Michael Schroeder
Wall Street Journal
September 20, 2004

U.S. and European officials said they expect to hammer out a deal by year-end to forgive most of the loans Iraq owes industrialized nations, giving a big boost to the new Baghdad government’s ability to sort out its tangled finances.

At recent meetings in Paris, the group of 19 wealthy nations known as the Paris Club edged closer to a deal involving the more than $21 billion in loans they are owed by Iraq and a like amount in interest. The issue is expected to be a high priority at a series of meetings among the World Bank, the International Monetary Fund and the Group of Seven major industrialized countries in early October.

The U.S. is urging the cancellation of at least 90% of the Paris Club debt, while Britain would prefer an 80% write-off. Other nations are holding out for a more-modest package. Russia has offered to cut 65% contingent on certain Saddam Hussein-era contracts with Russian interests being honored, and France has urged a 50% reduction.

France argues that Iraq, with its vast energy resources, shouldn’t get better treatment than the world’s poorest nations. As a way to entice Paris, the U.S. recently proposed that poor nations in Africa, Asia and Latin America should also get debt relief comparable to Iraq’s.

The U.S. took that position after an intra-administration dispute among the Treasury Department and White House security and budget advisers. Some administration officials worry that writing off too much poor-nation debt will reduce fiscal discipline in borrower nations. But the Treasury, which is in charge of getting Iraq’s debt in order, prevailed, according to individuals with knowledge of the debate.

A Paris Club agreement, which applies only to Iraq debt owed to wealthy nations, would be the first step in a wide-ranging process to reconfigure Iraq’s more than $150 billion in debt. Iraq hasn’t paid any of its debts since before the first Gulf War more than a decade ago. The U.S., with a relatively small Iraq debt of $2.19 billion, believes a Paris Club deal could serve as a relief model for other major creditor countries, including Saudi Arabia, Kuwait and Eastern European states.

Iraq owes other nations about $65 billion, including $25 billion in principal and interest to Saudi Arabia, and an additional $15 billion to private lenders, according to the IMF. Iraq also must use its oil revenue to pay a further $30 billion in war reparations, mostly to Kuwait, approved by a United Nations special court. The U.N. says it has yet to rule on an additional $98 billion in reparation claims.

Resolving the mountain of debt is essential for rebuilding Iraq’s war-torn economy. Companies are wary about investing in Iraq until it gets its economic house in order. “Every day there is no agreement on lending will slow down efforts to rebuild the economy,” said Bathsheba Crocker, co-director of the Post-Conflict Reconstruction Project at the Center for Strategic and International Studies in Washington.

A Paris Club debt-relief pact can’t be completed until the IMF signs off on its own economic review of Iraq as a condition of awarding the country some postconflict development loans, totaling about $850 million.

To earn the IMF’s seal of approval, Iraq must show that its new government has put in place credible budget and central-bank systems. Iraq also must make arrangements to settle $80 million in unpaid IMF fees that have accrued since 1990.

IMF officials met in Paris recently with senior Iraqi officials and “made good progress,” said an IMF spokesman. John Taylor, U.S. Treasury undersecretary for international affairs, said the IMF could complete its Iraq review during the IMF and World Bank annual meetings beginning Oct. 1.

The Bush administration would like to announce a Paris Club resolution before the Nov. 2 election, but odds of that are slim. Mr. Taylor and two other people close to the talks said a debt-forgiveness deal is on course to be completed by the tight year-end deadline set by G-7 country leaders at a June meeting in Sea Island, Ga.

Jo Wrighton in Paris and Marc Champion in Washington contributed to this article.

What Iraq Owes

Debt, excluding interest, owed to Paris Club nations

Japan $4.11 billion
Russia $3.45
France $2.99
Germany $2.40
U.S. $2.19
Italy $1.73
Other $4.14

Source: Paris Club