Paris Club Definition History Members Function Vs London Club

Paris Club Definition

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The club consists of two types of participants – members and observers. The members are the creditor nations, who send officials to attend the meetings. The observers are international institutions, NGOs, and other countries. As of 2022, the group had 22 member nations, most of which were OECD countries.

Key Takeaways

The Paris Club of creditors is an informal group of countries that aim to provide debt relief and solutions to nations who need them. The group ensures that the debtor countries implement significant economic and financial reforms to step out of the debt situation.The Paris club fund operates through six principles: case-by-case, consensus, conditionality, solidarity, comparability of treatment, and information sharing.The group’s first case was that of Argentina, which consequently marked the club’s formation.

How Does The Paris Club Of Creditors Work?

Paris club countries send their officials to Paris every month, except February and August, to meet with other creditor countries. The officials hold respectable positions in the finance ministry or the country’s central bank. The meetings are held in closed sessions with the member countries, the debtor nations, and the observers.

Any country can appeal to the group for debt relief, provided they satisfy certain conditions. Firstly, they should manifest the need for such a relief, and secondly, they should implement economic reforms as part of the debt situation. This is important because the creditors need assurance that debtor countries do not continue functioning similarly, leading them to a debt situation again.

Once the group has received the appeal, the members hold a closed meeting to decide the appropriate debt treatment for the country. They take into account many factors – economic and financial. But, more importantly, they consult the IMF and the World Bank regarding the necessary reforms and comprehend the gravity of the financial situation in the debtor country.

When the creditors reach common ground, they invite the debtor country for negotiations and deliberate until both sides find the terms and conditions satisfactory. The countries then sign an agreement, and the debtor nation agrees to implement reforms to aid in maximum debt recovery.

History

The formation of the Club de Paris can be traced back to the military coup in 1955, which overthrew the then Argentinian President Juan Domingo Peron. Under the new leadership of Pedro Eugenio Aramburu, the country became a member of the International Monetary Fund (IMF) and the World Bank.

To ease the debt situation, the new President met with eleven creditor countries in Paris on May 16, 1956. This marked the foundation of the Paris club, and Argentina became the first debtor country to appeal before the group. However, until 1980, the group had signed only thirty agreements. But the debt crisis in the 1980s made the group more proactive. As a result, the group has now signed 478 agreements with 102 countries, covering over $612 billion.

Members

Club de Paris currently has 22 members as of 2022, most of whom belong to the organization for economic cooperation and development (OECD). Here’s a list of the Paris club countries:

FranceUnited StatesIsraelJapanAustraliaSpainNetherlandsCanadaSwedenSouth KoreaItalyBelgiumGermanyIrelandNorwayAustriaFinlandUnited KingdomDenmarkBrazilRussiaSwitzerland

Functions

The main function of the Paris Club is to help the debtor nations with their payment problems. This is achieved in two ways – first, by offering credit facilities to eligible countries, provided they satisfy some conditions. Secondly, they support indebted countries by offering them solutions. This would, in turn, help the nations become more eligible to receive loans by making them more creditworthy. The Club de Paris functions to avert any debt crisis that might arise.

The group supports debtor countries undertaking financial and macroeconomic reforms by providing debt treatment. This is done through debt rescheduling or relief by postponement or debt service obligation reduction. Either way, this can be a huge relief for debt-ridden countries. The Paris club functions with six important principles: case-by-case, consensus, conditionality, solidarity, comparability of treatment, and information sharing.

Difference Between Paris Club And London Club

The London club is another informal group that was founded in 1976. It is similar to the Paris club, except for banks lending to countries instead of other countries. London club meeting procedures are similar to the Paris club but are mostly prolonged due to the higher membership.

Another difference between the two clubs is that major clients of the London club belong to Latin America and Asia. In contrast, the Club de Paris gets its clients from Sub-Saharan Africa. However, among the two, the latter is believed to be more proactive regarding debt rescheduling practices.