Reuters, CNN/Money
October 2, 2004

Washington: Differences between France and the United States over how much of Iraq’s debt to cancel hardened Saturday as the two attended a meeting aimed at promoting international harmony.

A day after President Bush took a jab at Paris over its opposition to the Iraq war, France said it had amassed an alliance behind its proposal that leading creditors initially forgive just half of their share of Iraq’s $120 billion debt load, and revisit the issue after three years.

This may leave the United States, which wants a 90-95 percent write-off for the country, isolated. “It’s up to (the United States) not to block a possible deal,” one French official said ahead of Saturday’s meeting of the International Monetary Fund in Washington.

Russia, Germany and Italy all supported France’s proposal, French Finance Minister Nicolas Sarkozy told reporters.

Other European countries also appeared to back France. Luxembourg Prime Minister Jean-Claude Juncker said the euro zone looked to be united in its stance on Iraq debt forgiveness and he expected the matter to be formally discussed soon.

Britain stood between the United States and France.

“The British said ‘we’ll agree to this position if you go up to 80 percent’. I said ‘no’,” Sarkozy said.

France, which opposed the U.S.-led war in Iraq along with Russia and Germany, argues that Iraq has the world’s second-largest oil reserves and should not be treated like impoverished African nations without such natural resources.

No negotiation

Treasury Secretary John Snow, who wants “very substantial” debt relief to get Iraq back on its feet, said Saturday creditor countries were moving toward an agreement.

“We’re making progress,” Snow said as he sat down to meet German Finance Minister Hans Eichel. Asked whether a deal on Iraqi debt could be reached by year end, Eichel said: “It’s quite clear we’ll have a solution.”

But U.S. officials showed little sign of compromising.

“There is no negotiation, so when you mention proposals that are out there for 50 percent or something like that, there is no negotiation,” a senior U.S. Treasury official said.

“Anything like 50 percent is completely unworkable and financially irresponsible because even the most elementary analysis of Iraq’s debt shows that it has to be reduced by much more than that if Iraq’s going to be put in a sustainable position,” the official added.

Iraqi Finance Minister Adil Abdul Mahdi said Saturday Iraq needs a “substantial amount” of debt forgiveness but declined to specify how much. He was speaking to reporters after meeting with Snow and Federal Reserve Chairman Alan Greenspan.

The debt dispute revived lingering tensions between Washington and Paris over the U.S.-led Iraq war, which France opposed along with Russia and Germany.

Bush took a stab at French opposition to the war on Friday, telling a campaign rally: “The use of troops to defend America must never be subject to a veto by countries like France.”

Presidential politics

Washington has been pushing for a rapid debt deal, and an accord among top industrialized nations before the November U.S. presidential election would be good news for Bush as he campaigns for a second White House term.

The chances of sealing a pact by then looked slim at best.

Finance chiefs from the Group of Seven rich nations – the United States, Japan, Germany, Britain, France, Italy and Canada – committed Friday to reach a deal by the end of 2004.

“We all want a deal by the end of the year,” Sarkozy said.

Asked by Reuters whether he and Snow had narrowed their differences during a bilateral meeting Saturday, Sarkozy simply replied: “(Paris Club Chairman) Jean-Pierre Jouyet will take on the baton in the framework of the Paris Club.”

G7 officials are to hold further Iraq debt talks at meetings in mid-October and late-November at the 19-member Paris Club, an informal grouping that seeks sustainable solutions to the payment difficulties of debtor countries.

An accord on Iraq debt forgiveness at the Paris Club, to which all the G7 states belong, could serve as a benchmark for relief deals with other creditors such as Saudi Arabia, Kuwait and eastern European states.

The IMF pegs Iraq’s total pre-war debt at $120 billion, some $40 billion of which is debt and arrears to Paris Club member nations.

“Things are progressing,” said one official involved in the debt talks, before adding: “There is a lot of work to do.”