(Roughly) Daily

Developing countries around the world are deeply in hock. According to UNCTAD (UN Trade and Development), global public debt reached a record high of $102 trillion in 2024. Although public debt in developing countries accounted for less than one third of the total – $31 trillion – it has grown twice as fast as in developed economies since 2010. Those developing nations had debt service on that external public debt of $487 billion in 2023– which meant, for half of them, paying at least 6.5% of export revenues to service external public debt. More practically, that means that 3.4 billion people are living in countries that spend more on interest than on healthcare or education. [See the UNCTAD fact sheet here.]

Not surprisingly, developing countries sometimes fall sufficiently behind to call their loans into question. When that happens, an under-the-radar “informal group” of creditors– the Paris Club– gets together to negotiate a way forward…

The Paris Club is an informal group of official creditors whose role is to find coordinated and sustainable solutions to the payment difficulties experienced by debtor countries. As debtor countries undertake reforms to stabilize and restore their macroeconomic and financial situation, Paris Club creditors provide an appropriate debt treatment. Paris Club creditors provide debt treatments to debtor countries in the form of rescheduling, which is debt relief by postponement or, in the case of concessional rescheduling, reduction in debt service obligations during a defined period (flow treatment) or as of a set date (stock treatment).

The origin of the Paris Club dates back to 1956 when Argentina agreed to meet its public creditors in Paris. Since then, the Paris Club has reached 484 agreements with 102 different debtor countries. Since 1956, the debt treated in the framework of Paris Club agreements amounts to $616 billion.

– Paris Club web site

The 22 members of the Paris Club are mostly the larger OECD members, plus Russia. South Africa is a prospective member, and China and India are Ad Hoc members. Organizations like the IMF, the World Bank, the African Development Bank, the Asian Development Bank, the Inter-American Development Bank, and the OECD are “observers.” Participants representing members are government officials. The U.S., for instance is represented by a State Department official (relying on positions formulated by the Treasury Department).

Sven van Mourik puts all of this into context…

In today’s world, finance is dominated not by states, but by private actors. The market capitalization of a company like Apple in December 2023 reached $3 trillion, exceeding the combined GDP of at least 140 countries. Last year, global private financial assets reached a record $291 trillion, of which some 50 percent is concentrated in North America. By contrast, the world’s nations together owed a global public debt of a record $102 trillion in 2024, of which so-called “developing” countries owe $31 trillion. While there’s a playbook for private debt and corporate bankruptcy, it’s a different story for the official debt owed by nation states. What happens when a state can no longer repay its foreign creditors?

Following a deep global debt crisis in the early 1980s, the world’s poorest states struggled to service impossible debts to foreign capital, leading to widespread revolts and humanitarian crises across the formerly colonized, developing countries of the Global South. Following the COVID-19 pandemic of 2020, the burden of this public debt is once again immense…

[van Mourik reviews some of the startling statistics cited above…]

… It is puzzling to see states prioritize the servicing of foreign debt, even when it directly harms their populations. Why not default? Experts at the International Monetary Fund and World Bank in Washington, D.C. claim that “there is no alternative” to what has become an ossified response to sovereign debt crises: cut the government budget, facilitate the private sector and grow your economy to repay your foreign debt. But what about when a state, fully cooperative with the policy measures prescribed by these institutions, still cannot repay its debts? 

As a financial historian, this question led me to investigate a creditor that routinely takes center stage as countries attempt to navigate sovereign default, an institution so secretive that it has largely escaped the public eye. The Paris Club, an informal forum of representatives from creditor countries largely in the Global North, has steered the destinies of nations in financial peril, restructuring over half a trillion dollars in sovereign debt since its first meeting in 1956. Without its approval, countries face default and can effectively be prevented from accessing long- and short-term trade credit — credit that facilitates the uninterrupted flow of goods across borders, and can be compared to a country’s life blood. Without it, states are unable to access vital imports like food, fuel and medicine.

The Paris Club convenes to set up a new payment schedule for a country at risk of defaulting on its “official” debt owed to other countries. It is unique in that despite its pivotal role, it remains an informal institution. It comprises 22 major creditor countries, including the United States, Germany and France, and occasional ad hoc participants like India and China, which together coordinate reduced or rescheduled debt payments for a country facing default.

The Paris Club itself doesn’t lend new money. Instead, it “treats” a country’s debt payment schedule, either through rescheduling interest payments or, since the late 1980s, by offering the poorest countries a “haircut” and partially restructuring the debt. In its 70-year history, including the recent Debt Service Suspension Initiative, the Paris Club has treated a total of $863 billion of debt for 102 countries through 543 agreements; this amounts to around two-thirds of the world’s sovereign debt restructurings through 2010. A staggering legacy for a group that lacks any public oversight. With some pride, former chairmen of the Paris Club’s secretariat have called the Club a “non-institution” and “totally discreet if not secretive.”…

[van Mourik unpacks the operations of the Club and explains its symbiotic relationship with the IMF and its “structural adjustment” programs– AKA “austerity,” the reduction of debtor government expenses, often on social welfare, education, and healthcare (and often to painful effect)

… While the Paris Club rescheduled debt payments, the IMF designed programs that served to optimize a country’s ability to pay back interest and principal; the arrangement has over the years evolved into a debt restructuring routine in which debtor countries have little say.

The IMF today remains an institution in which the countries of the Global North have nine times more voting power than the countries of the Global South, as voting rights are tied to economic weight. In the Paris Club, a similar power differential is reflected in the spatial and temporal arrangement of the procedures, which borders on the theatrical. A debtor country’s delegation only ever confronts its creditors alone and is required to leave the room when they deliberate to set the terms of a deal…

[van Mourik explores the consequences of these deals, concluding…]

… creditor-dominated organizations like the IMF and the Paris Club allow rich countries to remain at the helm of a sinking ship. After all, as economist Daniel Munevar concluded following the COVID-19 pandemic, continuing within our current framework of debt servicing would “sound the death knell” for the world’s climate ambitions, as it prevents debtor countries from implementing the costly policies needed to meet ambitious climate targets. Others conclude that a serious degrowth strategy, one that prioritized ecological sustainability and social well-being over growth for its own sake, would require the countries of the Global South to default. 

Various formations of countries across the Global South have proposed debt restructuring regimes, like the UN Framework Convention on Debt, that would “improve the fairness and transparency of debt resolution mechanisms.” Gabor, the economist, has called this new UN framework “a bid to wrest deliberative control away from the closed-door clubs where Northern financial might prevails.”The question is under what circumstances such strategies might be successful. Despite the Paris Club’s inclusion of non-Western members like Korea and Brazil, or the IMF and the Paris Club’s recent collaboration with China and the G20, the deck remains stacked against low-income borrowing countries, who “have little voice in any of these fora.”

The deeper challenge for all states is to reform a global financial architecture that evolved based on the interests of a handful of Western creditor states, at the cost of austerity and social destruction elsewhere. Debtor countries that wish to retain access to global markets — even for the most vital imports — must participate, and service their debt within regulatory frameworks over which they have no control and which have proven to be defective…

Who really controls international debt? “The Quiet Powerbroker,” from @thedialmag.bsky.social.

All this said, it’s important to note that in fact an alternative is emerging, but not one that’s in the spirit of the UN Framework. Even before the Trump Administration took the U.S. off the field, China had become the world’s largest development lender.

“How China Lends: A Rare Look into 100 Debt Contracts with Foreign Governments“:

We collect and analyze 100 contracts between Chinese state-owned entities and government borrowers in 24 developing countries in Africa, Asia, Eastern Europe, Latin America, and Oceania, and compare them with those of other bilateral, multilateral, and commercial creditors. Three main insights emerge. First, the Chinese contracts contain unusual confidentiality clauses that bar borrowers from revealing the terms or even the existence of the debt. Second, Chinese lenders seek advantage over other creditors, using collateral arrangements such as lender-controlled revenue accounts and promises to keep the debt out of collective restructuring (“no Paris Club” clauses). Third, cancellation, acceleration, and stabilization clauses in Chinese contracts potentially allow the lenders to influence debtors’ domestic and foreign policies. Even if these terms were unenforceable in court, the mix of confidentiality, seniority, and policy influence could limit the sovereign debtor’s crisis management options and complicate debt renegotiation. Overall, the contracts use creative design to manage credit risks and overcome enforcement hurdles, presenting China as a muscular and commercially-savvy lender to the developing world.

For a fascinating and illuminating on-the-ground consideration of these issues, see/hear Mary Kay Magistad‘s On China’s New Silk Road.

* Victor Hugo

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As we redesign debt, we might send thoughtful birthday greetings to Jean-Jacques Laffont; he was born on this date in 1947. An economist, he made pioneering contributions in public economics, development economics, and the theory of imperfect information, incentives, and regulation. Over the course of his career, he wrote 17 books and more than 200 articles. His 1993 book A Theory of Incentives in Procurement and Regulation, written with Jean Tirole, is a fundamental reference in the economics of the public sector and the theory of regulation. Laffont died in 2004; had he lived, he might well have shared the 2014 Nobel Prize for Economics awarded to his colleague and collaborator Jean Tirole for the work they did together.

He was uninvolved in the Paris Club; indeed, his last book, Regulation and Development, discussed policies for improving the economies of less developed countries in ways more consistent with the UN’s new framework than the IMF’s old-but-still-dominant playbook.

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