For seven decades, some of the world’s biggest official creditors have coordinated their positions in negotiations with debtor countries struggling with repayment. The Paris Club has sought not only to tackle debt treatment for individual sovereigns, but also to shape the rules governing bailouts and conditionality, largely by leveraging its 22 permanent members’ influence at the International Monetary Fund. Now, the world’s debtors have created a club of their own. The question is whether its stated goals are sufficiently ambitious.

The so-called Borrowers’ Platform, which just held its first official meeting on the sidelines of the IMF-World Bank Annual Meetings, aims to facilitate knowledge-sharing and capacity-building assistance among debtor countries, while amplifying their voices in global financial circles. But, at a time when the Paris Club’s ability to act collectively is weakening, the Borrowers’ Platform must do more to fulfill the functions the creditors’ club has long undertaken.

The first of these functions—advancing coordinated debt restructurings—serves the interest of debtors and creditors alike. Free-riding can lead to inadequate resolutions for debt distress, punishing repayment obligations that do not allow debtors to recover, and even costly defaults, all of which weaken the market for sovereign loans. Recognizing this, the Paris Club ensures that loans are disclosed transparently and treated equally. If debt reduction is needed for debtors to regain solvency, all creditors receive similar treatment. If debt rescheduling was sufficient, they offer similar terms.

The Paris Club’s second function is to shape the global financial architecture that underpins the sovereign-debt market. Founded in 1956, it has played a key role in the IMF’s development, advancing the principle of conditionality, which aims to ensure that debt relief does not lead to moral hazard.

Moreover, when faced with systemic shocks, the Paris Club has championed global solutions. The 1988 “Toronto terms” debt treatment arose in response to the debt crisis in the poorest countries. The Heavily Indebted Poor Countries Initiative was launched in 1996 to help countries that could not service their debts, despite earlier relief. The 2005 Multilateral Debt Relief Initiative built on this progress.

Today, however, the Paris Club’s capabilities are being rapidly eroded, as the global lending environment grows more varied and fragmented. Chinese institutions, both public and private, have emerged as major lenders to many developing countries. Other types of private lenders have also cropped up, including Eurobond holders, banks, and domestic creditors.

When debt restructuring is needed, these lenders do not sit down at the same table. Instead, different committees carry out negotiations whose outcomes are contingent on one another reaching a similar deal. This helps explain why Ethiopia and Zambia had to wait more than three years for debt-restructuring agreements.

But the coordination issues arise sooner: lenders do not necessarily share the amounts or terms of their loans. This lack of transparency undermines the market’s functioning. Lenders fear hidden debts or debts with opaque seniority status—such as collateralized loans or total return swaps—which would dilute other creditors’ claims.

A debtors’ club cannot dictate the terms of debt restructurings, like the Cartagena Group attempted to do in the 1980s; any effort to do so would only cause lenders to price that risk into new loans. But a debtors’ club can guarantee transparency, thereby improving trust among creditors, and commit to treating all creditors in a comparable way. It can also devise methods for delivering agreements among heterogeneous creditors faster, such as menus of options or auctions that reveal preferences. If the results are seen to provide fair solutions to the collective-action problem, all creditors should welcome them.

Ensuring that the global financial architecture meets borrowers’ needs will prove more difficult. Development finance and the framework for debt restructuring are in urgent need of reform, not least to cope with the US-China rivalry and the hardball tactics of the hedge funds that increasingly dominate sovereign-debt markets. In particular, officials must find ways to build a global financial safety net that is strong enough to weather downturns, without disrupting developing economies’ market access.

Other key challenges include ensuring that IMF-World Bank conditionality leads to renewed growth, rather than austerity-induced contractions; updating debt-sustainability analyses to account for the effects of investment and climate change on growth; and convincing China and the West to cooperate within the G20’s Common Framework. Assessing the potential costs and benefits of debt-relief-focused legislation in the United States and the United Kingdom is also essential.

The Borrowers’ Platform will probably not be able to bring about deep reform right away. In addition to the Paris Club, the G20, the IMF-World Bank Development Committee, the Forum on China–Africa Cooperation summits, and plenty of other platforms also shape the global financial system. But as the Platform gains credibility, its influence will grow.

The Platform’s credibility depends on remaining owned, operated, and financed by its members, not by outside organizations. Its members must embrace full debt transparency, sharing amounts owed and under what conditions. And it must develop technical capacity rapidly by leveraging the knowledge of experienced former finance ministers, organizing peer-to-peer exchanges, and compiling existing research. The goal should be to apply lessons from the past wherever possible and to innovate when necessary.

The Borrowers’ Platform will face plenty of challenges: capture by funders, duplication of responsibilities, or fragmentation among borrowers would doom it to irrelevance. But it also has tremendous potential. A creditors’ club has run the system for 70 years, with mixed results; it is time to find out whether a debtors’ club can do better.

Project Syndicate