Reuters
Forbes.com
March 16, 2004

London: A deal to reduce Iraq’s huge debt burden is being hindered by disagreement over whether Iraq’s debts to Saudi Arabia should be classified as loans or as grant aid, senior European treasury officials said on Tuesday.

They said the unwillingness of Iraqi officials to deal with the Saudi issue was compounding the problem and U.S. pressure may be needed to secure a deal on the debts, which the Saudis say are loans amounting to $24 billion plus $6 billion in oil.

“We are counting a lot on the influence of the U.S.. They will make the Iraqis come to the Saudis and participate in a compromise,” one senior European Treasury official familiar with attempts to resolve Iraq’s debt crisis told Reuters.

The United States has already sent special envoy James Baker to the Gulf to push along the process.

But progress has been slow and disagreements remain on whether to grant substantial debt reduction as wanted by the Group of Seven rich nations, in a deal the G7 wants to be backed by a debt reduction from the Paris Club of sovereign creditors.

“This (G7) consensus was joined by some non-Paris Club creditors, but far from all,” the senior official said.

Some 50 countries hold half Iraq’s debts, a far wider group than is usual where rich G7 countries tend to hold the debts of poor nations.

The International Monetary Fund is due to present its final assessment of Iraq’s total debts in April, based on submissions by creditors, but the Iraqis have been reluctant to recognise debts without their own documentation.

The official said the ruling Coalition Provisional Authority had appointed Ernst & Young to help sort out records in order to ease reconciliation.

A second Treasury official who is responsible for handling his country’s Iraq debt negotiations said that outside the $42 billion of principal and overdue interest owed to the Paris Club, much of the rest of Iraq’s debts were subject to question.

Gulf Arab countries, including Saudi Arabia, are owed an estimated $45-55 billion.

“The figures for non-Paris Club members are very provisional. Even the question of interest is not certain and I have seen figures submitted with interest and without interest,” the official said.

“For the Gulf countries, there is no qualification of the debts and we are in a very unsafe area,” the official said.

Bind in creditors

While the Group of Seven rich nations and Russia have committed themselves to a substantial debt reduction for Iraq, others have been less willing to cooperate.

Bulgaria for example has held talks with private sector banks on selling debts owed to it to private sector banks, something which the treasury officials said would damage attempts to get a comprehensive debt reduction.

What the G7 through the Paris Club wants to do is to ensure that if it grants a big debt reduction, which financial analysts say could be between 60 percent and 80 percent, that will be matched by the other creditors.

That could be done by formally inviting some of the creditors to join the Paris Club process, although the issue has not been discussed yet.

The complex issues surrounding Iraq’s debts, which some campaigners say should be written off entirely as illegitimate, mean there will probably not be a debt deal any time soon.

While some of the members of the Paris Club have held talks on Iraq, there have not yet been any substantial negotiations on debt reduction.

For a debt deal, there needs to be a sovereign government, which will take office on June 30, and an International Monetary Fund programme, which will take time.

The G7 said it wanted a deal before the end of 2004.

“I expect it will take a little bit of time . . . I see it more in the last quarter,” the first treasury official said.