Paris Club Must Regain Influence Amid COVID-19, Bloomberg Reports

[Asia Economy Reporter Byunghee Park] The Paris Club is a group of creditor countries, mainly composed of Western developed nations. Its purpose is to assist developing countries facing economic difficulties. Established in 1956, it began to significantly increase its influence from the 1980s, and before the 2008 global financial crisis, the amount of funds it lent to developing countries was greater than that of the World Bank (WB) or the International Monetary Fund (IMF).

According to an analysis by the Kiel Institute for the World Economy, a German think tank, the Paris Club had lent $226.8 billion to developing countries as of 2008. This was roughly equivalent to the combined developing country debt holdings of the WB’s $194.4 billion and the IMF’s $48.6 billion. At that time, China’s developing country debt portfolio was $49.7 billion, similar to that of the IMF.

However, since then, China has significantly increased its lending to developing countries. As of 2017, the amount China lent to developing countries reached $355.9 billion. Although the WB and IMF also increased their debt portfolios to $301.8 billion and $113.6 billion respectively, they still pale in comparison to China. The Paris Club’s lending volume decreased to $200.8 billion, down from 2007. As China greatly expanded its support for developing countries, the influence of the Paris Club diminished.

[Image source= Bloomberg]

Bloomberg recently argued that the Paris Club needs to regain the influence it lost due to COVID-19. This is because there are concerns that the funds China lent to developing countries could cause significant problems in the future.

David Malpass, President of the WB, has criticized China’s Belt and Road Initiative even before taking office, stating that it saddles developing countries with massive debt. He pointed out that developing countries’ debts have increased significantly due to the Belt and Road projects with China, and that they could face successive economic crises in the future. These concerns have grown even stronger with the spread of COVID-19. There are also projections that the actual debt developing countries owe to China may be larger than estimated. This is because China demands more stringent secrecy than the IMF, WB, or Paris Club when promoting the Belt and Road Initiative with developing countries.

Before the formation of the Paris Club, unresolved debt relations between countries sometimes led to wars. In 1861, France invaded Mexico for failing to repay debts. In 1912, the U.S. Marine Corps invaded Nicaragua for the same reason. The United States occupied Nicaragua for over 20 years.

The Paris Club was established in 1956 to prevent such debt disputes between countries from being resolved through violence. During the first 20 years after its establishment, it lent funds only about once a year. However, its influence grew in the 1980s as Latin American countries faced successive economic crises. In 1989, it concluded 24 loan agreements in a single year. The Paris Club earned a reputation as a tough negotiator. Rather than forgiving debts when debtor countries were in difficult situations, it preferred to extend payment deadlines to recover all the money lent.

[Image source= Bloomberg]

Peter Doyle, a former IMF economist, pointed out, "If the Paris Club tries to squeeze debtor countries again as it did in the past, it will lose influence for decades even after the pandemic." He emphasized that the Paris Club should regain trust by helping developing countries escape economic crises rather than focusing on debt repayment. Doyle left the IMF in 2012, expressing dissatisfaction with the IMF’s role after the global financial crisis.

The Paris Club currently has 22 member countries. Although it was originally formed mainly by Western developed countries, it has recently expanded its membership by admitting South Korea and Brazil as the 21st and 22nd members in 2016.

This content was produced with the assistance of AI translation services.