There are just weeks to go before the door closes for submission of claims by potential commercial creditors of Iraq, while foreign governments are already pressing ahead with negotiation of their debt settlement terms
Following its landmark outline agreement with the Paris Club of major industrial country creditors in November 2004, Iraq is now focusing on the practical implementation of a deal that could eventually see four-fifths of its present foreign debt burden written off.
The task of reconciling detailed individual claims is getting under way, and Iraq Focus has learned that some foreign government creditors outside the Paris Club have already begun negotiation of debt settlement terms with Baghdad. Professional advisers have been appointed:
Lazard Frres will advise the Iraqi government in its dealings with members of the Paris Club;
US investment bank Houlihan Lokey Howard & Zukin is advising on negotiations with all government creditors outside the club - except the members of the Gulf Co-operation Council (GCC).
On the creditor side, Citigroup Global Markets and JP Morgan Securities are acting as joint global co-ordinators of all the private commercial creditor claims. Commercial creditors need to get their skates on if they are to secure at least part payment from Baghdad under any eventual settlement. Ernst & Young, appointed as the government's reconciliation agent to produce an agreed list of exactly what is owed to whom, has now extended its initial deadline for submission of claims from non-government commercial creditors - but only until 15 April.
Piecing the jigsaw together
It is far too early to guess when negotiations with all the creditors will finally be completed. But two factors should facilitate the process.
At the purely practical level, it turns out that Iraqi financial records are in a much better condition than had originally been feared. This will be a big help in reconciling the government's record of what it owes to individual creditors with the detailed claims those creditors submit to Ernst & Young.
But even more important is the brutal negotiating truth that - on 21 November 2004 - Iraq had already reached an outline agreement with the Paris Club, specifying the levels of write-off to which it is entitled. This specifies that no creditor must be treated more generously than the club members. If anyone is paid more, the Paris Club reserves the right to cancel the write-off terms it has agreed.
By 2004, Paris Club members accounted for only $38.9 billion of Iraq's estimated $115 billion- 130 billion foreign debt. However, they include all the big western economies, and their real clout on this issue is much greater than their minority share of Iraq's debt. Consequently, the November deal will be the quasi-obligatory benchmark for all other creditors.
The Paris Club deal provided for immediate cancellation of 30% of the debt stock, with a further 30% cancelled once the government in Baghdad reaches a standard economic programme agreement with the International Monetary Fund. Finally, a further 20% will be cancelled once the IMF confirms that this standard three year programme has been successfully completed.
Four distinct processes are now running in parallel.
Club class
Lazard is advising on implementation of the Paris Club deal, through bilateral talks with individual member governments. This process should be relatively straightforward, as the main principles have already been agreed. Now it is a question of reaching agreement, creditor by creditor, on detailed issues such as interest rates.
The US has already unilaterally cancelled all the $4.1 billion it is owed.
Russian finance minister Alexei Kudrin has said that the debt owed to Moscow will be written down from an original $10.5 billion to just $700 million-1 billion. The Russian Security Council has explained that this generosity is designed both to assist Iraq's recovery and to smooth the path for reinstatement of contracts formerly awarded to Russian companies in Iraq.
Moscow would dearly like to see Lukoil recover the massive oil field development deal it was awarded by Saddam Hussein. Baghdad has still to reach agreement with an estimated 45 government creditors outside the Paris Club and the GCC. These countries could be owed a total $18 billion-20 billion. The exact figures remain subject to detailed reconciliation.
The range of foreign government creditors is unusually wide, perhaps a reflection of the political importance of pre-1990 Iraq, both in the Arab world and as an ally of the Communist bloc, and of its oil-fuelled purchasing power and appetite for technology and defence equipment.
Outside the club
Among the non-Paris Club creditor countries are a number of East European, Latin American and North African states, and India, Pakistan and China. Some of the money was owed to governments and some represents trade debt on which Iraq defaulted but which was covered by export credit agencies (ECAs).
A number of these governments have already begun talks with Baghdad, or are on the verge of doing so. These include Poland, owed about $780 million in principle and interest, mainly relating to credits advanced in the 1970s and 1980s. Warsaw plans to start formal talks during the next few months; it has already accepted that the Paris Club terms will be a benchmark.
Bulgaria (owed $1.7 billion) and Romania ($2.6 billion) appear to be taking a more hard-nosed line. Since soon after the fall of Saddam, the Bulgarians and their intermediaries have been trying to manoeuvre a cash-generating debt sale - and they are not alone in this.
However, in practice they will find it hard to escape being bound by the Paris Club terms, especially at a delicate stage in their final negotiations for entry to the European Union (whose main governments are, of course, Paris Club members).
A degree of uncertainty hangs over the amounts owed to the third category of creditors - commercial and private sector entities such as banks that had participated in syndicated loans or South Korean contractors that worked on projects in Iraq.
It is not yet clear whether some commercial debt may have been itemised in overall national totals submitted by governments to the IMF, for the outline debt tally it has already produced in 2004.
For example, in some cases, the figures submitted by a country to the Fund may include the full value of trade deals that were 85% export credit-insured; in other cases, they may only include the 85% for which the ECA became liable when Iraq failed to pay.
The final category of creditors are the six GCC states: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. Baghdad is negotiating directly with these major creditors, rather than through any coordinated process managed by advisers.
© Menas Associates 2005
