2. Collective Action Clauses

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1. How the Paris Club deals with debtors and creditors

2. Collective Action Clauses

4. Code of Conduct

  • The need for a framework to deal comprehensively with international sovereign debt is dramatically evident. The mechanism should be shared, accepted and stable and should be mainly addressed to debt crisis prevention. This is the challenge for the future and will involve the clear committment of creditors and debtors

  • The Paris Club was founded in 1956 with the aim of finding a mechanism of coordination among official bilateral creditors that could possibly be:

  • accepted by debtors

  • predictable

  • The Paris Club work closely with debtors during the preparation of negotiations, by exchanging informations and by finding out shared solution of debt management.

  • The structure of sovereign debt since then has changed and the Paris Club has lost some influence in coordinating the behaviour of the main creditors, especially in the cases of developing Countries that have access to capital markets, with consequences on the trasparency and comparability of treatment.

  • The Collective Action Clauses and the Code of Conduct represent a step forward in order to avoid distorsive behaviour, but in the firts case they concern only a portion (growing) of the debt and in the second case they cannot guarantee nor the predictability nor the exit from the crisis.

  • There are monitoring mechanism on debt management (UNCTAD, FMI, WB): we should try to improve them without multiplying controls that can be perceived by debtor countries as a further limitation of their financial sovereignity.

  • The need for debt relief should be sought very carefully: the treatment and the involvment of creditors must limit the risk of undermining the reliability of the Country on capital markets and must be evaluated in the general framework of their financial situation (see the case of some Tsunami-affected Countries that have declared that they do not wont any debt relief).

  • Paris Club creditors have no afficial contacts with representatives of private creditors during a negotiation with a debtor Country. The Secretariat of the Paris Club however organizes periodical meetings with representatives of private creditors. Since 2001 the Paris Club Secretariat, tohether with the Institute for International Finance – IFF, organizes an annual meeting with private creditors that wish to share opinions and experiences with the Club members on the most relevant issues related to external debt. The agenda of the meeting includes usually a presentation by the Paris Club on the previous year activity and the perspectives for the current year, with reference to the Agreed Minutes and the comparability of treatment. Those meetings are an useful opportunity for exchanging information and opinions on concrete debt treatments and Country cases in an informal and confidential framework.

  • The Comparability of treatment clause included in the Agreed Minutes signed at the Paris Club has the aim of addressing the priveate creditors behaviour by giving the debtor Country support in seeking a financial treatment from the private creditors that can be comparable with the ones agreed at the Club on the basis of the needs of the Country as assessed by the International Financial Istitutions. Even if the Clause relies only on Debtors responsability it is at the moment the only concrete tool to avoid that some categories of creditors can be previleged and the effect of the treatnment obtained by the Club be limited.

  • As the structure of sovereign debt is changed the reverse comparability case can be more and more frequent, further limiting the primary influence of the Paris Club treatments. Even when prior agreements with private creditors were required before the agreement at the Paris Club, the reverse comparability is risky because of the different motivations that inspire private creditors, different interest rates and consequencies on markets. This makes even more urgent to find an innovative coordination mechanism, by taking into account that sometimes the reverse comparability is de facto applied by debtor countries.


The main objective of the Paris Club is the coordination of the creditors and debtors policies in finding out a solution to debt crisis in strict cooperation with the IMF and the WB. The Paris Club is one of the only tools currently available for the international community to tackle the issue of orderly, predictable and quick debt workouts
The experience of the Paris Club in its relationship with debtors has been built in almost 40 years with more than 80 Debtor Countries involved and 400 billion dollars treated. As one of the main creditors Italy has been participating to the Paris Club works since the beginning.

  • 19 members

  • treats the debt of countries taht are facing crisis of liquidity of solvency (as the HIPC Initiative9

  • fullfills an exceptional financing gap identified in the balance of payments in an IMF supported program.

  • provides the debtor Country with a multilateral framework more efficient than bilateral negotiations for an orderly debt workout. The request for a Paris Club is a decision that may have financial consequences on the debtor Countries and must remain exceptional

Debt negotiation in the Paris Club

  • Conclusion of an agreement with the IMF

  • Invitation of Paris Club Creditors and preparation of the negotiation among creditors and with the debtor (data call and reconciliation process held with the Paris Club Secertariat)

  • Negotiation of the Multilateral Agreement and signature of an ageed minute

  • Signature of bilateral agreements with each participating Country

The rules of the Paris Club are:

  • Consensus

  • Solidarity

  • Conditionality

  • Case by case approach

  • Comparability of treatment

The comparability of treatment

  • The rationales of the clause is the preservation of the financial interests of the Paris Club Creditors, the guarantee that the debt treatment reaches its goal and is not diverted to repay other creditors on better terms and the promotion of capital markets efficiency, avoiding moral hazard. The implementation of the clause is needed to fulfill the financing gap.

  • The debtor commits itself to seek a comparable treatment from other categories of creditors, reports regularly to the Chairman of the Paris club on negotiations held and deals achieved and Paris Club creditors assess whether the comparability tratment clause is satisfied.


In case of bonds, the comparability of treatment can be implemented thanks to the Collective Action Clauses that can be even standardized in order to facilitate early dialogue, coordination and communication, propose credible and effective means to amend bonds covenants, hamper disruptive legal action


Following the East Asian financial crisis an international debt workout mechanism was proposed and specific proposals were made by UNCTAD in its trade and development reports in 1998 and 2001. The absecnce of a clear and impartial framework for resolving international debt problems trapped many developing Countries on the verge of bankruptcy. At its Spring meetings in 2003 the IMFC of IMF considered a concrete proposal for a Sovereign Debt Restructuring Mechanism designed to facilitate the sovereign debt restructuring. I may be considfered a stepo forward, innovative and addressed to the bond problem.

The Committee however decided that it was not feasible to move forward, inviting borrowers to include CACs intheir bond contracts. The SDRM did not get strong support from developing Countries, concerned that the introduction of astatutory mechanism would impair thair access to capital markets and increase the role of IMF.

On the contrary the “voluntary mechanisms” , even if can be more feasible of a statutory one, cannot gat the same predictability and comprehensiveness needed to get the Country out of the debt crisis.

Paris Club creditors will be involved in further work on SDRM and will define their relationship with the SDRM as the mechanism gets refined

Code of Conduct

The proposal of elaborating a code of conduct that may define a framework of rules to be applied in debt restructuring has ben introduced as an alternative to the more ambitious statutory mechanism of SDRM. The proposal, originally designed by the Banque de France and some representatives of privet creditors (IIF), has been discussed in an informal group during the Spring Meetings in 2003.

The code too raised perplexity due to the different opinions between borrowers and private creditors on the following issues:

  • Crisis prevention: the opportunity of maintaining a dialogue between debtors and creditors out of the crisis implies the exchange of confidential information that may be used by creditor traders on the secondary market. This risk can be avoided only by creating a Committee of creditors that is able to “filter” the information an reliable.

  • The alternative of the obligation to “good faith” negotiations (preferred by creditors” and unilateral offers (preferred by debtors). Strictly linked to this issue is theone of paying the fees of the committee.

  • The need of a supervisor of the Code and the choice of having the IMF as supervisor.

Moreover there is still perplexity on the effectiveness of the CoC in contributing to a more predictable and orderly restructurinfg process, even in the case of a large diffusion of CACs in the international bonds.

At the meeting of the G20 Finance Ministers and Governors in Berlin last november, Brazil presented a proposal of Code, called “Principles for stable capital flows and fair debt restructuring in emerging markets”, elaborated by the IIF. The principles call for:

  • transparency

  • dialogue and cooperation between creditors and debtors

  • good faith

  • comparability of treatment.

The Code is not yet effective because it needs the endorsment of the parties involved, but it represents a step forward. The main critical points, that the document does not tackle are:

  • Modality of standstill

  • Role of the IMF and of his policy of lending into arrears, and the interrelated definition of good faith

  • The monitoring process.

The G20 gave his political support to the document in his final declaration, without adopting the principles. Italy’s position is that, even if the principels are in the right direction – it is necessary to find the consensus among all the other stakeholders, debtors and creditors. This is the only way by wich a voluntary mechanism can contribute to reduce the problems related to the prevention and resolution of debt crisis.

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