David Chance
Reuters
May 28, 2003

ABSTRACT

The U.S. will go to the weekend G8 summit urging debt relief for Iraq, saying it is merited by what it describes as Saddam Hussein’s abhorrent 23-year rule, but economists say it is creditor politics which drives relief.

Forgiving Iraqi debts has been politicised by the divisions between the U.S. and other United Nations members over the war and by the post-war settlement which has seen the U.S. and Britain granted the status of occupying powers.

The U.S. is estimated to be owed $2.1 billion in principal compared with anti-war Russia’s $9 billion, Germany’s $4.3 billion and France’s $1.8 billion.

Some economists argue that history shows the U. S. has been far more willing to forgive the debts of relatively rich middle income countries which support it politically than it has the very poor in, say, the Democratic Republic of Congo, where billions of dollars of debts contracted from the Mobutu era are still owed.

The U.S. has tried to draw comparisons between Saddam’s Iraq and Slobodan Milosevic’s Yugoslavia, with John Taylor, the Treasury Undersecretary for International Affairs, telling Reuters that Iraq would need a write-off similar to Serbia’s 66 percent deal in 2001 plus some more to reflect the oppressive nature of the former government.

Meanwhile, France, Russia and Germany have said there may be no need for debt reduction, but rather a rescheduling of the debts, spreading payments out over a long period, typically 25 years. Such an arrangement would be negotiated under the auspices of the Paris Club.

But, according to an economist working for a leading international body, the issue of debt relief was complicated by the legal status of Iraq, where the U.S. and Britain are occupying powers and there is only a limited role for the United Nations.

“You cannot have a Paris Club (of sovereign creditors) debt reduction without an agreement with the International Monetary Fund,” the economist told Reuters.

There is no sign of such an agreement and the IMF could take a year to complete its assessment of the economy and produce a programme for any Iraqi administration to implement.

Even then any Paris Club debt reduction agreement requires unanimous agreement among creditors — something which appears to be unlikely given the grudging acceptance of the removal of sanctions by some of Iraq’s creditors, and the big stakes at play in terms of debts owed and the prospect of contracts to develop Iraq’s huge oil reserves.