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Paris Club (Club de Paris)Argentina debt relief 2014

+What is the Paris Club

Established in May 1956 it is an informal group of financial officials from 20 some of the worlds biggest economies.

They provide financial services such as debt restructuring, debt relief and debt cancellation.

Their main objective is to maximize profit of the credit nations by multilateral cooperation.

Permanent member countries are among others Australia, Austria, Canada, Germany, Holland, Russia, Spain and Switzerland.

There are 20 member countries in total.

+Meetings of the Paris Club

Meetings are held once a month in Paris.

Apart from the financial officials, representatives of the IMF, OECD, World Bank and UNCTAD participate as observers.

They have discussions to evaluate external debt situations of previous or potential debtor countries.

There are 2 criteria for a country to get help from the Paris Club:

1. It has to be default or about to default on its payments

2. It must have accumulated arrears or made a convincing argument that it will default on payment of not granted a reschedule.

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Criticism expressed towards the Paris Club

It refused to adjust its methods to fit the new and different economic environment.

Unfair treatment to representatives of debtor countries.

Creditors decisions taken secretively.

+Argentina’s backgroundFactors leading to Argentina’s economic depression

Argentina’s population saw their pensions taken away, unemployment soar, inflation jump and their industries decimating.

After only 9 months (March – December), new economy minister Domingo Cavallo resigned leaving the economy in worse shape than ever.

The news that President Fernando de la Rua also resigned added to the uncertainty surrounding Argentine’s economy.

After failing to lift the country out of 4 years of recession, the new government had to abandon a 10 year old currency peg that values 1 peso to 1 dollar.

The devaluation lead to a default on Argentina’s $132bn foreign debt, which was the biggest default ever.

+Argentina’s economic depression

An economic depression which began due to the Russian and Brazilian financial crises, lasting from 1998 until 2002.

Caused widespread unemployment, riots, the fall of the government, a default on the country’s foreign debt, the rise of alternative currencies and the end of the peso’s fixed exchange rate to the US dollar.

The economy shrank by 20% from 1998 to 2002.

+Argentina’s background (after 2002)

Been in economic depression for seven years

The global financial crisis in 2008 delayed the possibility for an agreement.

After years of masking its true inflation rates – the Argentine government maintained its rate was 6% annually, whereas independent studies said it was 26% - the government finally owned up to the real numbers in February.

The Argentinean peso dropped 20% against the dollar in January 2014. It already held the dubious honour of being South America’s third most devalued currency versus the dollar in 2013, with a total 23% drop.

The country officially entered recession in March, when reports showed that GDP had contracted for the second consecutive quarter: a negative 1.5% growth rate in Q1 2014, after -0.4% in Q4 2013.

+Paris Club: Argentina Debt Treatment – 29th May 2014

Total external debt of country: The deal covers Argentine’s arrears of $9.7 billion - of which most is due to the 2001-2 crisis

Argentina owes money to 14 of the club’s 19 members. The biggest creditor is Germany (30% of the total debt), followed by Japan (25%), the Netherlands (9%), Italy (8%), and the USA (7%).

Categories of debts treated: treatment of arrears as of 30th April 2014.

Cut-off date: 10th December 1983.

Debts to be repaid: over five-years

The current government will foot the bill for the first two payments.

First instalment: at least $1.15bn due by May 2014

Next payment: $500 million before May 2015

After the next presidential election, in October 2015, the remaining $8.5 billion will be the responsibility of the new administration.

+Current situation

International analysts have called the deal a “positive step,” but much more needs to be done.

“The economy remains in a precarious position,” said David Rees, mentioning GDP negative growth, inflation and currency devaluation.

Argentina’s Finance Minister is confident Argentina will meet the five-year deadline if the Paris Club members continue participating in major investments into the country.

If such help is not provided, the deadline for the debt payment will be extended for further two years.

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Is debt relief effective in reducing disparity?

+Yes…

More stable government: less worries, more focus on increasing country development

Enables governments to increase key public spending/investment into areas such as health, education, infrastructure, and services

More equal accessibility to services in general

Less unemployment, production increases, GDP may increase

Frees up resources, therefore boosts social spending

Allows additional money to be spent on the programs benefiting the poor

Improves public debt management

+No…

It creates a false sense of economic stability

Countries become too self assured, they take other actions i.e. make large investments

Countries still spend a significant portion of their resources servicing their debt as they are now accumulating new debts

Increased risk of countries returning to unsustainable debt levels