The Paris Club History

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Table of Contents

Introduction
A Prelude to the Paris Club
The Problem with Gunboat Diplomacy
International Law and International Commerce
Conclusion
References

Introduction

An extraordinary event occurred in the year 1956. It was the birth year of the Paris Club. Representatives of various foreign governments and financial institutions met in the French capital in order to find a mutually beneficial solution to Argentina’s debt problems. Even without a legal framework to stand on, the said representatives pledged and subsequently demonstrated a high level of cooperation for the purpose of helping the Argentinian government settle its obligations. There are two major implications of the emergence of the Paris Club. With regards to international law and international commerce, the Paris Club symbolizes the need for greater cooperation in order to avert a global financial crisis.

A Prelude to the Paris Club

The average employee or business person is well aware of the nature of loans or debts. Most people are aware of the punitive nature of debt collections. Many are aware of the heartbreaking and mentally depressing stories of foreclosures or loan defaults. A car that is needed for work gets repossessed even after paying significant sums of money to cover the amortization requirements. Entrepreneurs lose office buildings, manufacturing facilities and different forms of properties because of the immediate demand triggered by a bank garnishment protocol.

It is not hard to understand the punitive nature of debt collections. It only requires a simple insight into the nature of human beings. Regardless of color, race, or creed, people are prone to borrowing significant funds in order to acquire goods they cannot afford to keep. It is part of human nature to overestimate capabilities and underestimate risks. After breaching credit limits, overdrawing accounts, and after it is no longer possible to support a certain lifestyle based on current income levels, debtors find it easier to default on their loans instead of doing everything possible to honor their obligations.

Due to the terrible business of going after errant debtors, creditors are compelled to develop unpleasant tactics in order to force them to settle their respective accounts. In the context of international finance, coercive tactics are far more unpleasant than foreclosures. In the history of international finance, creditors were made infamous by their propensity to use violent force for the purpose of collecting debts (Bonilla 2011). Wars erupt between states even if nation states borrowed money from private financial institutions. In the year 1898, Great Britain, Italy, and Germany demonstrated how private lenders have the capability to enlist the military power of their respective governments on account of bad loans (Kolb 2011). The Venezuelan government borrowed money from British, German, and Italian private lenders only to renege on the said loans at the first sign of economic trouble. As a result, warships representing the three aforementioned countries blockaded Venezuelan ports and initiated a bombardment of coastal fortifications (Kolb 2011). After this incident, historians coined the term “gunboat diplomacy” as a generic term describing some of the coercive tactics employed by nation states as a last resort against sovereign borrowers planning to renege on their loans (Roselli 2014).

More often than not, sovereign borrowers need not require the threat of violent countermeasures in order for them to pay up their creditors. The mere idea of confronting the consequences of the application of a gunboat policy or further economic sanctions is more than enough for borrowers to capitulate to the demands of lending institutions. For example, Egypt sold the Suez Canal to the British government as a means to honor the country’s financial obligations. Egypt went on a financial free fall after this incident. Thus, in the year 1882 representatives of Great Britain took control of Egypt’s financial resources as a means to secure the repayment of foreign debts (Kolb 2011).

The Problem with Gunboat Diplomacy

Images of warships with World War II cannons trained at coastal fortifications probably crossed the mind of Argentina’s finance minister when he considered his country’s dire financial predicament in the year 1956. After Argentina declared its insolvency one would have expected the same type of reaction displayed in the case of Venezuela and Egypt. On the contrary, not a single warship was tasked to blockade Argentinian ports. Government representatives did not apply excessive economic pressure in order to squeeze money from empty national coffers. In an unexpected turn of events, the Paris Club came into existence. Representatives of European countries met in Paris in order to restore mutually beneficial debt repayment schemes in favor of Argentina (Herman & Ocampo 2010). Subsequent meetings between the said representatives were held in Geneva or The Hague. Nonetheless, the original name given to the participants became an important identifier to the new type of debt repayment schemes that emerged in the aftermath of the Paris Club incident.

Fast forward to the year 2005, the Paris Club creditors decided to implement a 90 percent debt reduction of the present value of Burundi’s external debt (The World Bank 2006). In the same year, the Paris Club cancelled more than $200 million from Honduras’ debt burden. Without a doubt, the cancellation of debts and the restructuring of debt payments in favor of delinquent borrowers contrasted significantly with the violent tactics mentioned earlier.

International Law and International Commerce

In the case of Argentina, Burundi, and Honduras, the Paris Club creditors were able to move with swift efficiency and high level of coordination. Even without a legal framework to stand on, the capability to resolve complicated financial issues in the most expedient manner requires a new way of appreciating international law and international commerce. Thus, it is important to point out the obvious transformation in the way sovereign countries dealt with financial problems at the end of the Second World War. First, there exists a greater propensity to embrace international cooperation. Thus, it is prudent to perceive the effectiveness of international law on the basis of greater cooperation between participating nations. Second, it is hard to ignore the fact that the participants were not only mindful of selfish interests, but there is now a greater need to figure out mutually beneficial solutions to serious financial problems involving sovereign states. It is a new way to appreciate the interconnectedness of sovereign states in the context of international commerce. Paris Club creditors understood the negative implications of allowing a country to default on its loans.

It is important to look into the decision to abandon gunboat diplomacy in dealing with loan defaults linked to the Paris Club creditors, because the insights gleaned from the said exercise enhances how people come to understand law enforcement in the context of international law. Historical events that transpired before 1956 painted a picture describing the imprudence of using violence and other coercive methods in forcing borrowers to honor financial agreements. For example, delinquent borrowers will find it more difficult to repay their debts if the financial mechanisms required to produce wealth were destroyed in the application of gunboat diplomacy.

The same thing can be said of onerous repayment schemes that cripple the economy in the long run. However, the ultimate case study on the prudence of abandoning burdensome and impractical repayment strategies was the experience of Germany after the First World War. Germany’s debt burden was a crushing blow to the national economy (Casey 2001). France, Great Britain, and the United States failed to intervene (Roselli 2014). The world’s economic leaders clung to antiquated idea of forcing borrowers to adhere to a rigid repayment schedule. At the end, Germany was forced into a corner, and the refusal to help a desperate borrower created ripple effects that were felt all over the world.

Conclusion

Debt repayment restructuring and other types of financial agreements that came about under the auspices of Paris Club creditors require a reinterpretation of international law and international commerce. It is high time to acknowledge the effectiveness and efficiency of international law enforcement and the stability of international commerce on the basis of cooperation and mutually beneficial decisions. Historical precedents illustrated the imprudence of using gunboat diplomacy and other coercive tactics to compel delinquent borrowers to honor financial obligations. Failed economies and the declaration of wars were often the result of inducing debtors to submit to a rigid repayment scheme. Paris Club creditors paved the way for a new way of understanding the interconnectedness of financial institutions. In the absence of cooperation and mutually beneficial decision-making processes, leaders inadvertently pave the way for the repeat of World War II and global economic recessions.

References

Bonilla, S, 2011, Odious debt: law and economics perspectives, Springer, New York, NY.

Casey, S 2001, Cautious crusade: Franklin D. Roosevelt, American public opinion and the war against Nazi Germany, Oxford University Press, New York, NY.

Herman, B & Ocampo, JA 2010, Overcoming developing country debt crises, Oxford University Press, New York, NY.

Kolb, R 2011, Sovereign debt: from safety to default, John Wiley & Sons, New Jersey, NJ.

Roselli, A, 2014, Money and trade war in interwar Europe, Palgrave Macmillan, New York, NY.

The World Bank, 2006 Global development finance 2006, The International Bank for Reconstruction and Development, Washington, D.C.

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