Paris Club comes under attack

For years the secretive Paris Club of sovereign creditors has ruled over debt workouts without comment or criticism. It dictated terms to the private sector and resisted, where possible, the writing off of debts to poorer nations. But that was in the days when official flows were the majority and private debt was in the hands of the banks. Now bondholders are outraged that the Paris Club is refusing to adapt its approach to the new economic environment, one in which private finance calls the shots. With the Paris Club refusing to budge on any of the major issues, the stage is set for a protracted battle. Brian Caplen reports

By Brian Caplen

French civil servants use old-fashioned methods to persuade Paris Club creditors and debtors to reach agreement: duress and subterfuge. Holed up in the vast post-modernist complex that houses the French treasury, participants are kept working - or waiting - throughout the day and night, with little sleep or food, until one side cracks.

The creditors sit in a windowless conference hall while the debtors are crammed into a tiny meeting room downstairs. OVers and counter-oVers are relayed between the parties by treasury officials who, to quote one delegate, "control the information Flow to maximum advantage". Their aim is to get deals done rapidly, on terms agreeable to the creditors and that accord with French or G7 foreign policy.

This is easy to achieve since Paris Club rules are not written down but are kept inside the heads of the treasury officials. A shrewd negotiator will quote the precedent of, say, Guinea in 1995 on Naples terms, to push an agreement forward, knowing that few if any delegates will have the expertise to challenge it. Even the order in which creditors are called on to speak may have been calculated by the chair to encourage a certain outcome.

Many debtors are totally fazed by the experience, which even one of the creditors describes as "humiliating and colonial".

While the G7 countries are treated to a grand lunch, the debtors are reduced to pleading with an official to order them pizza. At the same time some debtors are so badly prepared that they are beaten almost before they start.

Their Figures don't add up and usually don't agree with those of the creditors. Many don't understand the principle of compound interest. Their best MBAs are working on the national budget, not starving at the Paris Club. Only the Russians can survive in these conditions because they are organized and have the stamina to outlast everyone else.

"It always struck me that there must be a better way of doing it," says one former UK treasury official who used to attend Paris Club meetings. "When it gets to 3am, your mind is fuzzy and you just want to sleep, can you really be producing the best results? This approach seems hopelessly out of date."

"Paris Club meetings are surreal," says another participant. "It's like being in a production of the Wizard of Oz. You lose all track of time."

Changes are being urged on the Paris Club. It is under the spotlight for lack of transparency, inflexibility and a hard-line view that comparable treatment between distressed private and public sector debts only runs one way: if the Paris Club cuts a deal the private sector has to follow suit but not vice-versa.

Now there are moves to organize sovereign defaults in much the same way as corporate ones, with all the creditors - governments, banks, bondholders, multilaterals - being involved. The influential Council on Foreign Relations in the US has been working on proposals to this effect. But no-one expects rapid reform. The Paris Club has yet to establish a website and its press releases have been described as "muddled and meaningless". One tried and tested club technique is to obfuscate the results of a negotiation so that all parties can declare victory. Giving up such powers by adopting transparency would clearly be unattractive to the French treasury.

An IMF precedent
Yet the pressure is on, especially since the IMF - also criticized for secrecy and backroom dealing - has made a lot of progress over the past three or four years in opening up.

Attacks on the Paris Club are coming not only from predictable quarters, such as hedge fund managers who have taken a haircut on their bonds, but from senior bankers. Veteran debt negotiator Bill Rhodes, vice-chairman of Citigroup, is usually diplomatic and circumspect about the players in international Finance. After all he may need to call them up next time he is involved in a debt workout. But he feels so strongly about what is happening that he was adamant his conversation with Euromoney should be on the record.

"There needs to be a proper working relationship between the private sector and the Paris Club," Rhodes says. "They have to sit down and hear our opinions. The official sector and the G7 are always talking about transparency. But what they often mean is transparency for others, for developing countries and the private sector. Why don't we have more transparency in the official sector? There needs to be more transparency [in the Paris Club], more Flexibility and more dialogue with the private sector."

Lex Rieffel, who was formerly a debt relief expert with the US Treasury, and now works for the Institute of International Finance in Washington, says: "The IIF's concern is that the Paris Club is part of the problem rather than part of the solution. It has not taken the same kinds of steps forward to be transparent as has the IMF."

Rieffel wrote two papers on the Paris Club in the 1980s and in one, published by Princeton University and entitled The role of the Paris Club in managing debt problems, he states: "The world of economics and Finance is full of mysteries. While many are genuine and arise from the complexity of human behavior, some appear artificially contrived by groups of players who Find it convenient or advantageous to camouflage their activities from others. The Paris Club is a mystery of the second category..."

De Fontaine Vive: young, urbane and modern, but an unbending Paris Club traditionalist

The mystery began in 1956 when the Paris Club First convened to consider how to treat Argentina's external debt. Since it was never a legal body and always under the auspices of the French treasury, it was prevented from developing into a huge sprawling bureaucracy.

This is clearly to its advantage and enables rapid deal completion. The downside is that so much power rests with a few officials. There is a small permanent secretariat and the chairman is always the head of the treasury or the head of international affairs at the treasury.
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