Iraq's Odious Debts

Iraq’s [US]$326 billion debt, war claims may complicate rebuilding

Bill Varner
Bloomberg
May 8, 2003

United Nations — The Bush administration’s plan to rebuild Iraq, including a request that more than a dozen creditor countries forgive [US]$127 billion of Iraqi debt, is getting little support from France, Germany and Russia, who opposed the U.S.-led invasion that toppled Saddam Hussein’s regime last month.

Negotiations — covering sovereign debt owed to such nations as Russia, Poland, Egypt and Germany as well as claims from Iraq’s 1990 invasion of Kuwait — may hinder Iraq’s reconstruction, according to Robert Hormats, a managing director of Goldman Sachs Group Inc. and a former deputy assistant secretary of state in the Reagan administration.

“This will be the biggest renegotiation of financial obligations in history and probably the most rancorous,” said Hormats, who also was an economic adviser in the administrations of Gerald Ford and Jimmy Carter. “The countries that are in control have very little of the debt, so they will pressure others to give, and those nations will demand concessions.”

U.S. Treasury Secretary John Snow asked for debt reduction in meetings of the Group of Seven industrialized nations last month in Washington. While some creditors are willing to discuss debt in global forums such as the Paris Club, they haven’t publicly made specific counterproposals.

Agreement to cut Iraq’s debt is critical because a resumption of Iraq’s oil sales at prewar levels of 2.4 million barrels a day won’t be enough to finance a reconstruction that may cost as much as $100 billion, according to Hormats.

“Not even close,” Hormats said in an interview.

Debt to Saudis

Iraq owes [US]$1.8 billion to France, [US]$4.3 billion to Germany and $9 billion to Russia, according to Exotix Ltd., a London-based brokerage for emerging-country debt. These nations provided loans and credit to help Iraq develop its oil fields and wage war against Iran.

Saudi Arabia is owed [US]$25 billion, according to Exotix, mostly incurred when the Saudis helped Iraq finance its eight-year war with Iran.

In the marketplace for defaulted sovereign debt, money managers are showing signs of confidence that Iraq will pay some of its bills. In September, the $11 billion of Iraqi debt that’s on the market was trading at 8 cents on the dollar. That has risen to as much as 25 cents in recent weeks, said Richard Segal, Exotix’s research director.

UN Role

The debt issue already is complicating U.S. efforts to set terms in the UN Security Council for postwar reconstruction and administration of Iraq. The U.S. favors a supporting role for the UN. France and Russia, which hold veto power, will only back measures giving the UN a central role in postwar Iraq, according to their ambassadors.

“They may be put out of joint if they aren’t getting reconstruction contracts or access to the oil fields,” investor Michael Lambert said of France and Russia. His Bermuda-based Emergent Alternative Fund has bought rights to [US]$6 million of defaulted loans to Iraq. Paris-based Total SA, Europe’s third- largest oil company, and OAO Lukoil, Russia’s biggest oil producer, had agreements with the government of Saddam Hussein for oil work once UN economic sanctions were lifted.

Conflicting and overlapping claims, coupled with the theft or destruction of Iraqi central bank records, may make it impossible to determine precisely how much Iraq owes, according to Segal. Iraqi officials had said some funds from neighbors were grants, while the nations involved say they were loans. There are also disputes about how much accrued interest should be included.

John Taylor, the U.S. Treasury undersecretary for international affairs, told a conference in Washington last week that Iraq won’t be able to start repaying debt until at least the end of 2004.

War Claims

In January, the Center for Strategic and International Studies, a Washington policy institute, said estimates of Iraq’s foreign debt ranged from a U.S. Department of Energy figure of [US]$62.2 billion to a World Bank estimate of [US]$127.7 billion. The latest Central Intelligence Agency estimate is [US]$120 billion.

The strategy center estimated unpaid Gulf War claims at $199 billion and put the sum of debt and war claims at [US]$326 billion. Of the unresolved claims from its 1990 invasion of Kuwait, Iraq may end up owing only about $40 billion, according to the UN Compensation Commission, the agency processing payments. Typically, final compensation is far less than original demands.

Germany’s minister for economic cooperation and development, Heidemarie Wieczorek-Zeul, said at a UN meeting April 14 in New York that debt relief isn’t realistic now.

“Debt relief is given to countries that show good governance,” Wieczorek-Zeul said. “This is not the case with Iraq. So for me, the discussion at this time is irrelevant.”

Paris Club

Russia is maintaining its claim to Soviet-era debts, though President Vladimir Putin has said he favors debt-relief talks within the Paris Club, an informal organization of creditor nations, according to the Interfax news service.

Kuwait, Iraq’s single largest creditor, with about [US]$80 billion in unsettled war-related claims and another [US]$17 billion in loans, sees the potential for relief through changes in the UN claims-compensation system.

Mohammad Abulhasan, Kuwait’s UN ambassador, said in an interview that while his government wouldn’t forgive the debt, it might discuss reducing the 25 percent of Iraq’s oil revenue that goes automatically to the UN Compensation Commission.

Such a reduction, which the U.S. favors, would trim the pool of money available to Kuwaiti claimants, including the government, businesses, families and individuals.

‘Intense’ Talks

“Kuwait could do that,” Abulhassan said, without citing a specific figure.

The U.S. wants to cut the rate to a range of 10 percent to 15 percent, and “intense” talks are under way, said Joseph Sills, a New York-based spokesman for the compensation agency.

A commission official in Geneva, speaking on the condition that he not be named, said discussions are under way among the 15 members of the UN Security Council and that it would likely decide on the issue by early June. The Security Council governs the compensation commission.

Settlement with creditors besides Kuwait isn’t out of the question, according to Exotix’s Segal and Eric Schwartz, the project director for a study of postwar Iraq commissioned by the Council on Foreign Relations.

These creditors “must know that any future Iraqi government would look more kindly on doing business with countries that reconsidered its debts,” Schwartz said.

The Paris Club may use Yugoslavia as a model for Iraq, Segal said. Creditors agreed to a 70 percent write-off of Yugoslav debt in 2001.

Bank Debt

Banks have [US]$2.6 billion of unpaid Iraqi loans, according to Exotix. The total at U.S. banks is [US]$32 million, according to the Federal Financial Institutions Examination Council.

Banks will use the London Club, their own informal organization of lenders, to reach an agreement similar to the Paris Club, said Raphael Soifer, chairman of Soifer Consulting LLC in Ridgewood, New Jersey, which advises financial firms. The biggest problem, he added, will be finding records in Baghdad.

“There is no precedent for a debtor government destroyed by military conquest,” Soifer said. “You have to go back to World War II.”

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