December 17, 2004
An informal group of industrial nations called the Paris Club may have almost as much to say about Iraq’s eventual recovery from war as all the armed forces now arrayed throughout the country.
A month ago this little-known, 48-year-old organization of financial representatives from 19 countries approved a plan for forgiving 80 percent of Iraq’s $38.9 billion debt owed to its member countries, including the United States, France, Germany, Japan and Russia.
Now everyone else who lent money to Iraq may have to go along.
Iraq’s other creditors, including its neighbors in the Middle East, some European countries not in the Paris Club and private commercial creditors, are feeling the squeeze to accept the 80 percent debt-forgiveness formula on the more than $80 billion Iraq owes them.
Acceptance would confirm the extraordinary leverage of an organization that operates behind closed doors, poring over the debt details of countries that cannot afford to make payments. Since 1956, it has approved 385 debt-relief plans.
Some of Iraq’s remaining creditors – including those in the Middle East – have expressed unhappiness over these terms, but most experts and the U.S. Treasury Department believe the creditors will go along. “They cannot hope for a better deal,” said Olin Wethington, counselor to Treasury Secretary John Snow and his chief aide on Iraqi debt.
Wethington expressed optimism that by the end of 2005, most, if not all, of Iraq’s creditors would agree to wipe out 80 percent of Baghdad’s debt.
“I think because of its importance, we can anticipate that creditors globally are going to step up and do at least what the Paris Club has done,” Wethington added.
Debt relief comes first
If this happens, Treasury and private experts say, it would clear the way for more companies and countries to offer new commercial deals and more investment to speed reconstruction and build a better life for Iraqis.
While reduction of Iraq’s estimated $120 billion debt to about $25 billion is unlikely to produce economic miracles, experts view debt relief as an important precursor to revitalization.
“Look, the single biggest problem with any new investment in Iraq is the security situation,” said Robert Hormats, vice chairman of Goldman Sachs International. “Hopefully that will be resolved. And if it is, you don’t want that black cloud of debt hanging over them.”
Wethington said some countries may wipe away more than 80 percent of their debt, but he didn’t say which countries.
One of them could be the United States, which has promised to forgive “at least” 80 percent of the $4.5 billion debt it holds.
Wethington said Iraq is in contact with Middle Eastern neighbors about forgiving the debt. Middle Eastern and non-Paris Club nations hold $67.5 billion of the remaining debt.
Edwin Truman, an economist at the International Institute for Economics, estimated that the Persian Gulf states hold nearly $50 billion of the debt.
Kuwait, which holds $15 billion of Iraq debt, and Saudi Arabia, with $9 billion, have indicated they want to await Iraqi elections before settling their claims, said Brad Setser, an economist and expert on Iraqi debt who used to work for the Council on Foreign Relations.
Truman predicted that although there may be some foot-dragging, Iraq’s neighbors will go along.
Bulgaria and Romania, among two of the non-Paris Club creditors, also have signaled their unhappiness with forgiving 80 percent of the debt. But they will face strong pressure to agree as well, Setser said.
Wethington said the Baghdad government soon will send a message to private creditors that it wants to begin the debt-relief process.
Some say it may take longer than a year to negotiate debt relief for the estimated $15 billion in private and commercial debt Iraq owes to companies and financial institutions. But Wethington said he believes these creditors will want to settle all debt as quickly as possible.
Even if other creditors seek a better deal, Iraq, with the Paris Club behind it, is not apt to give in, Hormats said.
“I don’t think it’s politically feasible for industrialized countries or creditor countries to have one set of terms and the private sector to have better terms,” he said.
An organization called Jubilee Iraq, which favors forgiveness of virtually all Iraqi debt, reported on its Web site that Japanese companies hold $3.2 billion of it and German companies $2.1 billion. Syndicated loans issued by banks and others total $2.6 billion, according to Jubilee Iraq.
Iraq also owes $500 million to the World Bank and International Monetary Fund. Under the Paris Club plan, debt would be forgiven in three stages – 30 percent immediately, another 30 percent when Iraq arranges an economic reform package with the IMF next year, and a final 20 percent in 2008, if Iraq has adopted the IMF reforms.
Approval of the debt-relief plan by the Paris Club was a foreign policy victory for President Bush and attested to the political and financial skills of his emissary, James Baker, a former secretary of state and secretary of the treasury.
Because the French and Germans went along with the plan, it could give Bush an opening in patching up relations with allies who opposed the Iraqi war, Hormats said.
Getting the 19 nations to agree to such a large debt relief was problematic a year ago, when the Bush administration and its European allies were at odds on the war. Bush dispatched Baker on a December 2003 trip to speak to major Iraq creditors, including France, Germany and Russia, and began the process of obtaining concessions that were ratified by the Paris Club.