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Debt sustainability: a Paris Club perspective

Debt sustainability: a Paris Club perspective. Emmanuel MOULIN Secretary general of the Paris Club New-York – March 7, 2005. Outline. DEBT SUSTAINABILITY FROM A PARIS CLUB POINT OF VIEW. Debt sustainability analysis as a key element of the Evian Approach

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Debt sustainability: a Paris Club perspective

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  1. Debt sustainability: a Paris Club perspective Emmanuel MOULIN Secretary general of the Paris Club New-York – March 7, 2005 UN Multi-stakeholder Meeting

  2. 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 UN Multi-stakeholder Meeting

  3. Outline DEBT SUSTAINABILITY FROM A PARIS CLUB POINT OF VIEW 1. Debt sustainability analysis is a key element of the Evian Approach UN Multi-stakeholder Meeting

  4. 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 UN Multi-stakeholder Meeting

  5. 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) UN Multi-stakeholder Meeting

  6. DEBT SUSTAINABILITY IN THE EVIAN APPROACH UN Multi-stakeholder Meeting

  7. RATIONALES FOR THE EVIAN APPROACH UN Multi-stakeholder Meeting

  8. RATIONALES FOR THE EVIAN APPROACH UN Multi-stakeholder Meeting

  9. 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) UN Multi-stakeholder Meeting

  10. 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 UN Multi-stakeholder Meeting

  11. Phase 1/ Flow treatment Phase 2/ Comprehensive debt treatment yes 3 Is the debtor eligible to a comprehensive debt treatment ? 4 yes no 1 Standard terms no Is the debt unsustainable ? 2 5 DEBT TREATMENT UNDER THE EVIAN APPROACH UN Multi-stakeholder Meeting

  12. 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 UN Multi-stakeholder Meeting

  13. Assessing debt sustainability UN Multi-stakeholder Meeting

  14. Outline DEBT SUSTAINABILITY FROM A PARIS CLUB POINT OF VIEW 2. Assessing debt sustainability: the case of Iraq UN Multi-stakeholder Meeting

  15. Sustainable cases Kenya (January 2004) Dominican Republic (April 2004) Unsustainable cases Iraq (before year-end) Argentina (tbd) EXPERIENCE AND PERSPECTIVE UNDER THE EVIAN APPROACH Experience and perspectives • Sustainable cases with goodwill clauses • Gabon (june 2004) • Georgia (July 2004) • Consultations with the private sector • June 9th 2004 meeting • Focused on country cases UN Multi-stakeholder Meeting

  16. Evaluation of Iraq’s debt (excluding reparations but including late interest) Total = US $ 114 bn UN Multi-stakeholder Meeting

  17. The DSA reflected the dynamic of Iraq’s 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 UN Multi-stakeholder Meeting

  18. The DSA clearly demonstrated that Iraq’s debt was not sustainable before treatment • According to the scenarios run by the IMF, there was no doubt that Iraq’s debt was not sustainable without substantial debt reduction: UN Multi-stakeholder Meeting

  19. The DSA clearly demonstrated that Iraq’s 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 UN Multi-stakeholder Meeting

  20. Treatment of Iraq’s debt in the framework of the Evian Approach • 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 UN Multi-stakeholder Meeting

  21. 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 UN Multi-stakeholder Meeting

  22. 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 UN Multi-stakeholder Meeting

  23. www.clubdeparis.org UN Multi-stakeholder Meeting

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