Overview: Iraq's debt talks
Following their landmark outline agreement with the Paris Club of major industrial country creditors last November, the Iraqi authorities are focusing on the implementation of a deal that could eventually see four-fifths of the external debt burden written off.
Four distinct processes are now running in parallel: the Paris Club deal; arrangements with the six Gulf Co-operation Council (GCC) states (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates); negotiated agreements with an estimated 45 other government creditors; and the restructuring of commercial debt.
Governments are already pressing ahead with negotiation of debt settlement terms, with the task of reconciling detailed individual claims getting under way.
Non-government commercial creditors must act quickly if they are to secure at least part payment from Baghdad under any eventual settlement. Ernst & Young (E&Y) - the government's reconciliation agent, to list exactly what is owed to whom - has extended its initial deadline for submission of claims until 15 April.
E&Y is among a number of professional advisers, including Lazard Frres, which is advising the Iraqi Interim Ministry of Finance and Central Bank of Iraq on their Paris Club dealings. US investment bank Houlihan Lokey Howard & Zukin is advising on negotiations with all non-Paris Club government creditors, except for GCC states.
Citigroup Global Markets and JP Morgan Securities are acting on the creditor side as joint global co-ordinators of all the private commercial creditor claims.
It is too early to guess when negotiations with all the creditors will finally be completed, but two positive factors should facilitate the process. Firstly, Iraqi financial records are in a much better condition than had originally been feared. The old Baathist administration was highly bureaucratic and paper-obsessed, and the fact that much of its debt archive seems to be intact will be a big help in reconciling the new government's record of what it owes to individual creditors with the detailed claims those creditors submit to E&Y.
Paris Club negotiations
The 21 November 2004 outline Paris Club agreement specifies the levels of write-off to which Iraq is entitled and sets out important principles for the negotiations ahead; no creditor can be treated more generously than any other Paris Club member (if anyone is paid more, the Paris Club reserves the right to cancel its agreed write-off terms).
Paris Club creditors do not hold the majority of Iraqi debt - as of 2004, the Paris Club accounted for only $38.9bn of the estimated $115bn-130bn foreign debt (GSN 746/13). However, as their political clout is much greater than their minority share of Iraq's debt, the November deal will be provide a 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; and a further 20% will be cancelled once the IMF confirms that its three-year programme has been successfully completed.
Lazard is advising on implementation of the Paris Club deal, through bilateral talks with member governments - a relatively straightforward process as the main principles have been agreed (GSN 746/16, 744/8). Now it is a question of reaching creditor-by-creditor agreements on detailed issues such as interest rates.
The United States has already unilaterally cancelled all the $4.1bn it is owed, reflecting long-running arguments from within the Bush administration that Iraq was saddled with Saddam era "odious debt" that should be forgiven. The USA was unable to press a wider debt forgiveness deal on the Paris Club.
Russia, looking for other business and faced with the prospect of never getting back much of its big Saddam era debt, has also announced a big debt write-down. According to Finance Minister Alexei Kudrin, Moscow's debt will be written down from an original $10.5bn to just $700m-$1bn. The Russian Security Council said this was designed to assist Iraq's recovery and smooth the path for reinstatement of contracts formerly awarded to Russian companies in Iraq (not least Lukoil's massive oil field development deal).
Other government creditors
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 $18bn-20bn - the exact figures remain subject to detailed reconciliation. The unusually wide range of foreign government creditors in part reflects the importance of pre-1990 Iraq as an ally and trading partner for the Arab world, the Communist bloc and the West.
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 $780m 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 $1.7bn) and Romania ($2.6bn) appear to be more hard-nosed. The Bulgarians and their intermediaries have, for some time, been trying to manoeuvre a cash-generating debt sale - and they are not alone in this. However, they will find it hard to escape the Paris Club terms, especially at a delicate stage in their final negotiations for entry to the European Union (whose main governments all sit in the Paris Club).
Commercial creditors and the GCC
A degree of uncertainty hangs over the amounts owed to commercial and private sector entities such as the banks that participated in Saddam-era syndicated loans or South Korean and Turkish 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. (Thus, in some cases, the figures submitted to the IMF 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 six GCC states are negotiating directly with the Interim Iraqi Government, rather than through any co-ordinated process managed by advisers. They are a major class of creditor.
© Gulf States Newsletter 2005
