debt sustainability: a paris club perspective

2UN Multi-stakeholder Meeting

Debt sustainability: a Paris Club perspective

Emmanuel MOULINSecretary general of the Paris Club

New-York – March 7, 2005


Outline

Debt sustainability analysis as a key element of the Evian Approach

Assessing debt sustainability in Paris Club debt treatments The case of Iraq

DEBT SUSTAINABILITY FROM A PARIS CLUB POINT OF VIEW


Outline

1. Debt sustainability analysis is a key element of the Evian Approach



The need for a new approach : Paris Club response to debt distress was partly inadequate

Inability to address sustainability problems

Terms more or less “generous” than the debtor country needs

Need for enhanced involvement of the private sector

Paris Club creditors approved the Evian Approach in 2003 a new approach for debt treatment of non-HIPC countries,

notably those having access to financial markets

DEBT SUSTAINABILITY IN THE EVIAN APPROACH


THE EVIAN APPROACH

The Evian Approach:

Takes into account debt sustainability considerations in a broad perspective

Paris Club debt treatments are systematically based on a DSA provided by the Fund

Considers two other issues:

Tailoring debt treatments to the situation of the debtor country

Further coordinating with private creditors (private debt sustainability)



Addressing sustainability problems

Before After

Identification of a financing gap in the context of an IMF supported programme

Financing gap is to be filled through a satisfactory implementation of the IMF programme

Paris Club creditors give financing assurances to the IMF to fulfil the gap

Paris Club creditors negotiate with the debtor country on the basis of the CAPA

Creditor make their own judgement on the sustainability of the debt on the basis of a DSA prepared by the IMF

Liquidity problem treated on the basis of the existing terms

Sustainability problem could be treated through a comprehensive debt treatment if the country is committed to policies that will secure

an exit from the Paris Club a comparable treatment


RATIONALES FOR THE EVIAN APPROACH

Adapt Paris Club response to the situation of countries

Before After

standard terms only

Classic terms

Houston terms (high degree of heterogeneity)

- eligibility: Gdp/cap, level / struct. of debt

- no cancellation / cash flow relief

Naples terms

- eligibility IDA-only

- 67 % debt reduction of eligible claims

Increasing use of ad hoc treatments to fix the situation

Possibility of comprehensive treatments when debt is unsustainable

Delivered according to a staged process

Could take various forms and include different types of flexible instruments

Active policy of adjusting the cut-off date


RATIONALES FOR THE EVIAN APPROACH

PSI in the debt restructuring process

Before After

Comparability of treatment

Clause : debtor country commits to seek from all its external creditors an agreement based on terms comparable and reports regularly

Ex post assessment without specific consultations : analysis based on cash flows, NPV & duration

Increasing transparency (regular meetings, web site)

Comparability of treatment & inter-creditor coordination

Ex ante commitment from the debtor country

Dialogue will continue and could take the form of early consultations

Clause : debtor country commits to seek from all its external creditors an agreement based on terms comparable and reports regularly

Ex post assessment without specific consultations : analysis based on cash flows, NPV & duration



Creditors make their own judgment on the basis of a debt sustainability analysis prepared by the IMF:

Multiple criteria analysis

key ratios can be considered in the analysis (World Bank classification, thresholds designed by IMF and World Bank in the new debt sustainability framework for LICs, cross-country comparison, academic research)

creditors also consider the economic potential of the country in the medium term and its vulnerability to external shocks

Debt treatment is provided on a case by case basis, considering the specificities of each debtor country (no standard terms)



Depending on their judgment on sustainability, creditor provide the debtor country with different kinds of treatment

in case of liquidity problem: treatment on the basis of the existing terms

in case of sustainability problem: treatment through a comprehensive debt treatment if the country is committed to policies that will secure

an exit from the Paris Club a comparable treatment


DEBT TREATMENT UNDER THE EVIAN APPROACH

Is the debt unsustainable ?

Is the debtor eligible to a comprehensive debt treatment ?

Phase 1/

Flow treatment

Phase 2/

Comprehensive debt treatment

Standard terms

yes

yes

no

no

1

3

4

2

5


Assessing debt sustainability

Debt sustainbility is a matter of judgement

Requires a dialogue between IMF and Paris Club

Combining short term (Program and capacity of payment and medium term view)

Assessment is closely linked to the particular situation of the country


Assessing debt sustainability

Assesing debt sustainablity

Egypt

J ordan

Irak- 80 %

LibanBrésil

P akistan

FRY Uruguay

Syrie

0

50

100

150

200

250

300

350

400

0 50 100 150 200

Debt/GDP (% )

Deb

t/ex

po

rts

(%

)

World Bank classificationSevere indebtednessModerate indebtedness


Outline

2. Assessing debt sustainability: the case of Iraq



Experience and perspectives

Sustainable cases Kenya (January 2004)

Dominican Republic (April 2004)

Unsustainable cases Iraq (before year-end)

Argentina (tbd)

Consultations with the private sector June 9th 2004 meeting

Focused on country cases

Sustainable cases with goodwill clauses

Gabon (june 2004)

Georgia (July 2004)

EXPERIENCE AND PERSPECTIVE UNDER THE EVIAN APPROACH


Evaluation of Iraq’s debt (excluding reparations but including late interest)

Total = US $ 114 bn

Total external debt (nov. 2004)

Paris Club creditors

32%

Private creditors13%

Non Paris Club creditors

55%


From a policy prospective, the DSA reflected:

Strongly founded assumptions on oil production and exports associated with discounted WEO oil prices

Considerable reconstruction needs

High costs of financing

The DSA reflected the dynamic of Iraq’s economy


According to the scenarios run by the IMF, there was no doubt that Iraq’s debt was not sustainable without substantial debt reduction:

The DSA clearly demonstrated that Iraq’s debt was not sustainable before treatment

Debt reduction

Year 2005 2015 2005 2015 2005 2015 2005 2015 2005 2015

EDT/GDP 210 219 142 144 90 86 49 42 29 20

EDT/XGS 415 410 280 270 177 162 98 79 58 37

TDS/XGS 17 92 11 60 7 36 4 17 2 7

95%50% 67% 80% 90%


80% appeared as an appropriate level of debt reduction; in 2015 ratios are in line with sustainability thresholds commonly considered: EDT/GDP = 86%

EDT/XGS = 162%

TDS/XGS = 36%

Ratios would remain far from sustainability thresholds with 50% and 67% debt reduction

The DSA clearly demonstrated that Iraq’s debt was not sustainable before treatment


Iraq’s debt has been treated under the Evian approach i.e. creditors have:

Developed their own opinion on the debt sustainability analysis and decided on the need for a comprehensive debt treatment;

Examined conditions for eligibility to a comprehensive debt treatment;

Designed the debt treatment in order to maintain a strong link between debt relief and economic performance

Treatment of Iraq’s debt in the framework of the Evian Approach


The Nov 2004 agreement will restore the solvability of Iraq:

In case of completion of the IMF Program, total debt to GDP would fall from 500% in 2004 to 80% in 2008 (IMF and Secretariat estimates);

Total debt to export would fall from 700% in 2004 to 150% in 2008

Macroeconomic impact of the signed agreement


Main challenges going forward

Debtor country

Private creditors

Public creditors

IMF/WB DSA

Building a shared view on sustainability

• Common definition• Transparency of analysis• Common references• Structure for dialogue

Debt sustainability


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debt sustainability: a paris club perspective

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