Global Policy Forum

By Emad Mekay

In a recent statement on the 50th anniversary of the Paris Club, a powerful creditors' cartel based in France, anti-debt groups described the club's policies toward borrowing nations as "medieval". But some say the word "colonial" is equally fitting.

The Paris Club's chief tool in its mission to maximise returns has been to push for loan restructuring in bankrupt countries. Since 1983, the Club has covered some 504 billion dollars of debt originally given through bilateral, and wrongly labeled, "aid" agencies or through export credit agencies, to dozens of countries in Africa, Asia and Latin America. The brunt of those programmes has been borne by sub-Saharan Africa and Latin America, but also by countries in Asia (the Philippines), the Middle East (Egypt and Jordan) and Central and Eastern Europe (Poland, Yugoslavia and Bulgaria).

The result of rescheduling debt has been the extension of repayment deadlines over a longer period combined with the introduction of penalty interest and in almost all cases the further implication of poor nations in debt. Nigeria is a classic example of this vicious circle. In 1985, its external debt was 19 billion dollars. Although it has paid creditors more than 35 billion dollars while borrowing less than 15 billion, its outstanding debt at the end of 2004 grew to almost 36 billion dollars because the government ended up paying compound interest to the Club's creditors. Rescheduling has also come standard with IMF programmes laden with economic conditionalities such as privatisation of state-owned industries and market liberalisation, a formula that critics say has worsened the debt situation in poor nations.

The secretive Paris Club has come to so closely coordinate with the IMF and the World Bank that representatives of the two bodies routinely sit in when debt management decisions are taken in Paris. Two Paris Club chairmen, Jacques de Larosií¨re and Michel Camdessus, have acted as managing directors of the IMF. The Club's official members are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, Norway, Russia, Spain, Sweden, Switzerland, Britain and the United States.

"Wealthy nations have imposed -- through the IMF, World Bank and the Paris Club -- a protracted state of unsustainability and emergency," said the Brussels-based anti-debt group Eurodad in a statement signed by dozens of independent groups. "As a consequence, a permanent exit from the debt trap has been consistently and willingly impeded, keeping debtor countries in a state of effective domination and dependence," it added.

The "non-institution", as it is sometimes called, and whose members meet 10 to 11 times a year, is also criticised as a flagrant example of non-democratic procedures. Its decisions are taken on the basis of unanimity. But it allows in only creditors, and debtors end up on the receiving end of dictates that they do not help shape. Afrodad, a platform of African NGOs, once described the Paris Club and its relations with indebted nations like this: "In a jury of foxes (the creditors), the chickens (the debtors) are always the guilty".

Politics drives most of the Club's debt rescheduling arrangements. One of the clearest examples of that in recent years is how the Club came to forgive 80 percent of Iraq's debt under U.S. pressure. Similarly, it covered 67 percent of Serbia and Montenegro's debt and half the debts of the pro-Washington government in Poland.

By contrast, countries hit by the devastating tsunami in 2004 have at best been given only a one-year moratorium, exposing them to the payment of additional interest at a time of national disaster. These examples, says the Committee for the Abolition of Third World Debt (CADTM), a Paris-based group, "reflect first and foremost the geopolitical interests at stake and are especially questionable". Other civil society organisations said in their statement on the 50th anniversary of the club this shows "a level of political arbitrariness defying all common sense of justice and fairness." "In the Paris Club the creditors act as judge in their own case," they added.

The groups have called for the creation of an impartial body to oversee the process of international debt management talks and to guarantee that the voices of indebted nations and creditors are both heard. These days, the Paris Club appears worried that new lenders like China and Brazil will woo its clients away and dilute the control of rich nations over developing ones. It has offered an open invitation for these nascent economic powers to sign on board. "As these new players from Asia and elsewhere begin to take more responsibility for the system ... they may begin to appreciate the importance of existing institutions," Bank of Israel Governor Stanley Fischer, a former IMF official, told a forum the Club held to celebrate its golden anniversary.

The point was echoed by numerous officials who help run the current global economic system. "The international community needs to find ways to engage with emerging donors. It must convince them that financing to low-income countries should be shaped by coordinated international efforts, rather than independent national policies," said Agustin Carstens, deputy managing director of the IMF.