Steven R. Weisman
The New York Times
January 5, 2004

Washington: After getting European and Asian nations to help Iraq with its debts, former Secretary of State James Baker 3rd faces a new challenge as he tries to persuade wary Arab nations to forgive an even larger debt, including the financial legacy of Iraq’s violent history in the region.

A White House official said that Baker may leave for the Middle East later this month. He visited European and Asian countries in two trips in December after being designated by President George W. Bush as a special envoy on debts in December.

Administration officials and experts say that the Middle East debts, estimated at about $45 billion, compared to $40 billion for the group of leading industrial countries known as the Paris Club, contains large sums lent to Iraq by Saudi Arabia and other countries during Iraq’s war with Iran in the 1980’s.

Under Saddam Hussein, Iraq called on its Arab neighbors to help supply and pay for arms for the war effort. Baghdad later insisted that the aid was in the form of grants, not loans, and therefore repayment was not required.

The newly reconstituted Iraqi Finance Ministry is doing research on the validity of that claim, administration officials said, complicating Baker’s mission.

“The paper trail is not what you would find in a normal government-to-government debt situation,” a Bush administration official said. “All these arrangements, whether there were grants or loans, is being researched by the Iraqis. There’s a lot of data collection to be done.”

In Europe and Asia, Baker, who is also a former Treasury secretary, won commitments for what officials said would be a “substantial” reduction of Iraq’s debt, estimated by a London-based brokerage firm at $116 billion.

“The trick is, what does ‘substantial’ mean?” said an official who traveled with Baker. “His purpose was to establish the principle that debt reduction is needed and to build a consensus toward an agreement this year. Now, everybody is at the table with a common understanding.”

Baker has refused to translate the words “substantial” into percentages of how much of Iraq’s debt might be forgiven. In addition, the $116 billion does not count perhaps another $100 billion in war reparations sought by Kuwait and other countries.

Specialists who have been in contact with the World Bank, the International Monetary Fund and the Paris Club – a group of 18 rich countries that negotiate debt relief for poor nations – say that the target is likely to be agreement to forgive two-thirds of the debt.

Whether it is realistic to get the Arab countries, who are much poorer than the Europeans and Japan, to forgive two-thirds of the debt is not clear.

“The model that they are likely to follow is Serbia after the Balkan wars,” said Richard Snyder, director of research at Exotix, the brokerage firm that estimated Iraq’s debts at $116 billion. “It’s premature to set a percentage now, but two-thirds is the figure being discussed.”

Snyder said that Baker’s trips to Europe and Asia were successful because the countries he contacted – many of which opposed the American invasion of Iraq – seemed willing to move beyond their concerns and to do what was best for the new government to be installed in Baghdad.

Some creditor countries had initially balked at forgiving Iraq’s debts because of its vast untapped oil reserves. Others said they did not want to negotiate Iraq’s future finances with someone who was effectively an emissary of a military occupation.

Baker’s mission succeeded in putting such talk in the past, though it could come up again when the Paris Club countries get down to specifics later this year, especially when they engage in discussions with the government of Iraq that is due to be installed by June 30.

The Baker strategy is described as a deliberate effort to sew up a broad agreement of rich countries on debt forgiveness and then try to persuade other countries in the region, and other creditor countries of lesser means, to go along with it.

“That is the strategy that most large debtors have followed after periods when they have been isolated internationally like Iraq,” said Snyder.

Snyder’s research estimated that Iraq’s total debt of $116 billion could be broken down as follows: $45.5 billion by the states in the Middle East and Gulf; $41.5 billion by the Paris Club; $5 billion by former Soviet bloc countries in Eastern Europe; and $9 billion other major country debts, including China with about $5 billion.

In addition to this debt, there are $3 billion in debts in the so-called London Club, run up by the Rafidain Bank, the largest private bank in Iraq in years past, mostly with other private banks; and $8.5 billion in other private claims, of which $2 billion is held by Japanese companies and $1.5 billion by South Korean companies.

All these sums include principal and interest accrued since Iraq stopped paying any interest in 1990, at the start of its invasion of Kuwait.