Debt sustainability: a Paris Club perspective
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Transcript of Debt sustainability: a Paris Club perspective
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Debt sustainability: a Paris Club perspective
Emmanuel MOULINSecretary general of the Paris Club
New-York – March 7, 2005
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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
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Outline
1. Debt sustainability analysis is a key element of the Evian Approach
DEBT SUSTAINABILITY FROM A PARIS CLUB POINT OF VIEW
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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
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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)
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DEBT SUSTAINABILITY IN THE EVIAN APPROACH
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
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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
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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
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DEBT SUSTAINABILITY IN THE EVIAN APPROACH
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)
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DEBT SUSTAINABILITY IN THE EVIAN APPROACH
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
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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
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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
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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
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0 50 100 150 200
Debt/GDP (% )
Deb
t/ex
po
rts
(%
)
World Bank classificationSevere indebtednessModerate indebtedness
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Outline
2. Assessing debt sustainability: the case of Iraq
DEBT SUSTAINABILITY FROM A PARIS CLUB POINT OF VIEW
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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
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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%
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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
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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%
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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
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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
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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
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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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