Iraq's Odious Debts

The Paris Club deal is not the end of the haggling over Iraqi debt

The Economist (UK)
November 27, 2004

For once, good news for Iraq. Its rich-country creditors, France, Germany and Russia, have agreed to forgive 80% of their $38.9 billion of Iraqi sovereign debt. The write-offs will come in parts: 30% of the debt now, another 30% in 2005 and a final 20% in 2008. The restructuring, done under the auspices of the Paris Club, an informal group of western creditor countries, came earlier than expected and just in time for the first round of Iraqi elections expected in January.

Generous or not, the deal owed nothing to the notion that Iraq’s debts were “odious”, incurred by a tyrannical government and therefore unworthy of repayment. The motivation is mostly political. America’s government lobbied European countries to support post-war Iraq, and the Europeans surely saw the deal as a way to mend transatlantic ties.

Yet debts held by the Paris Club are only around a third of Iraq’s total sovereign obligations. According to Richard Segal of Exotix, an emerging-market-debt trading firm, debt owed to Gulf states, which amounts to around $49 billion, is likely to come up next for negotiation. Other countries, including China, Turkey and ex-communist central European countries are owed around $16 billion. The claims of commercial creditors, including loans grouped under the London Club and other private claims, total a further $12 billion. This includes the Washington Club, a group of big companies, the biggest of which is South Korea’s Hyundai, seeking $2 billion for building hospitals and power stations in the 1970s and 1980s.

What will the Paris Club deal mean for Iraq’s debts to western companies and banks? One London fund manager bristles at the suggestion that it will, or should, have any effect. The Paris Club loans were politically motivated, he says, as was the forgiving of them. Past experience in Russia and elsewhere does not support the idea that other creditors must follow where the Paris Club leads. What will make a difference is Iraq’s desire one day to re-enter the global capital markets. For this reason, he says, the Iraqis should press for a write-down of no more than 30%.

Mr Segal, however, thinks that none of Iraq’s creditors is likely to escape with a write-down lower than 65-70%. That is in part thanks to the requirement of “comparability” written into the Paris Club agreement, meaning in essence that a debtor nation should not give better terms to other creditors. A particularly sticky point will come when poor countries such as Bulgaria and Romania negotiate with oil-rich Iraq. They may not feel as generous as France and Germany.

Thanks to Iraq’s oil, however, there is plenty of room to haggle. Some creditors may be offered derivative contracts that will pay them handsomely if Iraq’s economic or oil-export growth is faster than expected, as has been tried in Mexico and Venezuela. But Iraq is no ordinary debtor. America will no doubt continue to have an influence on any negotiations.

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