Iraq's Odious Debts

Paying for the reconstruction of Iraq

Caspar Weinberger
Forbes.com
August 11, 2003

When the 1991 Gulf War ended with the unequivocal triumph of coalition forces in less than 100 hours of exceptionally low-casualty conflict, there was a certain amount of confusion within the U.S. Administration over whether we should push on to Baghdad and oust Saddam Hussein and his regime. In hindsight it’s easy to see that those who argued strongly in favor of this were right. Unfortunately, those who argued that we must respect Iraq’s “sovereignty” and not do anything that might upset its neighbors or the UN carried the day.

Thus, we left Saddam in power – with what was left of his military; we accepted his false promises, all of which in due course were broken; and we treated Iraq as a sovereign nation. Understanding the reasons for these decisions is not nearly as important as acknowledging that we must never go down that road again.

After this year’s even more convincing defeat of Saddam and his military, there is once again division within the U.S. Administration over how to proceed. Iraq’s future is dependent on the sale of its oil. But its oilfields and distribution lines – once the envy of the region – need to be repaired and upgraded, having suffered years of neglect. The funds that have been set aside for this will fall short of the amounts needed. And current projections for oil production will more than likely not be met because of the disrepair and the damage done by looting and sabotage, which will limit funds available for the U.S.-led Coalition Provisional Authority to get the country up and running.

The Bush Administration’s internal debate is over the issue of financing: How are we to raise the billions of dollars needed for the reconstruction of Iraq’s oilfields, not to mention the rest of its infrastructure? Should the proceeds from the sale of Iraqi oil be used to pay these costs, and, if so, who should administer such a plan?

The UN has already passed a resolution putting the Coalition Provisional Authority in charge of Iraq’s finances. (Set aside the question of whether we needed such approval; the fact is that we have the power.) The Export-Import Bank of the U.S. has come up with a plan to finance Iraq’s reconstruction costs. The Ex-Im Bank would issue securities or trade credits backed by revenue from future sales of Iraqi oil – oil-revenue securitization. The proceeds from the sale of these securities would provide the initial funds to repair the oilfields and distribution facilities so that they could start generating income.

The securities could also generate enough in financing for the reconstruction of Iraq’s infrastructure. The Provisional Authority would supervise and manage the oil production and marketing effort.

But, as the Wall Street Journal has reported, this idea has “generated resistance among Administration and UN officials dubious of the Authority’s legal and moral right to assume debts on behalf of the Iraqi people.” These same officials also say that this plan will fuel resentment within Iraq because some Iraqis will feel that their “conquerors” are robbing Iraq of its national resources. The answer to these objections goes back to the issue of sovereignty: Defeated countries that have had their regimes changed have no sovereignty. That comes after a new government that respects human and civil rights – and that can live at peace with itself and its neighbors – is in place. If the Provisional Authority doesn’t have the right to recover the oil revenues to pay for the reconstruction of Iraq’s oilfields and the rest of its infrastructure, who does? It will be years before Iraq’s new government could even borrow on this scale from the international community. What other country – or group of countries – will be able to gather the funds needed to start the oil flowing to market? Are we alone to pay for this?

Another and even more absurd objection to the idea of mortgaging future oil revenues is that that debt will be added to the $60 billion to $130 billion in foreign debt lent to Saddam’s regime. The real problem is that the holders of this old debt don’t want it subordinated to a mortgage secured by oil revenues. And guess who are the largest holders of this old debt? France, Germany and Russia. Certain U.S. officials fear these countries will oppose the creation of any new debt superior to theirs.

Why should anyone worry about the opposition of these three countries? Is our fear of them so great that we would bear the burden of reconstruction alone so they can be paid back the money they so improvidently lent Saddam?

If the idea of mortgaging Iraq’s oil revenues causes so much hand-wringing, why not simply use the revenues as they come in to pay us back until the costs of the reconstruction of Iraq’s oilfields and its infrastructure are recovered? This would be simple, fair (these costs would never have been incurred if Iraq and its supporters hadn’t maintained such a regime) and fully based on precedent. Surely the French ought to recall how much they demanded in reparations after World Wars I and II, and the Germans, how much they were called upon to pay after World War I. And both should remember how much the Marshall Plan helped them following World War II.

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