America's current impossible-to-repay national debt
The Paris Club and the London Club
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The consequences arising from the continual accumulation of public debts in other countries ought to admonish us to be careful to prevent their growth in our own.—JOHN ADAMS, First Address to Congress, November 23, 1797
Debt is a serious threat to the national security of any country. Since the United States is the biggest debtor in the world, it is safe to assume that the accumulated debt of $17.3 trillion plus $123.3 trillion in unfunded liabilities makes it the biggest threat to our national security.
The Treasury Department just released data showing that China held U.S. Treasury debt of $1.317 trillion in November, an increase from $12.2 billion. Japan held $1.186 trillion worth of U.S. debt.
When the debt grows so much that it is impossible to pay it back, who can possibly provide debt relief for us? Can our debt be forgiven? Can a country refuse to pay its debt to creditor countries? Is that a good idea? Should we continue to amass such a huge amount of debt through out-of-control spending? I have discussed in a 2012 article what can happen if a country refuses to pay its debt.
Developing countries have venues to either reduce or renegotiate debt via a Paris Club “treatment.” The Paris Club is a “voluntary, informal group of creditor nations who meet approximately 10 times per year, to provide debt relief to developing countries.” The reduction or renegotiation is done on a “case-by-case basis.”
The Paris Club members are: United States, Austria, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, Norway, Russia, Spain, Sweden, Switzerland, and the United Kingdom. Other creditors may participate on an ad-hoc request.
The London Club, with no permanent membership, is a parallel group of private firms who meet in London “to renegotiate commercial bank debt.”
The Federal Credit Reform Act of 1990 mandates that Congress must be involved in any official foreign country debt relief and must be informed of any debt renegotiation or reduction. Because the United States is a Paris Club member, Congress must participate in the Paris Club operations and in the U.S. policy of debt relief. (Martin A. Weiss, The Paris Club and International Debt Relief, December 11, 2013, CRS RS21482)
The Paris Club, with its rules and principles of debt relief, is run by a secretariat at the French Treasury; a chairman is selected from senior officials at the said Treasury. The current chairman is Jean-Pierre Jouyet, Under-Secretary of the French Treasury. When meetings take place, the participants include representatives from debtor and creditor nations, from international financial institutions, and from regional development banks.
Since 1983, the total rescheduled or reduced debt has been approximately $573 billion, involving 429 agreements with 90 debtor countries. This seems like a drop in the bucket when compared to our huge U.S. debt. But then we are the most productive developed nation with the largest economy on the planet - for now. We are told by economists and politicians alike that we cannot compare apples with oranges. We are such a big, prosperous nation that we can afford a lot of debt. Can we?
Since many low-income countries in South Asia and sub-Saharan Africa have had their debt reduced either bilaterally or multilaterally since 1956, concerns were raised in Congress about the possibility of these countries sliding back into indebtedness due to cheap loans. Congress should be more concerned about our rapid escalation of national debt.
The Paris Club principles of debt reduction/renegotiation include:
- Case-by-case negotiations
- Decisions are made by full consensus of creditor nations
- Debt renegotiations are for countries that need debt relief as “evidenced by IMF economic policy conditionality”
- Solidarity of all creditors implementing the terms agreed upon
- Comparability of treatment – a creditor country cannot give a debtor country a more favorable treatment than the consensus reached by the Paris Club members
Because the Paris Club is not a formal institution, the signed renegotiations or reductions of debt owed to the United States called “Agreed Minute” must be approved by Congress.
The four types of Paris Club “treatments” are:
- Classic Terms – “the standard terms available to any country eligible for Paris Club relief” - debt rescheduling at market rate
- Houston Terms – “for highly-indebted lower to middle-income countries” - debt rescheduling with longer grace and repayment period
- Naples Terms – “for highly-indebted poor countries” - debt reduction either by 23-year repayment with six-year grace period or 33 year repayment with reduced interest
- Cologne Terms – “for countries eligible for the IMF and World Bank’s Highly Indebted Poor Countries Initiative (HIPC)” - debt reduction with 90 percent eligible debt cancelled
According to Martin A. Weiss, under Cologne terms of HIPC, “The United States and several other countries routinely provide 100% bilateral debt cancellations.” (Congressional Research Service, RS21482, p. 4)
In 1993, Congress granted United States authority (Foreign Operations Appropriations, par. 570, P.L. 103-87) to participate in the Paris Club debt forgiveness. Thus any Administration can cancel loans made through the U.S. Agency for International Development (USAID), military aid loans, Export-Import Bank loans and guarantees, and agricultural credits guaranteed by the Commodity Credit Corporation.
The Government Accountability Office (GAO) raised concerns about the official process for estimating cost of foreign loans (bilateral debt) to the United States.
When the national debt surpasses the size of our economy and it has, it is time to worry about the global run on the dollar. As former President Ronald Reagan said, “We don’t have a trillion-dollar debt because we haven’t taxed enough. We have a trillion-dollar debt because we spend too much.” We are now at trillions and trillions. Congress should have heeded John Adams’ sound advice from 1797. The developing countries’ debts, forgiven or renegotiated via the Paris Club, pale by comparison with our current impossible-to-repay national debt.