Sunday, October 25, 2009
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 410 agreements with 86 different debtor countries. Since 1956, the debt treated in the framework of Paris Club agreements amounts to $ 539 billion.
This is the second in a series of articles written by Philip Wood, Allen & Overy's Special Global Counsel, on the financial crisis and the global slowdown from a legal perspective.States are just like everybody else. They can and do become bankrupt. Here is a map showing state insolvencies in the period 1980 to 2005. About 40 per cent of states were insolvent in this period.For the people who live there, the insolvency of their country is a national humiliation. Some vent their sense of helplessness in rancour towards the foreign moneylender and the Washington Consensus. The banking system collapses so that people lose their savings. Inflation and interest rocket. Hopes of happiness are dashed. Bankruptcy is a destroyer.Foreign banks lending in foreign currency are effectively expropriated by a rule of law. This is because, as is almost universally the case, corporate liquidation law converts foreign currency into the local currency at the commencement rate of exchange. If the local currency is depreciating rapidly, as it always is, the claim becomes worthless in nominal terms, even if there were a dividend. So local creditors are incentivised to liquidate, foreign banks are not.So what does the law do about the situation generally?A state is insolvent when it is unable to pay its foreign currency debts as they fall due. Some states are serial insolvents.The medieval history of state insolvencies was one of wars, kings, more wars and ruined Italian bankers. In the 19th century, most insolvencies involved defaults on international bond issues. Some were hardly surprising. The romantic Greek independence loan of 1825 of £2,000,000 (maybe half a billion now) was issued at 56.5%. After deductions of this and that, £245,000 eventually reached Greece, £60,000 in stores. The loan remained in default until 1879. So Byron died for this...