 7.4 billion) were rescheduled according to a very generous schedule of repayment : 33 years, of which 6 years grace period (until 2038) 16

I V C A S E S T U D I E S Iraq (2004): a highly sensitive political negotiation (cont d) In November 2004, Paris Club creditors agreed on a stock treatment of the Iraqi debt that led to a 80% debt reduction Retrospectively, the debt treatment granted to Iraq was very generous but proved the flexibility of the Paris Club and its ability to resolve very complex negotiations In 2011, the IMF projects Iraq debt-to-gdp ratio at 21% and debt-to-export ratio to 30%, both at very low levels The Paris Club was preserved as the key institution for dealing with sovereign debt restructuring Comparability of treatment was fully respected by private creditors A debt exchange was carried out in 2005, reflecting closely the payment schedule and the cancellation levels of the Paris Club deal Discussions with Gulf countries proved far more politically sensitive The implementation of the Paris Club deal to the debts owed by Iraq to Gulf countries is still not totally resolved 17

I V C A S E S T U D I E S Nigeria (2005): a very innovative exit treatment 18 The Paris Club demonstrated in the case of Nigeria its ability to deal with political and technical constraints for granting exit treatment to resources rich countries In 2004, Nigeria was willing to restore its relations with the international financial community after years of financial mismanagement The newly elected democratic regime asked for an exceptional support from the G8 to benefit from a democratic dividend Nigeria, an oil-rich country ineligible to the Naples terms, had already benefited from 4 Paris Club debt treatments in the past, under the Houston terms, that were not sufficient to help the country exit the rescheduling cycle (1986, 1989, 1991, 2000) At end-2004, total external public debt of Nigeria amounted to US$ 35.9 billion, of which US$ 30 billion due to the Paris Club In 2005, a long negotiation with Nigeria aimed at alleviating various hurdles to a generous debt treatment The Nigerian authorities wanted to implement their own reform program (NEEDS) without a full-fledged IMF support program The solution was found through the creation of the IMF Policy Support Instrument, a IMF program with no financing and lighter conditionality Once the PSI program was agreed with the IMF, the Paris Club was in a position to discuss with Nigeria on a debt treatment In order to benefit from more generous Paris Club terms than the Houston terms, Nigeria asked for its eligibility to the IDA-only status, reserved to poor countries The World Bank agreed on this eligibility, based on a comprehensive assessment of Nigeria s poverty situation The IDA-only status allowed the Paris Club to grant the Naples terms to Nigeria (67% reduction of eligible debts) The oil-windfall benefiting to Nigeria in 2005 with rising oil prices allowed it to repay its arrears to Paris Club creditors and buy-back its remaining debt at market price The Paris Club asked for a full repayment of arrears (US$ 6.3 billion) and agreed on a US$ 6.1 billion exit pre-payment at market price (at discount) In total, Nigeria benefited from a 60% debt stock reduction (US$18 billion including late interest) and repaid US$ 12.4 billion

V What Future for the Paris Club?

V W H A T F U T U R E F O R T H E P A R I S C L U B? The Paris Club Declining Role As An International Creditor Sovereign debtors mainly rely on private bond markets and the Paris Club faces competition from emerging lenders Paris Club creditors are no longer the main holders of claims on developing and emerging sovereign debtors Credits granted by sovereign lenders are now a minor source of borrowing for emerging economies given the development of the international bond market Paris Club creditors remain key lenders for low-income countries that generally do not have access to these markets, but emerging lenders as China also play a growing role in this regard China is not a member of the Paris Club despite a proposal made in 2006 by the Club Emerging creditors are reluctant at this stage to fully adhere to Paris Club principles that were tailored in the past According to Paris Club figures, its members held US$ 352 billions claims on sovereign debtors (i.e. approximately 10% of the US$ 3544 billion debt stock of emerging and developing countries source: World Development Finance, 2011) Large emerging debtors represent the majority of these claims (China, India, Korea, Vietnam, Indonesia, Pakistan, Philippines) Paris Club creditor still play a critical role for a few significant countries: Countries having no market access like Sudan, Zimbabwe, Cuba Large sensitive emerging countries like Egypt Paris Club activity has significantly decreased in the last couple of years 2010 was an exceptional year, Paris Club concluding 10 agreements, notably with the last group of HIPC countries reaching completion point (7 countries) In 2011, only two agreements were concluded (Cote d Ivoire, Guinea-Bissau) 19

V W H A T F U T U R E F O R T H E P A R I S C L U B? The Paris Club has still a role to play in the 21rst century Paris Club principles and practices are a useful reference for future debt treatment agreements, notably in Europe Paris Club heritage is valuable for the international community of investors Paris Club principles and rules have proven efficient in dealing with coordination problems among various categories of creditors In the current Euro zone sovereign crisis, policy makers are confronted to many issues that were already raised during past emerging sovereign crisis To what extent is debt restructuring and debt reduction unavoidable to restore financial stability, growth and normal market access in the future? What instruments can help mitigating the destabilizing impact of debt restructurings on the financial system and on the real economy? How can debtor countries implement orderly debt restructurings without creating major litigation risks in the future? To a large extent, answers brought by previous emerging markets debt restructuring are still relevant for the future Sovereign debt restructuring shouldn t be taboo and can be implemented in an orderly way After a long period of hesitation, the international community have successfully created legal instruments and processes that are suited to promote a cooperative and collective approach to debt reduction, even if it failed to create a genuine SDRM 20