The London and Paris Clubs of Creditors are informal and informal organizations created to restructure debt and resolve other debt issues between different countries. The London Club unites more than 1000 creditor banks and deals with debt to banks. The Paris Club includes 21 states and deals with intergovernmental debt issues.
Paris Club
Given the fact that the Paris Club is made up of creditor countries that are considered the leaders of the world economy, its influence is much higher than the London one. The Paris Club has two main areas of activity:
- Issuing loans to developing countries, that is, third world countries.
- Debt restructuring and settlement of debt disputes between creditor and debtor countries.
The Paris Club has no formal status, therefore in its activities it is guided by the developed rules and principles. Membership in this club is informal, so any country with an outstanding intergovernmental loan can participate in debt settlement meetings.
In order to receive assistance from the Paris Club in debt restructuring, the debtor country needs to present convincing evidence of the fact that without restructuring it can no longer pay the debt. As a rule, this evidence is other large loans. In addition, the decisions of the Paris Club are influenced by the IMF's forecasts for a particular country.
The Paris Club also provides real assistance to debtor countries pursuing certain economic policies. These macroeconomic transformations are assisted in the form of additional loans and borrowings.
Loans received from member countries of the Paris Club are distributed equally among all debtor countries. That is, the same grace period for repayment is established for all creditor countries. And if one of the creditor countries made concessions to its debtor, the debtor has the right to demand the same concessions from his other creditors.
The main idea of the Paris Club is to provide comprehensive assistance to the poorest debtor countries, which are completely unable to cope with all loans on their own. Based on public opinion, members of the Paris Club periodically write off part of their debts to such countries. Since 1994, the club has written off up to 67% of the total debt in this way, and now up to 80%.
Of course, this discount is not available for all countries. They must not only be among the poorest countries on the planet, but also bring about positive economic transformation.
London club
The structure of the London Club consists of commercial banks and various funds that provide lending services to various countries. The main activity of the London Club is the settlement of issues related to the repayment of countries' problem debts to banks. Moreover, the London Club deals only with those debts that are not guaranteed by any state.
In its activities, the London Club adheres to the following principles:
- An individual approach must be developed for each debtor.
- The revision of the terms of debt repayment must be supported by evidence of the debtor's inability to fulfill his obligations.
- Losses from the restructuring of someone's debt are evenly distributed among all members of the London Club.
- The club's management (chairman and secretariat) is periodically updated.
Like the Paris Club, the London Club aims to ease the debt burden of the world's poorest countries. The London Club first began operations in 1976, easing the credit burden on Zaire.
Features of the London and Paris Clubs
Despite the similarities in their activities, the clubs are still very different from each other. The Paris Club, which brings together central banks and finance ministries of developed countries, has much greater financial capacity. The member countries of the Paris Club lend a lot for political reasons and with great pleasure.
Members of the London Club are always limited in money, so loans are given extremely carefully, at high interest rates and commissions. They can be understood: private banks do not print money, they lend hard earned money, and if they are not returned, they will not be protected by either guarantees or insurance.
When considering the settlement of problem debts in the London Club, a committee is created, which includes representatives of banks that have issued 90-95% of the amount of all loans of the debtor. In the Parisian club, the committee is represented by the heads of central banks and finance ministers, regardless of their share of the debt in question.
Thus, the rules and principles of debt restructuring and cancellation in the Paris Club are always the same for all debtors. In the London Club, the same rules and principles can vary significantly depending on the country in which the meeting is taking place and on the composition of the advisory committee.
The final decision on debt issues in the London Club is made on the basis of decisions of the advisory committee, in the Paris Club - on the basis of IMF forecasts.
