Rich country’ creditors seek emerging markets lender accord

Rich country’ creditors seek emerging markets lender accord

By Hugh Carnegy in Paris

Fear of renewed debt problems in poorer nations has prompted the Paris Club of “rich” sovereign creditors to meet emerging market lenders for the first time in an effort to harmonise approaches to lending and restructuring.

The two sides met in the French capital on Wednesday under the joint auspices of the G20 group of leading economies, despite some reticence towards the club among non-members.

“The challenge is to make sure collectively that the way we provide finance to low-income countries is not going to be unsustainable in the long run,” said Ramon Fernandez, head of the French Treasury and chairman of the Paris Club.

“You can live with higher debt ratios but it has to be done in a manageable way,” he added.

Underlying the discussion, held behind closed doors, was the worry that countries that benefited from the Paris Club’s long-running debt relief programme for highly indebted poor countries (HIPC) could slide back into difficulty given a newfound access to cheap finance from sovereign and market lenders.

All but four of 39 countries to benefit from the HIPC project have completed the process with $74bn in debt forgiven to date.

Only nine of those 35 countries remain red-flagged by the Paris Club as suitable only for grant aid, not loans. Among concerns are that some emerging country lenders may indulge in excessive bilateral lending for commercial advantage.

“The former Soviet Union used to do it and paid a big price,” said Sergei Storchak, the Russian deputy finance minister who co-hosted the meeting.

He warned against “the story repeating itself”.

Speaking alongside Mr Fernandez in an interview with the Financial Times, Mr Storchak said “lots of space” had opened up for “huge amounts” of fresh lending and borrowing.

“I couldn’t imagine 10 years ago that some HIPC beneficiaries would go to the bond markets. They now issue their paper and more importantly they have the chance to borrow at reasonable prices.”

The meeting included China, India, Mexico, Turkey and Gulf Arab countries, with the 19 Paris Club members, which include the US, Japan, Australia, Russia and leading European countries.

Mr Fernandez said it was possible for all sides to agree on principles for sustainable lending and restructuring – although he said this would take time.

He added that it was possible for emerging market lenders to join the Paris Club, or take observer status, as Israel, Brazil and South Korea had done.

“The door is open but it is still probably viewed in some places as the rich countries’ club. Joining a group that has this kind of image is a political decision.”

Complicating the issue is the role of private sector creditors, as shown in the Greek debt crises and the default by Argentina.

“Now the issuing of debt is more and more spread on international markets so when a restructuring is necessary we have to find a way to gather all the creditors in a way that is going to be workable,” Mr Fernandez said.

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