US embassy cable - 05PARIS6373

UNCLAS SECTION 01 OF 08 PARIS 006373 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EB/IFD/OMA 
TREASURY FOR DO/IDD AND OUSED/IMF 
SECDEF FOR USDP/DSAA 
PASS EXIM FOR CLAIMS -- EDELARIVA 
PASS USDA FOR CCC -- ALEUNG/DERICKSON/KCHADWICK 
PASS USAID FOR CLAIMS 
PASS DOD FOR DSCS -- PBERG 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, EAID, XM, XA, XH, XB, XF, FR 
SUBJECT: PARIS CLUB - SEPTEMBER 2005 TOUR D'HORIZON 
 
 
SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET DISTRIBUTION 
 
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SUMMARY 
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1. (SBU) At the September 2005 Paris Club meeting, creditors 
agreed that Iraq's recently announced debt restructuring offer to 
its private creditors was broadly comparable to the deal it 
received in the Paris Club last year.  Some creditors (Italy, 
Japan, Italy) suggested that Iraq may not be negotiating in good 
faith with its private creditors, but the IMF said it was 
premature to judge whether the Fund's lending-into-arrears policy 
had been violated, and the Paris Club Secretariat reminded 
creditors that the issue is not for the Paris Club to decide. 
The IMF gave a cautious assessment of Iraq's prospects for 
signing a Stand-By Arrangement by the end of the year, stating 
that it hoped to commence negotiations in the fourth quarter. 
Negotiations with Nigeria on a final settlement with the Paris 
Club are expected to take place in October, if a Policy Support 
Instrument for Nigeria is approved by that time.  Creditors 
agreed to "freeze the flows" as of September 15, so that any 
missed payments falling due at the end of the month do not add to 
arrears.  In addition, the Secretariat confirmed that Nigeria is 
prepared make an additional cash payment toward its 2005 debt 
service.  Other countries on the agenda included Angola, 
Argentina, Burundi, the Dominican Republic, the Democratic 
Republic of the Congo, Gambia, Indonesia, Malawi, Peru, Russia, 
Sao Tome and Principe, Serbia and Montenegro, Sierra Leone, and 
Sri Lanka.  END SUMMARY. 
 
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ANGOLA 
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2.  (SBU) The IMF reported that the authorities were no longer 
interested an SMP, but were now eyeing a PSI as a means to a 
Paris Club treatment.  The Secretariat took stock of whether any 
creditors had cut bilateral deals with Angola to recover some of 
their claims, and whether any creditors were contemplating new 
financing.  Although no creditor reported cutting a bilateral 
deal (not counting Germany in 2003 and Russia in 1996), Sweden 
acknowledged that it recently extended USD 17.5 million in short- 
term financing, and Italy said it was under tremendous pressure 
from its export credit agency to resume lending.  Creditors 
agreed that, for the time being, they should refrain from cutting 
any deals in order to maximize pressure on Angola to reengage 
with IMF - even though this strategy has been unsuccessful to 
date.  The UK was the most vocal is questioning the wisdom of 
lending to a country in debt distress. 
 
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ARGENTINA 
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3.  (SBU) Italy once again was the sole creditor to block a 
proposal by the Secretariat to send a letter to Finance Minister 
Lavagna urging Argentina to clear its arrears with the Paris 
Club.  Italy reiterated its argument that a letter to the 
authorities would signal that there is no hope for repairing 
relations with the IMF, and that the Club accepts the results of 
the bond exchange.  In response, the Secretariat circulated a 
revised letter urging Argentina to clear arrears and conclude a 
program with the Fund.  Italy has yet to comment. 
 
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BURUNDI 
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4.  (SBU) Creditors agreed to provide Burundi a debt treatment on 
Cologne terms following decision point in July.  The agreement 
will be finalized by mail.  (The US is not a creditor.) 
 
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Dominican Republic 
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5.  (SBU) Creditors agreed that the DR had satisfied the 
comparability of treatment requirement, clearing the way for 
negotiations with the Paris Club next month on a 2005 
rescheduling.  The IMF reported that the authorities completed a 
restructuring of commercial bank loans in July and are working to 
restructure debt to private suppliers.  Canada reported USD 1.5 
million in post-cutoff-date arrears resulting from a missed 
payment in August. 
 
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DEMOCRATIC REPUBLIC OF THE CONGO 
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6.  (SBU) Creditors agreed to extend the consolidation period of 
the current Paris Club arrangement through March 2006, in line 
with the extension of the DRC's Poverty Reduction Growth Facility 
(PRGF).  The current arrangement provides for interim debt relief 
on Cologne terms.  The US announced that we are now in a position 
to provide interim relief, and that we will continue to seek 
budget authority to join the consensus on an eventual HIPC 
completion point treatment.  The Secretariat noted that, under 
the current Paris Club arrangement, some moratorium interest 
payments are scheduled to fall due in March 2006.  Creditors will 
decide how to deal with these payments as the date approaches, 
based on the DRC's capacity to pay. 
 
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GAMBIA 
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7.  (SBU) The Secretariat will inform the Gambian authorities 
that the second and third phases of the 2003 Paris Club agreement 
granting interim debt relief on Cologne terms will not enter into 
force because the country's PRGF is off track.  (The US is not a 
creditor.) 
 
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INDONESIA 
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8.  (SBU) Creditors reported on the status of their bilateral 
agreements implementing the tsunami debt deferral.  The US, 
Australia, France, and Norway have concluded their bilateral 
agreements.  Several other agreements are nearing completion. 
Some creditors (Austria, Canada, France, Italy, Korea, Norway, 
Switzerland) reported that they are charging no or low interest 
on deferred amounts. 
 
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IRAQ 
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9.  (SBU) The IMF gave a cautiously worded assessment of Iraq's 
prospects for signing an SBA, stating that staff hope to commence 
negotiations on an SBA in the fourth quarter.  When asked 
pointedly by Sweden whether Iraq was currently off track, the IMF 
responded that the Executive Board did not declare the EPCA to be 
off track, but did identify a number of issues that need to be 
resolved before SBA negotiations can commence. 
 
10.  (SBU) Some creditors (Italy, Japan, France) suggested that 
Iraq may not be negotiating in good faith with its private 
creditors.  The IMF said it had encouraged the Iraqi authorities 
to negotiate in good faith, as required under the Fund's lending- 
into-arrears, but that it was premature to pass judgment, since 
negotiations on an SBA had yet to begin.  The Secretariat 
conveyed concerns raised by some private creditors about the 
negotiating process, but pointed out that lending into arrears 
was not an issue for the Paris Club to decide.  The US emphasized 
that Iraq and its advisors had held numerous meetings with many 
creditors, and that the vast majority of claimants appeared to be 
satisfied. 
 
11.  (SBU) Creditors agreed to extend the deadline for concluding 
Paris Club bilateral agreements to the end of the year.  (To 
date, only the US and Canada have concluded their bilateral 
agreements.)  On the issue of comparability of treatment, 
creditors agreed with the Secretariat's preliminary assessment 
that Iraq's offer to its private creditors was comparable to the 
treatment it received in the Paris Club. 
 
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MALAWI 
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12.  (SBU) Creditors agreed to extend the consolidation period of 
the current Paris Club arrangement from December 2004 to 
September 1, 2006, following approval of Malawi's new PRGF last 
month.  The current arrangement provides for interim debt relief 
on Cologne terms.  Malawi is projected to reach completion point 
in mid-2006 at the earliest.  (The US is not a creditor.) 
 
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NIGERIA 
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13.  Paris Club negotiations are tentatively scheduled for the 
week of October 17, assuming a PSI is in place by that time.  The 
Secretariat urged creditors to complete their data reconciliation 
 
SIPDIS 
process with Nigeria as soon as possible so that the Secretariat 
can calculate precisely how much Nigeria owes each creditor once 
the deal is struck.  (The implication that the aggregate figures 
could shift pending further data reconciliation is somewhat 
worrisome.)  Encouragingly, creditors did not object to the 
Secretariat's proposal to freeze the flows as of September 15, so 
 
SIPDIS 
that any missed payments at the end of the month do not add to 
arrears.  The Secretariat confirmed that Nigeria is prepared to 
honor, on a pro-rated basis, its commitment to pay USD 1 billion 
in debt service in 2005 (above and beyond the USD 12.4 billion 
cash outlay envisioned under the upcoming deal).  If creditors 
agree to freeze the flows as of September 15, Nigeria would owe 
creditors an additional USD 450 million in debt service on top of 
the USD 300 million paid earlier this year.  In other matters, 
creditors agreed with the Secretariat's assessment that Nigeria 
has already satisfied the comparability of treatment requirement 
through previous restructurings of its private debt.  On the 
issue of how to score the proposed debt treatment in terms of ODA 
assistance delivered, the Secretariat informed creditors that the 
Development Assistance Committee viewed the buyback portion of 
the deal as a commercial operation, meaning the discount involved 
should not count as ODA. 
 
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PERU 
---- 
14.  (SBU) The Secretariat summarized the results of Peru's 
recently concluded prepayment operation.  Peru prepaid a total of 
USD 1.6 billion to 12 Paris Club creditors, reducing non-ODA 
principal maturities falling due in 2006-2009 from USD 1.77 
billion to USD 197 million.  The US and Belgium were the only two 
Paris Club creditors with exposure to Peru not to have 
participated in the prepayment operation.  (The US welcomed 
Peru's prepayment offer but did not sign the Agreed Minute for 
legal and budgetary reasons.) 
 
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RUSSIA 
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15.  (SBU) The Secretariat summarized the results of Russia's 
recently concluded prepayment operation.  Russia prepaid a total 
of USD 15 billion to 16 Paris Club creditors (including the 
United States), reducing its overall Paris Club debt from USD 
37.2 billion to USD 22.2 billion.  Creditors agreed that Russia 
had respected the terms of the agreement, thus triggering the 
agreement's non-securitization provision, which prohibits 
creditors from securitizing their remaining Russian claims until 
at least December 31, 2006.  Russia said that it had yet to make 
a decision about any future prepayment operations, but indicated 
that it has sufficient resources to prepay the balance of its 
Paris Club debt. 
 
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SAO TOME AND PRINCIPE 
--------------------- 
16.  (SBU) Following approval of STP's new PRGF last month, 
creditors agreed to provide STP with a retroactive Cologne 
treatment, effective from May 2001 to December 2007.  The 
agreement will be finalized by mail.  In return, STP will be 
responsible for making an upfront payment of about USD 1.5 
million covering interest arrears and late interest.  (The US is 
not a creditor.) 
 
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SERBIA AND MONTENEGRO 
--------------------- 
17.  (SBU) The USDEL announced that it had obtained domestic 
legal authority to support the Paris Club's decision in June to 
extend S&M's current arrangement (which provides for the 
capitalization of 60% of interest payments) until the end of the 
year.  The Secretariat will send a letter to the S&M authorities 
notifying them of the extension and urging them to implement 
reforms necessary to complete the final review under the 
country's IMF program. 
 
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SIERRA LEONE 
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18.  (SBU) Sierra Leone reached decision point in March 2002 and 
received interim debt relief from the Paris Club on Cologne 
terms.  Interim relief expired in June 2005, when Sierra Leone 
completed the sixth and final review of its PRGF.  Although the 
authorities hope to have a new PRGF in place next January, the 
Paris Club cannot formally extend the consolidation period of the 
current arrangement in the absence of an IMF program. 
Nevertheless, creditors agreed to bill Sierra Leone as if Cologne 
terms still applied.  (In the case of the US, we will no longer 
be able to go beyond Cologne terms and forgive 100% of pre- 
Cologne Summit flows falling due after decision point.) 
 
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SRI LANKA 
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19.  (SBU) Creditors reported on the status of their bilateral 
agreements implementing the tsunami debt deferral.  Norway and 
France have concluded their bilateral agreements.  A few other 
creditors have made good progress.  (The US expects to finalize 
its bilateral later this month.)  Norway, Canada, France, and 
Korea reported that they are charging no or low interest on 
deferred amounts.  In response to Sri Lanka's request for a two- 
year extension of the debt deferral, creditors agreed that any 
extension could only take place within the normal Paris Club 
framework, meaning Sri Lanka would first have to have an IMF 
program in place. 
 
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METHODOLOGICAL DISCUSSION:  DE VENECIA SWAP INITIATIVE 
--------------------------------------------- --------- 
20.  (SBU) Creditors dismissed Philippine Congressman de 
Venecia's proposal calling on the Paris Club to conduct debt-for- 
equity swaps with middle-income countries to help them achieve 
the Millennium Development Goals.  Several creditors 
characterized the proposal as a "non starter" and stressed that 
the Club - through the Evian approach - already had the tools to 
deal with middle-income countries in debt distress.  In a related 
issue, a few creditors (led by Norway, and supported by the UK, 
Italy, and Russia) thought the Club should consider removing the 
ceiling on non-ODA debt-for-development swaps.  Other creditors 
(Sweden, Netherlands, Australia) disagreed, arguing that the club 
was not a development institution.  The Secretariat agreed to 
produce a working paper on the subject. 
 
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METHODOLOGICAL DISCUSSION:  BREAKAGE COSTS 
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21.  (SBU) Although most creditors agreed with the Secretariat's 
recommendation that debtor countries should not be forced to pay 
so-called "breakage costs" in future prepayment operations, and 
that creditors and debtors should not negotiate bilateral 
settlements, two creditors (Netherlands, Australia) requested 
more time to study the matter.  The Secretariat agreed to revisit 
this issue in the future. 
 
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METHODOLOGICAL DISCUSSION: EXTENSION OF HIPC 
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22.  The Secretariat encouraged the IMF to work closely with 
Paris Club creditors to ensure that the data it was using to 
evaluate potential new HIPC countries was accurate.  Japan 
suggested that the IMF and World Bank may not be taking into 
account the full extent of Japan's debt cancellation for certain 
low-income countries. 
 
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Methodological Discussion:  IDA-administered Loans 
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23.  (SBU) EU creditors agreed that they will not require any 
payments after November 1 on EU loans administered by IDA and 
extended to HIPC countries having reached completion point. 
These loans were previously thought to be multilateral loans but 
were recently reclassified as bilateral loans subject to Paris 
Club treatments. 
 
MINIMIZE CONSIDERED. 
STAPLETON#