Iraq's Odious Debts

G-7 agrees that Iraq needs help with debt – Important roles seen for IMF, World Bank

Paul Blustein
The Washington Post, USA
April 13, 2003

The world’s seven major industrial nations agreed yesterday on the need for a “multilateral effort to help Iraq,” including international negotiations concerning Baghdad’s debt burden and reconstruction loans from institutions such as the World Bank.

“We began substantive discussions about how our nations and the international institutions can work together to help the Iraqi people recover, not just from 25 days of conflict, but from 25 years of misrule,” Treasury Secretary John W. Snow said after a meeting in Washington of the Group of Seven’s top economic policymakers.

But on the issue of giving Iraq debt relief, participants offered somewhat disparate interpretations of what they had agreed to, underscoring how the U.S. rift with France, Germany and other countries with strong antiwar sentiments is plaguing the Iraqi reconstruction effort. Estimates of reconstruction costs vary widely; most are in the tens of billions of dollars annually, though most of that would be peacekeeping expenses.

There was broad agreement at the G-7 meeting, and a later meeting of a larger group of countries at the International Monetary Fund, that the IMF and World Bank should play important roles in aiding a new Iraqi government. The countries also agreed that the U.N. Security Council must approve a new resolution to replace ones that impose strict sanctions on economic transactions with Iraq, although they left undecided what such a resolution would say. The Bush administration is balking at mandates that would give the United Nations as big a part in running postwar Iraq as many European nations want.

Snow said the G-7 also backed the U.S. position on sending World Bank and IMF teams to Iraq to begin looking at aid requirements. He said he no longer expected resistance on that issue from World Bank President James D. Wolfensohn. The two men tangled last week when Wolfensohn said that despite his eagerness to help Iraq, he couldn’t send a fact-finding mission there, much less offer loans, because U.N. resolutions ban World Bank activity in the country.

A World Bank spokesman confirmed late yesterday that Wolfensohn believes he now has the backing he needs from the bank’s 184 shareholder nations to send a mission as soon as it is safe to do so. He still intends to consult the bank’s board on the matter, the spokesman said.

Regarding the debt, Snow said the G-7 recognized that “the Iraqi people cannot bear the burden of current debt levels.” The need for debt forgiveness has become an increasingly urgent refrain of the Bush administration. Deputy Defense Secretary Paul D. Wolfowitz said last week that the best way France, Germany and Russia could help Iraq is to write off the money they “lent to the dictator to buy weapons and to build palaces.”

European irritation with U.S. pressure was evident yesterday, even though officials acknowledged that, as stated in the G-7 communique, the debt issue would need to be addressed at the Paris Club, an organization of creditor nations that negotiates debt deals with financially strapped governments.

“Any speculation about debt forgiveness is very, very premature, to put it in cautious terms,” Hans Eichel, the German finance minister, said at a news conference. Eichel, whose nation is owed about $4 billion, also noted that the Paris Club handles mostly restructuring of debt rather than outright forgiveness.

At another news conference, French Finance Minister Francis Mer said: “Certainly Iraq needs our attention, but so does Niger. Let’s not forget that there are a lot of other countries.” For Iraq, “one does not clear the slate,” Mer said, although the debt “can be progressively renegotiated.”

France is owed $1.7 billion to $1.8 billion in principal, with more due in accrued interest, Mer said. Iraq has failed to service its foreign debts for years, and the precise amount owed to each creditor, including the United States, is the subject of much guesswork.

The G-7 also issued an updated “action plan” on handling financial crises, which made it clear that a proposal to establish an international “bankruptcy” procedure for countries has been shelved. The proposal, put forward by IMF Deputy Managing Director Anne O. Krueger in November 2001, was backed by a solid majority of the IMF’s member countries, according to fund officials, but it was opposed by the United States, the institution’s dominant shareholder, and a number of emerging-market nations.

The group endorsed an alternative voluntary plan for emerging markets to issue bonds with clauses that make debt restructurings easier to negotiate.

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