Global Policy Forum

Paris Club Remains Divided


By Elizabeth Price

Wall Street Journal
October 2, 2004

A weekend gathering of international finance ministers failed to bring them closer to an agreement on forgiveness of Iraqi debt. Last year, the Paris Club of sovereign creditors set a goal of deciding how much of Iraq 's debt to write-off by the end of 2004. But with just three months left in the year, the major players - the U.S., France, Germany and Russia - seem further apart than ever. "I sense broad agreement on the larger proposition of the need to resolve the Iraqi debt issue," U.S. Treasury Secretary John Snow told reporters Friday following a meeting of finance ministers from the Group of Seven leading industrial nations. "The International Monetary Fund analysis shows substantial debt reduction is required."

But earlier that same day, Russian Finance Minister Alexei Kudrin praised a French proposal for Paris Club members to write off just half of the $42 billion Iraq owes them, and then revisit the issue again in three years. Under the proposal, Iraq wouldn't be required to service its Paris Club debt during the three years until a final decision is made. "As minister of finance, I can tell you that I like this initiative," Kudrin told reporters on the sidelines of meetings by the G7.

The U.S. declared the end of major combat in May 2003, but widespread terror attacks has made security elusive and hindered Iraq 's reconstruction. The World Bank pulled its staff out of Baghdad, after an explosion at U.N. headquarters killed one of its employees. In particular, attacks on oil infrastructure have prevented Iraq from scaling up oil exports, a key source of revenues for the government. "When the conflict is not yet over, it is very difficult to assess" Iraq 's repayment ability, Kudrin said.

France, Germany and Russia opposed the U.S.-led war with Iraq , and are owed larger sums than the U.S. They argue that Iraq , with its large oil reserves, shouldn't receive more generous debt forgiveness than the world's poorest countries. The U.S. counters that much of this debt hasn't been serviced since at least a decade before Saddam Hussein was removed from power.

Last week, the IMF approved a $436 million one-year credit agreement with Iraq under its program for countries recovering from war. An IMF requirement was a Paris Club assurance it wouldn't demand debt repayments from Iraq through the end of 2005. The Iraqi government has said it wants to negotiate a regular, three-year IMF credit program, something that generally requires a debt rescheduling agreement for countries heavily indebted to the Paris Club.

IMF officials have been careful to avoid public recommendations of how much debt forgiveness Iraq needs to reach a sustainable financial position. Fund economists have prepared a debt analysis, which hasn't been published, outlining projections for growth and other economic indicators under given amounts of debt relief . The IMF estimates Iraq owes a total of about $120 billion, to lenders around the world.

U.S. officials have said the IMF's analysis backs their view that creditors must write off between 90% to 95% of the debt. With Iraq 's economy estimated worth just $20 billion-$30 billion, its total debt burden amounts to a staggering 600% of gross domestic product. A senior U.S. Treasury official who spoke on condition of anonymity bristled when asked what he thought of the French proposal. "There is no negotiation taking place about any numbers like that," the official said. "Anything like 50% is completely unworkable and financially irresponsible."

Despite the tension, officials expressed confidence the Paris Club would meet its goal of a deal this year. "There will be substantial relief, but how much is unclear," German Finance Minister Hans Eichel said ahead of a meeting with Snow on Saturday. "That will be decided by year's end." Snow too said he was confident the conflict would be resolved. "There will be ample opportunities to address this later," Snow said.

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