Pedro Nicolaci da Costa
Reuters
July 1, 2004

It is hard to argue against debt relief for struggling economies but experts say U.S. efforts to forgive most of Iraq’s $120 billion would be a slap in the face for nations still paying old dictators’ bills.

Democratic governments of countries like Russia, Brazil and Argentina have been forced to assume hefty debts incurred under totalitarian or military regimes.

Timely debt repayment came at a high human cost. Budget constraints meant governments had to cut social programs and rein in already flimsy safety nets.

Africa, ravaged by poverty and an AIDS epidemic, is rife with nations that have all but collapsed under the burden of debts accumulated by authoritarian leaders.

“The Bush administration’s effort to have Iraq’s debt canceled really underscores the double standard of the United States toward the issue of indebtedness, particularly for developing countries,” said Salih Booker, executive director of Africa Action, an advocacy group based in Washington, D.C.

Washington contends Iraq is different, saying its debts were amassed during Saddam Hussein’s ruthless rule and so should not apply to the entity created to take over after U.S. occupation.

The concept, known as “odious debt,” holds that liabilities of an old despot are not in the interest of the nation and are thus no longer relevant after drastic political change.

But Iraq is hardly alone in that category.

“If you take that definition, the vast majority of Africa’s $300 billion in external debt is odious,” argues Booker. “What this suggests is that it’s not an issue of justice or legality or morality – it’s pure politics.”

The Russians, to whom a large chunk of Iraq’s debts are owed, know first-hand that regime change is not always accompanied by write-offs. Post-Soviet Russia is still working off loans piled up during its totalitarian days.

In Latin America too, democratically elected governments have had to take on the debts of their military predecessors.

“It’s a very subjective call,” said Christian Stracke, senior emerging markets analyst at CreditSights, a Wall Street research firm. “We forced Argentina and Brazil to honor the historical liabilities of the military governments. Why wouldn’t you do the same for Iraq?” he asked.

Some say Latin America’s transition to democracy was less clear cut, with a measure of continuity between military dictatorships and the ensuing democratic process.

Not so in Iraq, says Washington, whose strategy was to kill or imprison officials of the former Baathist regime, distancing the new interim government from the Saddam era.

But Russia’s transition from Soviet rule is also a vivid example of extreme political transformation, and yet the old debts carried over.

“Stalin and Brezhnev racked up these loans. Not only was the government different but the territorial expanse of the entity was different,” said Stracke. “So why should Russia be treated one way and Iraq get treated any better?”

Sovereign creditors have already started jostling for position in anticipation of heated negotiations on the issue.

The United States wants to wave away up to 95 percent of Iraq’s outstanding debt, while Japan and Britain have talked about forgiving 80 percent. France, which opposed the U.S.-led war on Iraq and which stands to lose the most from a major debt write-down, has urged only a maximum 50 percent cancellation.

U.S. officials argue Iraq should not be burdened with heavy debt payments at such a difficult juncture, but the French point out that vast oil reserves should boost the war-torn country’s return to prosperity.

“There’s going to be a lot of banging heads together,” said Crispin Hawes, director of Middle East & Africa research at consulting firm Eurasia group in New York.

Hawes ventures that when a compromise is eventually reached it is likely to entail around a 65 percent reduction, comparable to a deal reached for Serbia.

The blanket forgiveness that the U.S. is seeking might actually harm Iraq, Hawes said, since it could undermine the new government’s credibility with international lenders, whose cooperation will be key to rebuilding the country.

“For Iraq’s monetary authorities to reestablish . . . credibility, they will need to pay some debt off,” said Hawes.