Iraq's Odious Debts

Iraq wins crucial IMF accord, $14 bln debt swap

Alister Bull
December 23, 2005

Washington: Iraq on Friday won a crucial loan accord with the InternationalMonetary Fund and a $14 billion debt swap with private lenders, taking key steps toward a wider debt deal and access to world financial markets.

The $685 million IMF standby credit arrangement was the fund’s first ever with Iraq and is designed to support the nation’s economic program over the next 15 months.

“The Iraqi authorities were successful in promoting macroeconomic stability in 2005, despite the extremely difficult security environment,” said IMF Deputy Managing Director Takatoshi Kato.

An insurgency in parts of the country and almost daily suicide bombings in and around Baghdad, the capital, has hindered economic rebuilding since the U.S. invasion in 2003.

But Washington says progress is being made and the IMF agreement is crucial for Iraq’s ability to borrow money overseas and necessary to trigger a full debt reduction deal approved by the Paris Club of creditors a year ago.

Iraq’s Deputy Prime Minister Ahmad Chalabi, who is in charge of economic policy, told Reuters he was pleased with the agreement because it translated into an actual reduction of Iraq’s debt stock.

“Iraq has already taken steps to cut subsidies while introducing a safety net for the poor. The challenge in front of the new government is to fight unemployment and proceed with price reforms,” Chalabi said by telephone from Baghdad.

U.S. Treasury Secretary John Snow said in a statement, “I applaud the IMF Board’s approval of a standby credit arrangement with Iraq today. . . . This arrangement will underpin economic stability and help lay the foundation for an open and prosperous economy in Iraq.”

An IMF stamp of approval was not only necessary to secure the Paris Club’s 80 percent reduction of some of Iraq’s foreign debt, but will also be an important vote of confidence as Iraq prepares to seek additional aid from donors.

Broader international support for the economic reconstruction of Iraq is a key part of President George W. Bush’s strategy to reduce the country’s reliance on American support and begin withdrawing U.S. troops.

Washington is eager to capitalize on Iraq’s largely peaceful elections on Dec. 15, which elected the country’s first full-time government since the fall of Saddam Hussein. U.S. Defense Secretary Donald Rumsfeld said earlier on Friday that around 7,000 troops would return home early next year.

The IMF voiced guarded optimism for the future but made plain that delivering security was essential.

“The medium term outlook for Iraq is favorable, but subject to many risks. A strengthening of the security situation will help the authorities to implement the program. Moreover, Iraq remains vulnerable to shocks, particularly those relating to oil,” the IMF’s Kato said.

Iraq also concluded a debt-for-debt exchange offer on Friday with the largest claimants against the former regime, worth about $14 billion, said Ernst & Young, Iraq’s debt reconciliation agent.

This represents about 60 percent of all the commercial claims registered with the firm. Under the offer, Iraq grants anyone with a claim of $35 million or more the chance to swap for either privately placed notes or an interest in a multi-currency loan.

Claimants swap at a rate of 20 percent of the value of their original holding. The new notes mature in 2028 and carry a 5.8 percent fixed coupon.

“This will allow the country, both the government and the private sector, to begin the process of reintegrating itself into the international financial markets,” said Bill Rhodes, senior vice chairman of Citigroup, one of the arranging banks.

(Additional reporting by Glenn Somerville in Washington, John Parry in New York and Khaled Oweis in Amman).

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