US embassy cable - 05ROME1671

UNCLAS  ROME 001671 
 
SIPDIS 
 
 
SENSITIVE 
 
DEPT FOR EUR/WE, EUR/ERA, EB/IFB/OMA 
PARIS ALSO FOR USOECD 
TREAS FOR HULL 
FRANKFURT FOR WALLAR 
 
E.O. 12958: N/A 
TAGS: EAID, ECON, EFIN, IT 
SUBJECT: ITALY ON DEBT RELIEF FOR POOR COUNTRIES 
 
REF: STATE 31823 
 
1. (SBU) Summary.  Italian Finance Ministry officials told 
Embassy Officers that Italy is carefully weighing the various 
proposals by G8 members and the International Monetary Fund 
(IMF)/World Bank for debt relief for the poorest countries. 
Finance Ministry officials hope that a consensus G8 proposal 
will emerge and asked about U.S. flexibility to achieve a 
common proposal.  Italy favors the IFF vaccine pilot program. 
 Finance Ministry officials chided the United States for not 
maintaining our previous percentage share in the recent IDA 
14 replenishment.  Finance Ministry reaction to the U.S. 
proposal included the concern that non-Highly Indebted Poor 
Countries (HIPC)- and International Development Association 
(IDA)-eligible countries would be excluded, and that the 
World Bank IDA fund would become undercapitalized without new 
donor inflows to compensate for payments eliminated on 
forgiven debt.  Finance Ministry officials also believe that 
HIPC debt to the IMF must be addressed together with IDA and 
Africa Development Fund (AfDF) debt and, again in this case, 
new inflows would be needed.  End Summary. 
 
Introduction 
------------ 
 
2. (SBU) On March 9, and again on April 27, Economic Officer 
and Specialist met with Francesca Manno, Finance Ministry 
Director of International Financial Relations, and Maria 
Luisa Panzica, Manno,s Economic Advisor, to discuss poor 
country debt relief.  Both officials were well versed on the 
U.S. position from G8 and IFI-related meeting with their U.S. 
Treasury counterparts.  Manno said that while Italy was not 
against the U.S. position, Italy did have some philosophical 
differences with the U.S. approach.  Manno doubted that G8 
members would endorse any single proposal, but thought that a 
hybrid approach would stand a better chance.  She asked if 
the U.S. position was "take-it-or-leave-it,8 or if we were 
flexible. 
 
Don,t Forget Non-HIPC, IDA Countries. 
------------------------------------- 
 
3. (SBU) Manno emphasized that Italy backed, and had 
implemented, 100 percent bilateral debt relief for HIPC 
countries.  However, she believed that the U.S. proposal is 
too narrow and noted the moral hazard in the U.S. approach of 
excluding non-HIPC, IDA countries.  HIPCs are rewarded, while 
poor countries (non-HIPC, IDAs), which have better managed 
their debt, are ignored.  Manno said that Italy preferred a 
country-by-country approach to allow G8 members to evaluate 
and act on debt relief for all poor countries, not just 
HIPCs. 
 
Can,t Bleed IDA; U.S. Plan Means Earlier IDA Replenishment. 
--------------------------------------------- -------------- 
 
4. (SBU) Manno chided the United States for not maintaining 
its IDA 13 percent share during the recently completed IDA 14 
replenishment.  She said even with its fiscal challenges, 
Italy maintained the same percent share between IDA 13 and 
IDA 14.  She noted that under the U.S. approach to debt 
relief, IDA would lose too much capital, as its assets (the 
loans to HIPCs) were written off.  Manno said either donor 
countries would need to provide new funds, or IDA would 
wither.  Manno pointed out that this was an implicit cost in 
the U.S. proposal, even though our proposal claimed no net 
costs to donors. 
 
Pay-As-You-Go for IDA Grants Increases Uncertainty. 
--------------------------------------------- ------ 
 
5. (SBU) Panzica said there were problems associated with 
financing foregone principal on IDA 14 grants with additional 
donor contributions on a pay-as-you-go basis.  She noted that 
the United States had been a strong proponent for increasing 
IDA grants to HIPCs.  She said that pay-as-you-go requires 
donor countries to make multiple requests to their 
 
legislative appropriators, which actually increases funding 
uncertainty.  Panzica explained that Italy,s Parliament had 
only just approved in March 2005, euro 185 million for IDA 
13, even though IDA 14 negotiations had already closed. 
Manno emphasized that funding for MDBs is a hot-button issue 
for some Italian lawmakers.  She said Finance Ministry 
officials plan to meet more frequently with members of 
Parliament to keep them updated on MDB-related issues, and 
hopefully, limit excessive delays on future funding requests 
and keep discussions on a &technical, not political, path.8 
 
How to Fund Forgiveness of IMF HIPC Loans? 
------------------------------------------ 
 
6. (SBU) Manno noted that while the United States opposes IMF 
gold sales to pay for IMF debt relief to poor countries, the 
United States has not proposed an alternative mechanism to 
recapitalize IMF losses that would arise from writing off 
HIPC loans.  In any event, Manno doubted that agreement could 
be reached to approve IMF gold sales to pay off IMF loans to 
HIPCs.  Italy is interested in exploring alternative 
financing mechanisms, often referred to as variants on the 
&Tobin tax8 ) an infinitesimally small charge on financial 
transactions worldwide.  Manno said that her office was not 
responsible for evaluating alternative financing mechanism 
proposed by a number of countries and institutions.  She 
admitted some proposals could create market distortions or 
disadvantage select market segments, but mentioned an ongoing 
lottery, with tickets selling worldwide, as a possible 
funding approach with minimal market impacts. 
 
Italy Supports IFF Immunization Pilot. 
-------------------------------------- 
 
7. (SBU) Manno said that Italy had not yet agreed to provide 
funds to the IFF Immunization Pilot, which Minister 
Siniscalco has publicly supported.  She went on to say that 
the pilot program could easily expand or contract its 
geographical scope, if donor response was greater or lesser 
than expected.  This meant Italy could decide at a later date 
whether or not to contribute funds, without adversely 
impacting the pilot program. 
 
Comment 
------- 
 
8. (SBU) Italy clearly wants to be active in G8 debt relief 
initiatives.  Manno and Panzica are well versed on the U.S. 
proposal, and Finance Minister Siniscalco has twice sought 
(unsuccessfully) to meet with Treasury Secretary Snow to 
discuss G8 development initiatives.  End Comment. 
 
SEMBLER 
 
 
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 2005ROME01671 - Classification: UNCLASSIFIED