Paris, July 1, 2016
I want to thank the Secretariat for hosting this important celebration, which is a celebration both of six decades of very successful collective action among official creditors and of Korea’s accession as a new member to the Paris Club. The venue – the Centre de Conferences Pierre Mendes – is appropriately grand for this occasion, and indeed brings back a lot of memories from the time I was Minister of Finance here.
The occasion of these twin celebrations also gives us an opportunity to take stock of the factors that have contributed to the success of the Club as the world’s forum for official sector involvement, and what can be done to ensure that the Club continues to remain effective and relevant in the decades to come.
From the IMF’s perspective, the Paris Club has played an invaluable role in resolving a number of difficult crises. However, with new emerging vulnerabilities, and structural shifts in the landscape of official finance, I see three major areas where it will be important for the Paris Club to continue to adapt. I believe it should (1) broaden its membership to include other major official creditors, (2) extend financing innovations in recent Paris Club agreements, and (3) address the issues raised by public holdings of sovereign bonds.
An indispensable partner in debt crises
As Finance Minister, I always saw the Club as an indispensable force for good in the international financial system. But the extent to which this was actually the case became even clearer when I assumed the role of Managing Director of the IMF.
As you know, the Fund’s principal responsibility is to maintain the stability of the international financial system. Healthy sovereign debtors are at the heart of this system. Thus, the Fund actively promotes prudent policies to ensure that its members maintain debt sustainability.
This said, circumstances can arise when sovereigns are unable to meet their full payment obligations. The Fund is often called upon to provide financial support in these situations, but because we can only lend when debt is sustainable, some form of debt restructuring is usually required. If and when official debt needs to be restructured in this context, the debtor needs to reach an agreement with each of its official creditors.
If there were no established forum for official creditor coordination, this process could be messy, protracted and costly for debtor, the creditors and the system. But thankfully, in the Paris Club, we have such a forum – one, that is established, that is reliably efficient and that has cultivated nimble practices over the years, such as the provision of “financing assurances” for debtors’ programs, that make it possible for the Fund to lend early in support of a member in need.
Sovereign debt restructuring at ground level
This is a 30,000 foot perspective on how the Club is a force for good in the international financial system. The Club’s true contribution can, however, be fully appreciated only from ground level, where the true complexity of the various crisis cases becomes visible.
Sovereign debt restructurings are inherently difficult situations. The debtor country is in a position where the economy is weak and people are feeling the pain of the crisis. Thus, from the debtor side, time is of the essence. However, on the creditor side, there are often very diverse positions and interests. Even establishing full information on the claims can be a challenge. This is where the Club has performed so admirably in bringing official creditors around a single table and delivering comprehensive consensus agreements at short notice.
Consider, for example, the cases of Iraq (2004) and Nigeria (2005), where the official creditor base was complex and pulling in different directions. The Club played an essential role in bringing about a solution in these difficult circumstances.
Another quite recent example, which showcased the Club’s speed and agility, is Grenada. Here, the Club moved early to provide financing assurances to the Fund well ahead of an agreement with private sector creditors. In fact, the private sector’s involvement turned out to be quite a complex process, but the Club’s early support paved the way for Fund financing which served as an anchor both for the private sector restructuring and a set of sound policies to return Grenada to external viability.
Yet another example of historic significance was the Club’s role in resolving a whole host of sovereign claims held by the Russian Federation following the dissolution of the Soviet Union, much of these in arrears. By bringing Russia into the Club in 1997, and through extensive information sharing, a robust framework was developed for clearing these arrears, consistent with the Club’s comparability of treatment principle.
The Club has also played a very special role in enabling countries’ re-integration into the global economy, providing debt relief at a moment when the country is opening up after years of detachment. Myanmar in 2013 is an example. Another, somewhat earlier, example is Poland, which received debt relief, started anew, and never looked back…!
These are already very important examples, and I have not yet even mentioned the HIPC initiative. Of the 39 countries eligible or potentially eligible for HIPC Initiative assistance, 36 are receiving full debt relief from the IMF and other creditors after reaching their completion points. To my mind, this was one of the most laudable achievements ever by the international community as it gave a new lease of life to some of the world’s poorest countries. Without the Club and its close and tireless communication and cooperation with International Financial Institutions such an ambitious initiative would not have been possible.
Prepare for new challenges in official finance
Now, after this reminder about the Club’s past achievements, let me turn to the present and to the future. Where are we in terms of debt vulnerabilities today? What are the structural changes we need to take stock of, and what is needed, in turn, to prepare for new challenges in the area of official finance?
· The global financial crisis and the euro area sovereign debt crisis, have reminded us that debt sustainability is not just an issue for developing economies. Indeed, debt among advanced economies remains high and while the situation has improved since 2008, not all economies are fully out of the woods yet.
· Most emerging and developing economies were not as strongly affected by the global financial crisis. But events since then have been less benign: in particular, the commodity super cycle has unwound, hitting commodity exporters hard. There is also increased uncertainty over growth prospects, given the recent slowdown in China. And there are risks related to rising private indebtedness, and a tightening of global liquidity. Indeed, we have seen a marked rise in debt vulnerabilities among some frontier economies as well as in small states vulnerable to natural disasters.
These conjunctural concerns suggest that sovereign debt will remain on the international policy agenda for some time to come, as will the need for an effective forum for official creditor coordination.
It is also important to take note of three structural developments that have affected the landscape of official finance.
· First, is the emergence of new global creditors like China, Brazil, India, South Africa, and indeed Korea. This is a welcome development, as it reflects the hard-earned prosperity gains registered by these countries over decades. But it also opens new challenges for official creditor coordination, especially where the creditors are not members of the Paris Club.
· Second, there is increased diversity also in the form of sovereign financing. Over the last decade or so, there has been a surge in the issuance of sovereign bonds and their subsequent purchase by foreign sovereign entities such as sovereign wealth funds and central banks. To the extent that these claims are held for investment purposes, they are akin to private claims, and not a concern of the Club. This said, there may be opportunities and risks associated with these bonded claims, specifically for the efficient resolution of sovereign debt crises.
· Finally, there is growing international recognition of the importance of sustainable development. It is possible that a country looks very healthy financially, but not so much if one considers future costs in terms of depleted resources and negative environmental externalities on people’s livelihoods. Official creditors need to be increasingly conscious of this broader sustainability imperative when considering restructuring agreements.
Areas for further action
These conjunctural and structural developments are clearly relevant for the Club and its role in official creditor coordination. The question is: how can the Club respond to these in a way that extends its past success and efficacy into the future? I see three important areas for action:
First, broadening the Club’s membership to include other major global official creditors is important to enhance the Club’s representativeness and continued long-term relevance. Korea’s membership is extremely welcome in this regard and will hopefully act as a catalyst for other creditors as well. The outreach to new potential members needs to come with an openness and willingness to adapt, while maintaining those core principles for the Club’s work that have, in a practical sense, critically served it in providing swift and effective responses in the past. Careful communication and explanation of the Club’s working principles and their purpose will be essential.
Second, the Club needs to continue to be innovative, and two recent initiatives in this regard are already very welcome.
· Take, first, the “hurricane clause” agreed by the Club in the November 2015 restructuring of Grenada’s debt—an example of a state-contingent solution for a small economy that is highly vulnerable to natural disasters. I am also aware of ongoing work on proposals for countercyclical loans, where the debtor would get automatic debt service relief in bad times. It is important for the international community and the Club to consider such proposals seriously. I can report that the Fund itself is currently examining the wider case for state-contingent financial instruments and we plan to discuss this topic with our members in early 2017.
· Another innovation, which speaks to the sustainable development considerations I mentioned, is the debt-for-environment swap the Club negotiated with Seychelles in February 2015, working closely with the USA’s Natural Conservancy. Such swaps, which reduce the debt burden for the debtor in exchange for commitments on marine conservation, are a win-win-win for all.
Third, we need to address the issues raised by alternative forms of sovereign finance, including tradable bonds held by other sovereigns or their entities. To be clear, I do not see scope for treating sovereign bonds held for investment purposes in the Club. These cannot be accorded the seniority enjoyed by official claims extended for public policy purposes. However, we may want to think about whether there is a case for greater information sharing, discussion and coordination among the foreign public sector entities that hold such bonds in the context of a restructuring. The key questions in this regard are: can these public sector entities work together in ways that would help expedite a restructuring when one is needed, which would be a net positive for the global financial system; and what role can and should the Club play in this regard.
We have exciting times ahead of us. For sure, they will not be without challenges. But based on our collective track record in jointly finding solutions, I remain confident that we will succeed. I think the Club well understands the key issues confronting it, and has already begun to consider what needs to be done. Its responses will need to be grounded in discussion and dialogue among creditors. I know that the next session will be about “the changing landscape of official debt restructuring” and I am looking forward to listening to this conversation.