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• Debt sustainability a Paris Club perspective

Emmanuel MOULIN Secretary general of the Paris
Club New-York March 7, 2005
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Outline
DEBT SUSTAINABILITY FROM A PARIS CLUB POINT OF
VIEW

• Debt sustainability analysis as a key element of
  the Evian Approach
• Assessing debt sustainability in Paris Club debt
  treatments
• The case of Iraq

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Outline
DEBT SUSTAINABILITY FROM A PARIS CLUB POINT OF
VIEW

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

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DEBT SUSTAINABILITY IN 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

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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 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 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 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
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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
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Outline
DEBT SUSTAINABILITY FROM A PARIS CLUB POINT OF
VIEW

• 2. Assessing debt sustainability the case of Iraq

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Experience and perspectives
EXPERIENCE AND PERSPECTIVE UNDER THE EVIAN
APPROACH

• 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)

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Evaluation of Iraqs debt (excluding reparations
but including late interest)
Total US 114 bn
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The DSA reflected the dynamic of Iraqs economy

• 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

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The DSA clearly demonstrated that Iraqs debt was
not sustainable before treatment

• According to the scenarios run by the IMF, there
  was no doubt that Iraqs debt was not sustainable
  without substantial debt reduction

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The DSA clearly demonstrated that Iraqs debt was
not sustainable before treatment

• 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

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Treatment of Iraqs debt in the framework of the
Evian Approach

• Iraqs 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

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Macroeconomic impact of the signed agreement

• 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

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Main challenges going forward
Debtor country

• Building a shared view on sustainability
• Common definition
• Transparency of analysis
• Common references
• Structure for dialogue

IMF/WB DSA
Debt sustainability
Private creditors
Public creditors
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