2. 2UN Multi-stakeholder Meeting Debt sustainability: a Paris Club perspective Emmanuel MOULIN Secretary general of the Paris Club New-York – March 7, 2005

3. 3UN Multi-stakeholder Meeting Outline  Debt sustainability analysis as a key element of the Evian Approach  Assessing debt sustainability in Paris Club debt treatments  The case of Iraq DEBT SUSTAINABILITY FROM A PARIS CLUB POINT OF VIEW

4. 4UN Multi-stakeholder Meeting Outline 1. Debt sustainability analysis is a key element of the Evian Approach DEBT SUSTAINABILITY FROM A PARIS CLUB POINT OF VIEW

5. 5UN Multi-stakeholder Meeting  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 DEBT SUSTAINABILITY IN THE EVIAN APPROACH

6. 6UN Multi-stakeholder Meeting 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)

7. 7UN Multi-stakeholder Meeting DEBT SUSTAINABILITY IN THE EVIAN APPROACH Addressing sustainability problems BeforeAfter  Identification of a financing gap in the context of an IMF supported programme  Financing gap is to be filled through a satisfactory implementation of the IMF programme  Paris Club creditors give financing assurances to the IMF to fulfil the gap  Paris Club creditors negotiate with the debtor country on the basis of the CAPA  Creditor make their own judgement on the sustainability of the debt on the basis of a DSA prepared by the IMF  Liquidity problem treated on the basis of the existing terms  Sustainability problem could be treated through a comprehensive debt treatment if the country is committed to policies that will secure an exit from the Paris Club a comparable treatment

8. 8UN Multi-stakeholder Meeting RATIONALES FOR THE EVIAN APPROACH Adapt Paris Club response to the situation of countries BeforeAfter  standard terms only  Classic terms  Houston terms (high degree of heterogeneity) - eligibility: Gdp/cap, level / struct. of debt - no cancellation / cash flow relief  Naples terms - eligibility IDA-only - 67 % debt reduction of eligible claims  Increasing u se of ad hoc treatments to fix the situation  Possibility of comprehensive treatments when debt is unsustainable  Delivered according to a staged process  Could take various forms and include different types of flexible instruments  Active policy of adjusting the cut- off date

9. 9UN Multi-stakeholder Meeting RATIONALES FOR THE EVIAN APPROACH PSI in the debt restructuring process BeforeAfter  Comparability of treatment  Clause : debtor country commits to seek from all its external creditors an agreement based on terms comparable and reports regularly  Ex post assessment without specific consultations : analysis based on cash flows, NPV & duration  Increasing transparency (regular meetings, web site)  Comparability of treatment & inter-creditor coordination  Ex ante commitment from the debtor country  Dialogue will continue and could take the form of early consultations  Clause : debtor country commits to seek from all its external creditors an agreement based on terms comparable and reports regularly  Ex post assessment without specific consultations : analysis based on cash flows, NPV & duration

10. 10UN Multi-stakeholder Meeting 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)

11. 11UN Multi-stakeholder Meeting 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

12. 12UN Multi-stakeholder Meeting DEBT TREATMENT UNDER THE EVIAN APPROACH Is the debt unsustainable ? Is the debtor eligible to a comprehensive debt treatment ? Phase 1/ Flow treatment Phase 2/ Comprehensive debt treatment Standard terms yes no 1 3 4 2 5

13. 13UN Multi-stakeholder Meeting 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

14. 14UN Multi-stakeholder Meeting Assessing debt sustainability

15. 15UN Multi-stakeholder Meeting Outline 2. Assessing debt sustainability: the case of Iraq DEBT SUSTAINABILITY FROM A PARIS CLUB POINT OF VIEW

16. 16UN Multi-stakeholder Meeting Experience and perspectives  Sustainable cases  Kenya (January 2004)  Dominican Republic (April 2004)  Unsustainable cases  Iraq (before year-end)  Argentina (tbd)  Consultations with the private sector  June 9th 2004 meeting  Focused on country cases  Sustainable cases with goodwill clauses  Gabon (june 2004)  Georgia (July 2004) EXPERIENCE AND PERSPECTIVE UNDER THE EVIAN APPROACH

17. 17UN Multi-stakeholder Meeting Evaluation of Iraq’s debt (excluding reparations but including late interest) Total = US $ 114 bn

18. 18UN Multi-stakeholder Meeting  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 The DSA reflected the dynamic of Iraq’s economy

19. 19UN Multi-stakeholder Meeting  According to the scenarios run by the IMF, there was no doubt that Iraq’s debt was not sustainable without substantial debt reduction: The DSA clearly demonstrated that Iraq’s debt was not sustainable before treatment

20. 20UN Multi-stakeholder Meeting  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 The DSA clearly demonstrated that Iraq’s debt was not sustainable before treatment

21. 21UN Multi-stakeholder Meeting  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 Treatment of Iraq’s debt in the framework of the Evian Approach

22. 22UN Multi-stakeholder Meeting  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 Macroeconomic impact of the signed agreement

23. 23UN Multi-stakeholder Meeting Main challenges going forward Debtor country Private creditors Public creditors IMF/WB DSA Building a shared view on sustainability Common definition Transparency of analysis Common references Structure for dialogue Debt sustainability

24. 24UN Multi-stakeholder Meeting www.clubdeparis.org