China, the Paris Club and Sovereign Debt Restructuring
There are three core solutions which can be used to address sovereign debt. The first are Collective Action Clauses (CAC’s). The second is the Sovereign Debt Restructuring Mechanism (SDRM) of the International Monetary Fund (IMF). The third consists of agreements and processes as negotiated within the Paris Club.
Over the last 4 years we have covered both CAC’s and the SDRM, but have only touched on the Paris Club in a few articles. The Club is comprised of the world’s creditor nations. These “creditor” nations are China, Malaysia, Russia, Japan, Germany, South Korea, Taiwan, Netherlands, Belgium, Israel, Switzerland, Hong Kong, Denmark, Norway, Singapore, Australia, France, Italy, Spain, Sweden, and Luxembourg.
While China, Japan, and Germany are the top creditor nations, the list of Paris Club members does not fully align with the monetary realities. America is included as an influential member of the Paris Club. The United States is of course a debtor nation and shouldn’t be a part of the Paris Club based on the membership criteria, but holding the international reserve currency provides a big stick.
Additionally, the other factor which is important to understand is that China, the largest of the creditor nations, is not a member of the Paris Club. It has been kept out for numerous reasons, but none as prominent as the fact that it holds the largest amount of US debt outside of the Federal Reserve.
When we consider that the purpose of the Paris Club is to provide a platform for creditor nations to discuss the debt of debtor nations, and possible debt restructuring solutions, the reason for China’s exclusion becomes more understandable.
Discussions have been taking place to bring China into the Paris Club but it hasn’t happened yet. The relationship is getting closer as the other creditor nations realize that no substantial and sustainable debt restructuring can take place without China playing a role.
There are at times ad hoc participants who are invited into select meetings and discussions. These would include the People’s Bank of China, Turkey, and Middle Eastern representatives from Kuwait and Abu Dhabi.
Then there are the observer attendees who can watch the negotiations but not directly participate. These are global institutions such as the IMF, World Bank, Organization for Economic Co-Operation and Development, United Nations Conference on Trade and Development, European Commission, African Development Bank, Asian Development Bank, European Bank for Reconstruction and Development, and the Inter-American Development Bank.
Absent form this list of course are the BRICS Development Bank and the Contingent Reserve Arrangement. It can be assumed that as China gains membership into the Paris Club these institutions will be invited along as observers.
Russia is a member and has strong alliances with China. The development of the Eurasian Economic Zone will strengthen trade and monetary agreements between both those nations, but will also draw other Paris Club (creditor nations) into expanded alliances with both Russia and China.
Such a situation would see the composition of the Paris Club shift and the largest of the creditor nations would begin to align against the interests of the United States, and in turn Great Britain. Considering that America is the largest of the debtor nations, but carries the biggest stick in the Paris Club, it is highly probable that the Anglo-American interests are attempting to prevent this shift from happening.
The complexity of the multilateral monetary transition comes into clearer focus when we factor in information such as discussed in this post. The Anglo-American interests are attempting to strengthen their negotiating position through geopolitical maneuvering, international monetary and legal agreements, as well as cornering and segmenting off resource regions, trade routes, shipping lanes, and capital flows, before allowing any fundamental transformation of the US dollar.
It’s all about negotiating from a position of strength and not weakness.
The list of nations in the Paris Club includes a high percentage of those who are experiencing massive migration from the third world and the subsequent social instability which follows. Terrorism and other methods of fragmentation are being used to influence and forever change the demographic of these nations.
The objective of such a strategy is broad and would include multiple outcomes and end results. The migration which is taking place is predominantly of Sunni Muslims. As we are discussing in other articles, Sunni Islam has been at odds with Russia and Shiite Iranian/Persian culture for a long time. The Sunni terrorism which is happening around the world is reshaping the geopolitical landscape to make alliances between these nations much more difficult.
When sovereign debt restructuring begins it will most likely be through a combination of the SDRM, CAC’s, and the Paris Club. Already the IMF has strong relations with the Paris Club and the multilateral world is shifting regardless of the delays and tactics of the Anglo-American interests. These are fascinating times to research and analyze for sure. – JC
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JC Collins can be contacted at email@example.com