Features of the Paris and London clubs of creditors
Given the fact that the Paris Club consists of creditor countries that are considered the leaders of the global economy, its influence is much higher than that of London. The Paris Club has two main areas of activity:
- Issuance of loans to developing countries, that is, third world countries.
- Debt restructuring and debt settlement between creditors and debtor countries.
The Paris Club does not have a formal status, therefore, in its activities it is guided by the rules and principles developed. Membership in this club is informal, so any country with an outstanding intergovernmental loan can participate in debt settlement sessions.
To get help 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, these proofs are other large loans. In addition, the decisions of the Paris Club are influenced by IMF forecasts for a particular country.
The Paris Club also provides real assistance to debtor countries pursuing a certain economic policy. Assistance in these macroeconomic transformations is provided in the form of additional loans and borrowings.
Loans received from the member countries of the Paris Club are equally distributed among all debtor countries. That is, the same grace period of 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 its other creditors.
The main idea of the Paris Club is to provide comprehensive assistance to the poorest debtor countries that are completely unable to cope with all loans on their own. Based on public opinion, members of the Paris Club periodically write off such countries a part of their debts. Since 1994, the club has thus written off up to 67% of the total amount of the debt, and now up to 80%.
Of course, such a discount is not available to all countries. They should not only belong to the poorest countries of the planet, but also carry out positive economic transformations.
The structure of the London Club consists of commercial banks and various funds that provide credit services to various countries. The main activity of the London Club is the settlement of issues related to the recovery of troubled debt of countries to banks. Moreover, the London Club is engaged only in those debts that are not secured by guarantees of any state.
In its activities, the London Club adheres to the following principles:
- For each debtor necessarily develop an individual approach.
- Revision of the terms of repayment of the debt must be supported by evidence that the debtor is unable to fulfill its obligations.
- Losses from the restructuring of someone's debt are evenly distributed among all members of the London Club.
- The club management (chairman and secretariat) is periodically updated.
Like the Paris Club, the London set a goal to ease the debt burden of the poor countries of the planet.For the first time the London club began its activities in 1976, easing the credit burden of Zaire.
Features of the London and Paris clubs
Despite the similarity in their activities, the clubs are still very different from each other. The Paris Club, which brings together central banks and ministries of finance of developed countries, has much greater financial capabilities. For reasons of policy, the member countries of the Paris Club lend a lot 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, lend money earned in hard currency and in case of non-return, neither guarantees nor insurance will protect them.
When considering the issues of settlement of bad debts in the London Club, a committee is created, which includes representatives of banks that issued 90-95% of the total amount of all loans to the debtor. In the Paris club, the committee is represented by the heads of central banks and ministers of finance, regardless of their share in the debt in question.
Thus, the rules and principles for restructuring and writing off debts in the Paris Club are always the same for all debtors.In the London Club, the same rules and principles may vary significantly depending on the country in which the meeting takes place and 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.