US embassy cable - 04BRASILIA3136

UNCLAS BRASILIA 003136 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR DEBT POLICY OFFICE AND OASIA 
STATE FOR WHA/BSC, WHA/EPSC, AND EB/IFD/OMA 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, PGOV, PREL, BR, IZ, Macroeconomics & Financial 
SUBJECT: DEBT REDUCTION FOR IRAQ - FOLLOW-UP WITH NON-PARIS 
CLUB CREDITORS 
 
REF:  A) STATE 238110, B) BRASILIA 2698 
 
1. (U) ACTION REQUEST - PARAGRAPH 5. 
 
2. (U) PER INSTRUCTIONS, ECONOFFS PRESENTED REFTEL A 
DEMARCHE (ALONG WITH FACT SHEET) TO BOTH THE BRAZILIAN 
FINANCE AND FOREIGN MINISTRIES. 
 
3. (SBU) FINANCE MINISTRY INTERNATIONAL SECRETARY LUIS 
PEREIRA TOLD ECONOFF DECEMBER 17 THAT BRAZIL WAS FOLLOWING 
THE IRAQ PARIS CLUB NEGOTIATIONS CLOSELY AND WELCOMED 
CONTACT WITH THE IRAQI AUTHORITIES TO DISCUSS DEBT 
RESTRUCTURING.  THE IRAQIS HAD NOT YET BEEN IN TOUCH. 
PEREIRA NOTED THAT HOW BRAZIL DEALT WITH IRAQ WOULD DEPEND 
IN PART ON THE TACK TAKEN BY THE LARGE NON-PARIS CLUB 
CREDITORS, WHOM HE REMARKED HELD A MAJORITY OF IRAQI DEBT. 
BEING SEEN AS ACTING IN CONCERT WITH OTHER CREDITORS AS 
PART OF A CREDIBLE MULTILATERAL PROCESS WAS IMPORTANT TO 
OBTAINING CONGRESSIONAL APPROVAL OF AN IRAQ DEBT WRITE-OFF. 
DEBT WRITEOFFS WERE A PARTICULARLY SENSITIVE POLITICAL 
ISSUE, WITH CONGRESSIONAL DELEGATIONS FROM STATES WITH 
LARGE DEBTS TO THE BRAZILIAN FEDERAL GOVERNMENT QUESTIONING 
WRITE-OFFS FOR FOREIGNERS WHEN THE FEDERAL GOVERNMENT 
INSISTED ON REPAYMENTS FROM THEIR OWN STATES.  PEREIRA 
NEVERTHELESS IMPLIED THERE WOULD BE POLITICAL WILL TO WORK 
WITH IRAQ ON A RESTRUCTURING OF WHAT BRAZIL ESTIMATES IS 
$602.9 MILLION IN BILATERAL GOVERNMENT TO GOVERNMENT DEBT. 
(NOTE: $163.7 MILLION IN PRINCIPAL, $22.3 MILLION IN 
INTEREST AND $416.9 MILLION IN PAST DUE INTEREST.)  PEREIRA 
SAID BRAZIL'S BUSINESS COMMUNITY WOULD BE CLOSELY WATCHING 
NEGOTIATIONS WITH PRIVATE SHAREHOLDERS.  THE BULK OF IRAQ'S 
DEBT TO BRAZIL IS HELD BY PRIVATE CREDITORS, HE EMPHASIZED. 
 
4. (SBU) IN CONTRAST, THE HEAD OF THE MFA'S ECONOMIC 
DEPARTMENT, AMB. PIRAGIBE TARRAGO, TOLD ECONCOUNS DECEMBER 
20 THAT THE MAXIMUM DEBT REDUCTION THAT BRAZIL COULD OFFER 
IRAQ WAS 50 PERCENT, THOUGH A DECISION HAD NOT YET BEEN 
TAKEN TO GO UP TO THE LEVEL.  IT COULD WELL BE THAT THE GOB 
MIGHT OPT FOR A LEVEL LESS THAN 50 PERCENT, TARRAGO NOTED. 
TARRAGO SAID THAT THIS POSITION WAS BASED STRICTLY UPON 
ECONOMIC FACTORS, THOUGH IT WAS CLEAR THAT THE LIKELIHOOD 
THAT THE BRAZILIAN CONGRESS WOULD OBJECT TO ANY LEVEL 
HIGHER THAN 50 PERCENT WEIGHED HEAVILY IN HIS THINKING. 
THE GOB OBSERVER DELEGATION TO THE NOVEMBER 21 PARIS CLUB 
SESSION HAD MADE THIS POSITION CLEAR AT THE TIME OF THAT 
MEETING, HE ADDED.  TARRAGO WAS PARTICULARLY INTERESTED IN 
USG THINKING WITH RESPECT TO HOW COMMERCIAL DEBT 
RESCHEDULING (WASHINGTON CLUB AND LONDON CLUB) WOULD 
PROCEED.  HE NOTED THAT SOME BRAZILIAN PRIVATE SECTOR 
CREDITORS WERE CURRENTLY INVOLVED IN THESE TALKS. 
 
5. (U) ACTION REQUEST - ANY INFORMATION DEPARTMENT CAN 
PROVIDE WITH RESPECT TO THE STATUS OF THE COMMERCIAL DEBT 
RESCHEDULING TALKS WOULD BE MOST HELPFUL.  WE WILL PASS 
SUCH INFORMATION TO BOTH TARRAGO AND PEREIRA. 
 
6. (SBU) COMMENT.  WHILE PEREIRA AND TARRAGO EACH PUT A 
DIFFERENT SPIN ON THEIR MESSAGE, THE OVERALL IMPORT SEEMS 
CLEAR:  GOB THINKING HAS NOT YET CRYSTALIZED WITH RESPECT 
TO THE LEVEL OF IRAQ DEBT REDUCTION, THOUGH IT APPEARS IT 
WILL BE EXTREMELY DIFFICULT FOR THE GOB TO OFFER ANYTHING 
OVER THE 50 PERCENT LEVEL.  END COMMENT. 
 
MINIMIZE CONSIDERED. 
 
DANILOVICH