The clubs of London & Paris

Mashaalah Rahnama-Moghadam is associate professor of economics at the Department of Economics dr Geography, Texas Tech University in Lubbock , Texas . David A. Dilts is professor of economics and labor relations at Indiana University in Fort Wayne , Indiana . He is an arbitrator and a member of the National Academy of Arbitrators. Hedayeh Samavati is associate professor of economics at Indiana University in Fort Wayne .

The expansion of free trade and economic growth in the Less Developed Countries (LDCs) is radically altering the political economy of the world.

Among the changes witnessed over the past decade has been the significant transition in conciliation of international commercial disputes. Joint conciliation and dispute review boards are beginning to come into use to resolve disputes that once were the purview of less peaceful means of resolving disputes or of arbitration or mediation.' The lack of effective enforcement mechanisms for peaceful international dispute resolution has been a serious constraint in disputes between countries, and people or firms from different countries.

The purpose of this article is to examine the dispute resolution procedures that have well served the parties in international financial disputes for almost four decades. The Club of Paris and the Club of London are the forums devised by the parties to resolve disputes between creditor and debtor countries (Club of Paris) and between commercial banks in creditor and debtor countries (Club of London). They are case studies in effective dispute resolution and a specialized form of mediation. The success of the clubs provides some useful insights into the motivations for peaceful settlement of international disputes and the nature of the enforcement difficulties frequently faced in this arena.

The international financial markets are where capital is transferred from one country to another. Both sovereign governments and private firms obtain capital through these markets. In general, the developed countries are the creditors because they have sufficient domestic capital to supply both their own private and public sectors and have sufficient excess capital to permit them to loan capital to other nations. Developing countries, on the other hand, generally have shortages of resources, especially capital. The governments and private sectors of LDCs must rely on the available capital surpluses of the industrialized nations for loans through the international financial markets to fund government projects and economic developments.2

In the period of time since the United States abandoned the gold standard, LDCs have experienced increasing difficulty in repaying loans. By the beginning of the 1980s this increased difficulty has become known as the World Debt Crisis,3 which has created substantial economic conflict between the debtor and creditor countries (including the commercial banks).4 The inability of LDCs to fulfill their debt obligations resulted in threatened defaults, demands for rescheduling, and for debt forgiveness.

As overwhelming as the magnitude of the World Debt Crisis may seem, and its potential for serious international conflict, the settlement of claims and disputes was accomplished in an efficient and peaceful manner. Therefore, the institutions and procedures used to resolve controversies during the World Debt Crisis provide a functional model for the resolution of many classes of international disputes.

The model is one of partisan mediation. Partisan mediation, in the case of debt disputes, means that there were negotiations between the creditors and debtors concerning rescheduling of existing loans. Also, one of the parties provided for the good offices of a mediator, without pretense or compulsion to neutrality. In general, third-party mediation is the model with which most ADR practitioners are familiar. The third-party model is functional because of the varied roles that may be needed during mediator-assisted negotiations. In the class of disputes examined in this article, there is a single purpose for mediation and that is to provide accurate technical information to correct miscalculations or potential errors of both parties.5

The Clubs of London and Paris

The institutions in which international debt controversies are resolved are the Club of London and the Club of Paris. The names of these institutions may be somewhat misleading, because these are not places where social activities occur. The two clubs are voluntary associations of creditors. Since their inception, these institutions have successfully resolved each of the disputes brought under their jurisdiction. In virtually every case, the debtor nation has either repaid its loans or is currently fulfilling its debt obligations in a timely fashion.

The Clubs of London and Paris are NOT neutral agencies in which advocacy proceedings bring a common ground to light or issue an impartial decision. The Clubs of London and Paris serve as the agencies of the creditors to the mutual benefit of both of the parties to the controversy. The creditors comprise the membership of both organizations. Due process, impartiality, and the burden of proof are alien concepts to these institutions. International organizations, such as the World Bank and International Monetary Fund, are frequently sought out for advice concerning the economic evidence upon which settlements are founded, but even in these activities there is no pretense that these institutions are neutral agencies. In fact, these institutions are founded on the premise that if an impasse over debt obligations is reached, it is in the best interests of both parties that one party take the initiative to resolve the controversy before both are forced into a situation where both are net losers.

The Club of Paris was created in 1956 for the purpose of settling controversies concerning debts that were guaranteed or owed by LDC governments to creditor governments. Its membership includes most of the world's larger industrialized nations, which are the suppliers of capital in the international financial markets. The inception of the Club of Paris arose out of Argentina 's threatened default in 1956. Argentina 's creditors met in Paris to discuss the ramifications for their commercial banks and the world financial markets, should Argentina actually default. The creditor nations agreed that it was in their best interest to renegotiate the loan contracts with Argentina . In exchange for interest rate concessions and extended repayment schedules, Argentina had to agree to make political and economic changes that would reduce the risk of default in the future. Argentina agreed and received concessions in return that permitted it to be able to fulfill its obligations.6

In 1979, the French Treasury provided the Club of Paris with a permanent secretariat and chairperson to establish a permanent business address, but with no addition to procedures or formality over what existed in its initial meeting.7 In general, negotiations concerning sovereign debt in the Club of Paris are handled very quickly, usually within one day.

The Club of London is also an informal organization similar to the Club of Paris, but the Club of London is concerned with international indebtedness of sovereign countries to private commercial banks. Furthermore, the Club of London is even more informal than the Club of Paris in that it has no permanent chair or secretariat. The methods and procedures used by the Club of London are somewhat more structured than the totally unstructured negotiation observed in the Club of Paris. The procedures used by the Club of London are:8

To negotiate a debt restructuring, the creditor banks form a Bank Advisory Committee (BAC) - a dozen or so people representing the major creditor banks and normally chaired by the biggest creditor [sic]. Account must be taken of the nationality of the banks in the consortium so that the negotiations can allow for domestic tax and regulatory regimes and how they affect different banks. Each negotiation is separate from the previous one but some continuity (and precedent) is assured by the presence on most steering committees of the world's largest banks. The BAC negotiates an agreement in principle with the debtor country. When all creditor banks have approved, it is signed by each in turn. It can take a month, however, to reach the final signature.

There is nothing in either of the Clubs that approaches the creeping legalism of labor arbitration or even the structure of family mediation. Both processes are totally voluntary. The precedents found in the Club of London have developed because of the need for consistency (hence some predictability) in sovereign debtors dealing with private creditors. The Club of Paris serves only sovereign nations and its procedures must be sufficiently flexible to accommodate the diplomatic and political needs of the parties.