Inside Economic Diplomacy Podcast- Episode 1: The Paris Club
OMAR PARBHOO, SENIOR ADVISOR, BUREAU OF ECONOMIC AND BUSINESS AFFAIRS, DEPARTMENT OF STATE: Somewhere in Paris among the artists the romantics and the tourists, there's a meeting of a special club.
EMILY-ANNE PATT, FINANCIAL ECONOMIST, BUREAU OF ECONOMIC AND BUSINESS AFFAIRS, DEPARTMENT OF STATE: It's a club that deals with hundreds of billions of dollars of sovereign money.
MR. PARBHOO: This informal group has special tasks, to work with indebted countries to reschedule debt, promote macroeconomic reforms, and ultimately get creditors their money back.
MS. PATT: Of course, we're talking about the Paris Club, and in May of this year, they signed a historic agreement with Argentina to clear arrears that were due to the club's creditors, an agreement almost 13 years in the making.
MR. PARBHOO: Today we'll talk more about the Argentina arrangement and explain what exactly the Paris Club. I'm Omar Parbhoo.
MS. PATT: And I'm Emily-Anne Patt. Welcome to the inaugural episode of Inside Diplomacy.
MR. PARBHOO: Before we get started, Emily-Anne. I wanted. To take a moment to welcome our listeners and explain what this podcast is all about.
MS. PATT: Of course.
MR. PARBHOO: The State Department has launched Inside Diplomacy to share with all of you some of the most interesting aspects of our foreign policy.
MS. PATT: And since in many ways economic policy is foreign policy, we had the Bureau of Economic and Business Affairs have a lot of interesting things to share.
MR. PARBHOO: We'll be putting out episodes regularly. So please subscribe to us on iTunes.
MS. PATT: And please visit our Facebook page at Facebook.com/econ.bizengage to let us know what you think.
MR. PARBHOO: Now back to Argentina. Emily-Anne, I know this is an issue you watch closely, so can you explain why Argentina is negotiating with the Paris Club in the first place?
MS. PATT: Happy to. I actually just spoke to a colleague of mine who has been personally involved in the discussions.
DAN KACHUR, INTERNATIONAL FINANCE ECONOMIST, BUREAU OF ECONOMIC AND BUSINESS AFFAIRS, DEPARTMENT OF STATE: My name is Dan Kachur. I work in the Office of Monetary Affairs on sovereign debt issues.
MS. PATT: Dan shared the basic parameters of the deal. Argentina started working with countries it owes money to to pay back these arrears. For those of you unfamiliar with the term, arrears just basically means money that is due that hasn't been paid.
MR. PARBHOO: And because of these arrears, Argentina has been virtually cut off from borrowing internationally, right?
MS. PATT: Right. It's difficult for any country to fund operations in large scale public investments without having at least the option to seek funding from international markets. In response, Argentina recently started taking steps to improve its standing with investors.
MR. PARBHOO: Which means going to the Paris Club to work out a deal with creditor countries.
MS. PATT: Exactly I asked him to explain the deal and we discussed the impetus behind it.
MR. KACHUR: At the end of May, Argentina agreed to fully repay Paris Club creditors $9.7 billion in arrears, including outstanding principal and interest. The deal also included $608 million in outstanding debt owed to US taxpayers who will now see the first payments since Argentina stopped paying its bilateral debts following its default in 2001.
MS. PATT: So why do you think that Argentina came to the table in May.
MR. KACHUR: We saw this Paris Club arrangement in the context of a series of actions by Argentina to repair its relations with the global financial community. In the year prior to the May deal, the Argentine government had resolved outstanding investment disputes, it announced a domestic subsidy reform, and it began to revise its reporting of inflation and GDP statistics. Clearly additional work needs to be done to resolve ongoing disputes with private creditors and to repair Argentina's relationship with the international monetary fund.
MS. PATT: Why was this Argentina deal so publicized?
MR. KACHUR: I think there was a strong interest because Argentina's unresolved public debt is substantial, and it's been an outstanding issue for more than a decade. I also think there was strong interest from the international investment community since they recognized that Argentina has great economic potential. And financial markets broadly welcomed the agreement.
MS. PATT: How do you think that this deal will impact US Argentina relations going forward?
MR. KACHUR: I think we all see the Paris club deal as a very positive development in our relationship with Argentina. We hope that the deal can be a catalyst to expand bilateral cooperation in other areas, including science and technology, agriculture and education, even investment and trade. We see great potential out there.
MR. PARBHOO: OK so this seems like a victory for the Paris Club and for the US. $608 million owed to u.s. taxpayers is a healthy sum so I can see why our government has been so eager to reach a deal. Let's be honest. It's hard to judge the Club without properly understanding what it is.
MS. PATT: You're right, the Argentina deal is just one example of the work that the Paris Club does all the time.
MR. PARBHOO: To get a better grasp of the overall mandate, I sat down with the head of the US delegation to the Paris Club.
ANDREW HAVILAND, DIRECTOR OF THE OFFICE OF MONETARY AFFAIRS, BUREAU OF ECONOMIC AND BUSINESS AFFAIRS, DEPARTMENT OF STATE: My name is Andrew Haviland. I'm Director of the Office of Monetary Affairs at the State Department.
MR. PARBHOO: I asked Andrew about the institutions and its membership, and most importantly, why it exists in the first place.
MR. HAVILAND: Well, it exists because there's countries out there that need to borrow money. And they sometimes are unable to pay it back. They get into trouble. The Paris Club, which is an informal group of creditor countries, got together and said, we need to work together to resolve these debt problems.
I would point out that the Paris Club has actually had done quite a bit of work over time, since 1956 over 430 agreements with 90 countries that's a pretty good record there. And that involved $583 billion worth of debt. There are 20 members currently. These are countries that are able to lend money.
MR. PARBHOO: How does a country become a member?
MR. HAVILAND: You have to be a creditor country, so somebody who is lending to other countries. This is sovereign to sovereign debt we're talking about. And you have to express an interest. So you get in touch with the French, which provide the Secretariat for the Paris Club. And you say I'm interested in joining this group, and you can come as an ad hoc member, which means you participate in discussions about countries where you are a creditor. Or we've devised a way for countries to become prospective members. And they can try it out and see, does this group really serve my needs? And then you can formally to commit to membership at some time.
MR. PARBHOO: Andrew explained how important it is to have a group that deals with defaults on the national level. For individuals in the US, we have courts to deal with bankruptcies.
MS. PATT: I can assure you that the challenges and solutions get a little more complicated for sovereign nations when we're dealing with multiple jurisdictions and often several types of creditors.
MR. PARBHOO: Right. And that's why an organization like the Paris Club is so important. It provides a mechanism to deal with sovereign defaults in an orderly, predictable way.
MR. HAVILAND: The purpose of the countries getting together here is not to throw money around or just randomly forgive debt. What we're trying to do is to keep capital markets working. Debt financing is one way, one of many ways, that a country finances its activities. And any time that you borrow money, there's the risk of default. Things can happen that you weren't expecting.
It's like the homeowner who has every intention of paying off that home and then you lose your job. The economy goes down the drain, and you don't have a job. So there's always going to be debt to stress, so what we've done is creditor countries get together and help countries work through those debt problems.
MR. PARBHOO: How do you reach agreement with such a diverse group of participants?
MR. HAVILAND: First of all the participants in the Paris Club are sovereign nations that have recognized that they're much better off if they work together. We know that collective action works better than going alone. So once we recognize that, we realize there is benefit in compromise. If you compromise, you can get a solution we've always found.
We also have a basic set of principles. We act on a principle of solidarity, which means we always stick together. If a debtor country comes to just the United States for example, and says, I've got a problem there. Can we just work this out alone? We say, no, come to the Paris Club and we'll work it out.
We also share information with each other about how much we're lending to other countries. And if a country is having a problem, we share that information. We also set some conditions for working out a deal. And basically that means that the country has to get its economy back on track. And so we all agree that this is important.
And then we also have a very important principle which is comparable treatment. We all act together as members of the Paris Club, as creditors, and then we say to the debtor country, if you accept the terms from us, all of your other creditors, whether they are private or other governments, have to offer you comparable terms, not the same terms but comparable ones. And that means we all work together and share the burden of helping this country get back on track.
MR. PARBHOO: So in the end, it is clear what the Paris Club is meant to do. But it always seems strange that a country with a lot of debt like the United States, would lecture other countries about their debt. Of course, Andrew had a different take when I posed this dilemma.
MR. HAVILAND: I would differ with the premise of that question, and that is that the Paris Club is a lecturing group. It is not a lecturing group. What we do is we help countries get out of debt distress so they can meet the contractual obligations they made when they borrowed the money. So countries take on different amounts of debt over different times for different reasons. And a debt is just one tool that a country can use to finance its activities.
So sometimes the level of debt that a country takes on or the sources of financing that it uses, that's a matter of national debate. And we have a very lively debate in the United States. In the Paris Club, we don't get into that. What we're concerned with is effective debt management and sustainable debt levels over time. That might mean we just reschedule payments. It might mean we have to forgive part of the debt, but we work together and find that. So there's no lecturing there's really involved there.
MR. PARBHOO: OK Emily-Anne, the Press Club doesn't seem as mysterious anymore. Our global financial system definitely benefits by having this group around.
MS. PATT: And for countries like Argentina, the Paris Club clearly provides a needed service that allows debtors to have an orderly forum to work out payment problems and for creditors to ensure repayment to taxpayers. You know, debt markets are a completely legitimate means of financing when done sustainably. The Paris Club helps to make those debt markets work.
MR. PARBHOO: The alternative would be dealing with each creditor separately and negotiating with and balancing multiple partners, which seems insurmountable.
MS. PATT: So as long as there are countries lending to one another, it seems like the Paris Club will have work to do.
MR. PARBHOO: As for Argentina, it will be paying back its arrears over time based on the deal reached in May. And most importantly for the Argentine government, if it continues on this path, this could allow it to borrow from the international financial community.
MS. PATT: That's right.
MR. PARBHOO: Well, thank you, Emily-Anne. To all you listeners out there, please remember to subscribe to us on iTunes.
MS. PATT: Until next time, Omar.
MR. PARBHOO: Thanks for listening everyone.