Alex Skorecki
Financial Times (UK)
February 25, 2004

Iraq’s $120bn external debt is “clearly unsustainable” and creditors will need to grant reductions of almost 90 per cent, says Fitch Ratings, the rating agency, in a report published on Thursday.

Fitch said if the debt were being serviced, interest payments alone would be equivalent to about 37 per cent of Iraq’s GDP. Creditors in the Paris Club, an informal group that helps to resolve payment difficulties of debtor nations, are owed about $42bn. Iraq’s creditors include the UK, France, Germany, Italy and Russia.

James McCormack, senior director of sovereigns at Fitch, said: “Iraq’s debt stock would need to fall by about 90 per cent to $14bn for its interest service burden to compare with the median for sovereigns rated B+ or lower by Fitch.”

Iraq finances are highly dependent on oil revenues. Over the next three years oil export revenue is projected to be about $50bn.

However, Fitch says even taking this revenue into account, substantial debt forgiveness will still be needed.

Fitch believes creditors will eventually agree to debt forgiveness, based on the reception given to a US initiative led by James Baker, the country’s envoy on Iraq debt.

However, it thinks they are likely to wait until the country is given sovereignty later this year.

Last October a more flexible scheme of debt reduction was announced under the so-called Evian Approach.

“Evian is meant to deliver medium-term debt sustainability as opposed to short-term debt relief,” Mr McCormack said, “so creditors will be assessing the prospects for Iraq’s oil export revenues, which affect its debt service capacity.”