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Fiscal Relief in a Tumultuous Time—The Paris Club in the Nineties

At the end of World War II, Argentina was entrenched in debt and on the verge of defaulting to its creditors in Europe. However, in voicing its concerns to France, Argentina was able to secure a three-day meeting in Paris that would allow its debt to be restructured along a more reasonable timeline; this was the inception of the Paris Club.

Pont de Bercy and the Ministry of Finance in France, 2010, besopha | Wikimedia Commons
Pont de Bercy and the Ministry of Finance in France, 2010, besopha | Wikimedia Commons

The international body has since assisted nations in every part of the world in developing a more sustainable debt plan with their creditors.

Since then, the Paris Club has evolved to provide measures of debt relief and forgive portions of a country’s loan; in 1991 the capacity for a country’s debt cancellation rose to 50 percent, with the poorest countries’ development assistance debt later having the potential to be reduced by up to 90 percent. Countries receiving assistance from the Paris Club are required to have an International Monetary Fund program; and in working closely with the IMF, the Paris Club is able to glean an accurate picture of what challenges a country is facing in repaying its debt.

In the early nineties, the Paris Club dealt with manifold issues, particularly those regarding the end of the Cold War and the breakup of the Soviet Union—which independent states would assume the USSR’s previous debts? Also in this period, the Paris Club forgave half of Poland’s $33 billion debt, which at the time was regarded as the most generous relief policy the group had ever developed.

After working as an economic officer in Zaire and Niger, Joseph Saloom came back to the United States in 1990 to work under the office of monetary affairs. In his domestic assignment, he worked closely with various international institutions such as the International Monetary Fund and the Paris Club. In addition to working in Washington D.C., Saloom would frequently fly to France to participate in Paris Club meetings.

In this “moment” in diplomatic history, Joseph Saloom reflects on his time working with the Paris Club and the pressures he faced; his first-hand perspective gives us a look at the inner workings of the organization.

Joseph Saloom’s interview was conducted by Charles Stuart Kennedy on November 5, 2005.

Read Joseph Saloom’s full oral history HERE.

Drafted by Wilton Cappel

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Excerpts:

“Who’s the debtor?

           
Logo of the International Monetary Fund (IMF), 2019, Paasikivi | Wikimedia Commons
Logo of the International Monetary Fund (IMF), 2019, Paasikivi | Wikimedia Commons

Debt Legacy of the USSR: During this period, we also did the first debt rescheduling negotiation. Let me put it this way: It’s hard to say who it was with. We started the negotiation with the Soviet Union and ended the negotiation with Russia! It’s right during that period. Interestingly enough, the most complicated issue in that Russian debt rescheduling was figuring out who the debtor was. Obviously, the Soviet Union had broken into several independent countries. The question then became, “Who’s the debtor? Who has responsibility for this debt?”

In effect, the Paris Club had to broker an agreement among the various new states to figure this out. It was relatively easy with all of them, with the exception of Ukraine. Russia said, “If we have claim to all the assets, we’ll take responsibility for all the debt.” Every country except Ukraine accepted that. The Ukrainians eventually accepted it, but it [took] six months of difficult negotiations between Russia and Ukraine brokered by the Paris Club to get to that result. Eventually having figured out who the debtor was, the actual terms of the rescheduling were not all that difficult. Russia is one of the relatively few countries now… It is now a creditor, but it has also been a debtor, so it’s one of the few countries that falls into both categories.

“I went to Paris 43 times in the course of the three-year assignment, and don’t let anybody tell you how glamorous it is.”

Lengthy Negotiations: We had other issues like that with the breakup of the former Yugoslavia. That was particularly complicated because Yugoslavia was a charter member of the IMF and the World Bank, and had World Bank loans as well as special drawing rights in the independent monetary policy. A key policy question, for example, was how to allocate responsibility for World Bank loans or special drawing rights? That was a protracted thing that ended up taking quite a long time to resolve. During that period, it was the first time we also introduced multilateral debt reduction for the poorest of the poor developing countries.

So, it was an exciting time. I went to Paris 43 times in the course of the three-year assignment, and don’t let anybody tell you how glamorous it is. You start negotiating at 9:00 in the morning and very often it goes all night, and then you start at 9:00 the next morning for the next debtor. In fact, for some of the big negotiations, they would take two or three days….

Everything has to be worked out on a case-by-case basis. You have to look at the finances of the state and see what it can and cannot afford…

“Give them a good deal. They are our friends.”

Political Pressures:

           
G7 Finance Ministers and Central Bank Governors meeting in Istanbul for 2009 annual IMF and World Bank conference, 2009, IMF Staff Photo / Stephen Jaffe | Wikimedia Commons
G7 Finance Ministers and Central Bank Governors meeting in Istanbul for 2009 annual IMF and World Bank conference, 2009, IMF Staff Photo / Stephen Jaffe | Wikimedia Commons

Q: Did you find yourself under pressure from the geographic bureau saying, “You’ve got to be kind to country X because this is…” Every country is vital if you’re in a bureau. Was this a part of your daily life?

Absolutely. I was stuck between treasury, who insisted on discipline and sensible policies, and the regional bureaus, who said, “Give them a good deal. They are our friends.” That was the balance. What was difficult with the regional bureaus is dealing with something that might have seemed to them to make sense for their particular country. I had to look over the horizon and see what other negotiations were coming along. If we agreed to one set of conditions for one country, then you had to realize that it set a precedent in Paris Club and, therefore, we would then be forced to do the same thing. Benin wants a certain treatment, but what if we cross the line rescheduled debt that had been previously rescheduled? In Benin’s case three million dollars, and who cares? But if we broke that precedent, it could be billions of dollars in a negotiation I could see coming three months later with Brazil. Holding the line on Benin, when you look at overall U.S. interests, was something that was just absolutely essential. But if you’re the Benin desk officer, it may not look that way to you!

Q: What happens if you say, “Okay, Benin, you’ve got to pay three million dollars,” and Benin doesn’t have it.

They default. They fall into arrears.

Q: Were some of the countries in such positions that no matter what they did, they weren’t going to be able to come up with the three million dollars?

Actually, the way the Paris Club works is the IMF does a balance of payments [analysis] and says, “Here is the balance of payments financing gap. Here is what they were capable of paying.” What the Paris Club does is it takes that as its target and reschedules that amount. The whole idea of the Paris Club is that we should give the debtor something that is, in fact, feasible, reasonable, and manageable for them to pay. The idea is precisely to avoid the kind of scenario in your question. The methodology is to have the impartial international arbiter of the Fund tell the creditors how much debt relief they have to give, and that’s the amount of debt rescheduling.

TABLE OF CONTENTS HIGHLIGHTS

Education
BA in Economics, Georgetown University 1966–1970
MS in Management, Massachusetts Institute of Technology 1970–1972
Joined the Foreign Service 1973
Kinshasa, Zaire—Economic Counselor 1985–1987
Washington, D.C.—Deputy Assistant Secretary; International Finance 1991–1993
Washington, D.C.—Director, Iraq Reconstruction Management Office 2006–2007