Harald Schumann
DER SPIEGEL, Germany
June 2, 2003

Should the Iraqis assume responsibility for their former dictator’s billions in debts? The dispute among Europeans, Russia and the United States on debt forgiveness is becoming a key to the future of the country. The US government has the better arguments in this respect, both economically and morally.

The nation of the conquered dictator was in ruins, its people were in distress, and democracy was everything but assured. At this point, the conquering powers agreed to extend a comprehensive and generous offer: They would forgive the impoverished heirs of a fallen state half of their billions in foreign debt and extend repayment of the remaining debt over a period of thirty years. This is not a fairy tale. It was precisely in this manner, essentially relieved of its obligation to provide debt service in hard currency, that the Federal Republic of Germany began its development into an economic miracle of the post-war era. The 20 creditor states forgave the generous sum of 15 billion German marks, then two-thirds of the federal government’s annual budget.

In February 1953, they signed the “London Agreement on German External Debts,” so as to “eliminate obstacles on the path toward normal trade relations and thus contribute to the development of a flourishing community of nations,” as was stated in the preamble – an intention that would later prove to be highly profitable for all parties involved. And, as Germany’s first post-war chancellor, Konrad Adenauer, declared, “most of the assistance we received was from the United States.”

Almost exactly 50 years later, the same problem is arising in Iraq, and under astonishingly similar circumstances. Although the Germans are on the side of the creditors this time, the issue as to whether the people of this devastated country, long-oppressed by a dictatorship, should be required to pay the unpaid bills of their expelled oppressors is as current today as it was then. And, once again, it is the victorious Americans who are pressing for debt forgiveness, and have placed it on the agenda of the G-8 summit being held in the French town of Evian through Tuesday of this week.

The Saddam Hussein regime left about 120 billion dollars in unpaid loans and import bills, with more than 90 percent of its total debt being owed to other countries. In the 1980s, these countries frequently secured their exports to Iraq with loan guarantees or, like Saudi Arabia, provided the Iraqi regime with generous loans to finance its war against Iran. In addition to this debt, the Iraqi state owes at least as much in reparations to Kuwaitis and other victims of Saddam’s attack on his southern neighbor. Another 60 billion dollars in debt results from delivery contracts that are still valid but not yet paid. All of this results in a debt burden that, even with annual oil revenues of 25 billion dollars (based on pre-war levels), would take years to repay.

For this reason, Third World activists, development experts and the US government, in a rare moment of consensus, are demanding that the creditor states largely waive their claims against Iraq. “A democratic Iraq” can and should “not pay Saddam’s debts,” declared the organization “Erlassjahr” (Year of Forgiveness), an alliance of more than a thousand mainly church-based initiatives that lobbies on behalf of debt forgiveness to benefit developing countries.

Frederick Barton of the Washington-based Center for Strategic and International Studies (CSIS), an experienced UN advisor for the reconstruction of countries devastated by war, also believes that cancellation of its debts is “a matter of survival” for Iraq.

For this reason, France, Germany and Russia, in particular, the critics of the Bush administration in Old Europe, should waive their claims to the funds “they lent the dictator so that he could buy weapons and build palaces,” concluded one of the key architects of the Iraq war, US Assistant Secretary of Defense Paul Wolfowitz. US Treasury Secretary John Snow has also argued for general debt forgiveness to benefit the new Iraq.

However, the Americans’ generosity with other people’s money was not welcomed with open arms by the governments in question. After all, said Moscow’s Finance Minister Alexej Kudrin, whose government must service more than 50 billion dollars in Soviet debt, no one forgave Russia’s debt, “no matter who was in power in the country.” And German Finance Minister Hans Eichel has completely rejected the American demand. “If a country is capable of servicing its debts, then that’s what it must do,” said Eichel, in a reference to Iraq’s oil reserves. Eichel’s French colleague Francis Mer was of the same opinion.

The more hard-pressed creditors, particularly the Russians, can certainly invoke the poor track record of international debt management. Regimes fall and their successors are left with their debts. This has been the iron-clad principle of international banking and trade practice until now. It is for this reason that the South Africans are still paying for weapons that the racists of the Apartheid era used to keep them in check, that the Russians must answer for the hubris of Soviet bureaucrats, and that the Indonesians are still toiling to pay for the self-enrichment of the Suharto clan.

It is also for this reason that German Finance Minister Hans Eichel feels fully justified in his demand that Saddam’s successors repay more than four billion Euros in debts. The lion’s share consists of unpaid shipments of construction equipment and machinery from the 1980s that were guaranteed by the government and are still on the books at the Finance Ministry, even though Iraq stopped making payments in 1988. In the view of Eichel and his colleagues, the fact that the equipment in question was used to support Saddam’s poison gas war against Iran, at least indirectly, is irrelevant, even if the occasional shipment may be have been used to build chemical weapons factories.

In contrast, many development economists are arguing for the worldwide application of the principle of “odious debt,” or debt which should not be considered transferable. The US government was the first to apply this principle when, in 1898, it abruptly declared all Cuban debts to be null and void in connection with Cuba’s liberation at the end of the Spanish-American War, because the funds in question had been borrowed by the Spanish oppressors.

In a recent article in the research journal of the International Monetary Fund, Harvard economists Michael Kremer and Seema Jayachandran outlined what such a concept would entail in today’s environment. They propose the establishment of a new international institution, which could dispute the creditworthiness of obviously illegitimate regimes with a “super-majority,” i.e., two-thirds or more of votes cast. Anyone who nonetheless chooses to extend credit would do so at their own risk and not at that of their people.

Such a guideline, argue Kremer and Jayachandran, would be far “more effective than trade sanctions,” since it would be virtually impossible to circumvent. No bank or government is willing to grant long-term loans that would become null and void with the demise of the borrower.

But as convincing as this may seem in theory, the moral desert of political realism has thus far shown little tolerance for such reforms. All large and medium-sized powers, including Germany, reserve the right to grant loans and issue trade guarantees at their discretion, or to use the International Monetary Fund (IMF) and World Bank for this purpose.

It is for this reason that the United States funds the corrupt family regime of Egyptian President Hosni Mubarak, who was never freely elected, or that of Pakistani dictator Pervez Musharraf. It is for this reason that the French and Germans support oppressive governments in Algeria and Tunisia. It is for this reason that the Russians continue to indiscriminately supply weapons on credit. And Saddam Hussein was once funded because he waged war on the dangerous mullahs in Teheran. The Iraqis are also in the red with the United States – to the tune of about four billion dollars.

Four years ago, the creditor states in North America, Europe and Japan finally introduced a regulated procedure to provide debt forgiveness to very poor states, states for which debt repayment is already an unlikely prospect at best. Under this procedure, governments, such as that of desperately poor Mozambique, can reduce their debt level to such an extent that it does not exceed 150 percent of their annual export revenues, provided they adhere to a reform program mandated by the World Bank and IMF.

The organization in which such rules – and exceptions – are negotiated is the so-called Paris Club, a loosely-knit association of state creditors to which, oddly enough, Russia has belonged as both a debtor and a creditor since 1997. This non-institution, which consistently convenes behind closed doors, and in which generally senior officials from ministries of finance and economics meet once a month in Paris to discuss the global debt situation, has the power to decide the economic fate of entire countries.

For states with so-called moderate income, such as Iraq, the Paris Club ordinarily rules out comprehensive debt forgiveness, unless, as in the case of Yugoslavia, it fits into the overall political concept. One and half years ago, this club of creditors forgave the new union of Serbia and Montenegro two-thirds of its total outstanding debt of 4.5 billion dollars, with half of this debt being absorbed by the European treasury. This “generous” debt forgiveness, according to Siegfried Borggrefe, Germany’s chief negotiator in Paris, was one that “is normally granted only to highly indebted developing countries.” In this case, however, stabilizing the Yugoslav economy happened to be in the best interest of German foreign policy.

Against this background, the verbal exchange between the US cabinet secretaries and their European counterparts on Iraq’s debts is little more than a mock duel, one that merely disguises their respective positions. There is certainly no lack of double standards and verbally concealed interests on either side.

At the core of this issue, however, is not the amount of outstanding debt, but rather the business of Iraqi reconstruction. Reconstruction can only move forward if the future provisional government becomes creditworthy as quickly as possible, particularly to fund the rebuilding of Iraq’s oil industry. To reach this objective, however, the country must overcome its pariah status in the international financial world. And this, explains Harald Eggerstedt, an expert on rapidly developing countries at Commerzbank, “can only be achieved by the Paris Club.” And Iraq will certainly be unable to obtain any new funding on the international market without first clearing up its past.

For these reasons, it is not particularly surprising that the governments of the United States and Great Britain, which currently bear sole responsibility for the reconstruction of Iraq, are urging for quick settlement of the debt issue. Without loans and outside capital, reconstruction will be an impossible task. Only an economically successful new Iraq, however, will be able to lend greater legitimacy, at least retroactively, to a war that represented a violation of international law.

At the same time, however, because George W. Bush and Tony Blair reject UN sovereignty over Iraq and would like to control the awarding of construction and oil drilling contracts to further their own interests, the remaining creditors are able to use the Iraqi debt as security for their own oil interests. After all, both French oil conglomerate Total and Russia’s Lukoil still have old oil drilling contracts or agreements with Iraq, and hope to see these agreements come to fruition.

When this issue was raised two weeks ago at a meeting of the G-8 finance ministers, the adversaries were able to establish only a very small common denominator: Iraq will be given until at least the end of 2004 to begin repaying its debts, since a stable and legitimate regime is unlikely to be established in Baghdad before then. All other details are to be negotiated in the Paris Club. This postponement was ultimately incorporated into a resolution, under which the UN Security Council lifted sanctions against Iraq the week before last.

Reconstruction expert Barton complains that it is “completely ridiculous” that the debt issue so important to Iraq has become “little more than a basis for negotiation.” In this regard, however, all experts agree that there is ultimately no alternative to comprehensive debt forgiveness. Iraq “will never be able to pay its debts,” says Richard Segal, economist at the London financial firm Exotix, which specializes in trading in the government loans of bankrupt states and has been familiar with the practices of debt management for years. According to Segal, whether the issue is one of debt forgiveness or long-term restructuring of debt is simply “a question of semantics.”

At a ratio of debt to gross domestic product of at least four to one, Iraq, says Segal, is “one of the world’s most highly indebted countries,” a problem that even oil exports cannot solve. And CSIS expert Barton warns that one cannot “squeeze blood from a stone.”

The same realization was also the driving force behind the West Germans once having been placed on a course of economic success by way of debt forgiveness. Bielefeld-based economic historian Werner Abelshauser describes the situation after World War II as follows: “The Americans needed the Federal Republic of Germany as a frontier state in the Cold War.” In Abelshauser’s opinion, the US administration, in an effort to convince all creditor nations to relent, completely overvalued its own claims for deliveries of goods within the framework of the Marshall Plan, and then generously waived these claims. At the time, writes Abelshauser, “everyone thought that the Germans would never be able to repay their debts anyway.”

Translated by Chris Sultan