US embassy cable - 05PARIS7308

UNCLAS SECTION 01 OF 07 PARIS 007308 
 
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 - OCTOBER 2005 TOUR D'HORIZON 
 
 
SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET DISTRIBUTION 
 
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SUMMARY 
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1. (SBU) At the October 2005 Paris Club meeting, creditors 
reached agreement with Nigeria on a comprehensive treatment to 
eliminate Nigeria's approximate $30 billion debt in exchange for 
cash payments totaling $12.6 billion ($12.4 billion in the deal 
itself, and $200 million upfront to meet a precondition for the 
deal).  Creditors also agreed to reschedule $137 million of the 
Dominican Republic's debt falling due in 2005.  Although the 
negotiations with Nigeria were protracted, the result was a deal 
structured largely along the lines agreed to in principle by 
Paris Club creditors in June.  Nigeria will make three payments 
totaling $8 billion, covering arrears and other senior debt.  In 
return, creditors will grant 67 percent "Naples terms" debt 
reduction.  Nigeria will then buy back the balance of the debt at 
a market-related price, computed so that overall payments sum to 
$12.4 billion.  The final phase of the deal is predicated on 
completion of the first review of Nigeria's Policy Support 
Instrument (PSI) with the IMF, anticipated for March 2006.  As a 
precondition to the deal, Nigeria must pay $200 million in 
additional 2005 debt service, fulfilling a previous commitment to 
the Paris Club.  The Dominican Republic requested rescheduling of 
both 2005 and 2006 maturities.  Creditors agreed to reschedule 
debt falling due in 2005, but turned down the DR's request for a 
rescheduling of 2006 maturities, citing a buildup in reserves and 
an improvement in economic and financial conditions.  Creditors 
agreed to reassess the country's financing needs in December 
2005, in the context of the third review of the IMF Standby 
Arrangement (SBA).  Other countries on the agenda included 
Argentina, Afghanistan, Cameroon, Iraq, Moldova, Russia, and 
Serbia Montenegro.  Jordan was discussed at a separate G-7 debt 
experts meeting.  END SUMMARY. 
 
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Nigeria 
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2.  (SBU) The Nigerians came to the negotiations requesting 
treatment considerably more generous than had been agreed in 
principle by the G-7 and other Paris Club creditors in June 2005. 
The final deal is somewhat more generous than was previously 
agreed - reducing the prorated amount of Nigeria's regular 2005 
payment by about $200 million (from $445 million), and providing 
for payments in three stages (with less in the first stage) 
rather than two.  The $12.4 billion total payment agreed to in 
June held, however, despite a request by Finance Minister Ngozi 
to reduce it by $500 million.  A new element in the deal is that 
Nigeria's payments will be made into an escrow account at the 
Bank for International Settlements (BIS) and will be released to 
creditors only after bilateral agreements have been signed and 
ratified. 
 
3.  (U) The main elements of the deal are: 
 
-- Prior Action:  Nigeria pays $200 million in additional 2005 
debt service, fulfilling a previous commitment to the Paris Club. 
(Note: Nigeria met the other prior action when it agreed upon a 
non-lending program with the International Monetary Fund (IMF) on 
October 17, under the IMF's new PSI.) 
-- Phase One (October 31):  Nigeria pays $6.4 billion, to be 
allocated first to outstanding "leveling-up" debt (i.e., 
'preferred' or 'senior' debt from Nigeria's 2000 deal with the 
Paris Club) and then to arrears (i.e., debt that is past due). 
Creditors provide an initial phase of debt reduction equal to 33 
percent of "eligible debt" (defined as outstanding debt excluding 
arrears, leveling-up debt, and post-cutoff date debt (i.e., debt 
from after October 1, 1985)). 
-- Phase Two (December 12):  Nigeria pays the balance of arrears 
($1.4 billion). 
-- Phase Three (20 business days after first IMF review of PSI 
(expected March 2006)):  Nigeria pays outstanding post-cutoff 
date debt ($0.3 billion) in full.  Creditors provide a second 
(and final) phase of debt reduction equal to 34 percent of 
eligible debt.  Nigeria then buys back the balance of the debt at 
a market-related price (for which it makes a payment of $4.4 
billion) that brings total payments to $12.6 billion. 
 
4.  (U) Assuming all three phases of the deal are implemented, 
Nigeria's entire stock of debt to the Paris Club ($30.1 billion, 
of which $975 million owed to the US) will be eliminated. 
Payments to the US, including the US share of the 2005 debt 
service payment, amount to $356 million.  The USDEL was able to 
sign the agreement after confirming that the projected payments 
from Nigeria would be sufficient to cover the budget cost of the 
envisaged debt reduction.  (Note: under the 1991 Credit Reform 
Act, the value of debt (its "budget cost") held by the US is 
calculated according to a variety of debtor country-specific 
factors.  The greater the likelihood of repayment, the higher the 
budget cost of any debt forgiveness). 
 
Dominican Republic 
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5.  (U) Creditors (US, Spain, France, Germany and Japan) provided 
a rescheduling of $137 million in pre-cutoff (i.e., debt from 
before June 30, 1984) maturities falling due in 2005.  Debts were 
rescheduled over 12 years, with a 5-year principal grace period 
(i.e., "Classic" terms).  The agreement (called the "Agreed 
Minute" by the Paris Club) includes a goodwill clause stating 
that creditors will review the external financing needs of the 
Dominican Republic in December 2005, in the context of the third 
review of the SBA, "with a view to providing additional relief in 
2006, if needed, to support the program."  The Agreed Minute also 
notes that as regards the DR's debts to the private sector, in 
light of the successful bond restructuring in July 2005 and the 
rescheduling agreement signed with commercial banks on 17 October 
2005 (if implemented--see paragraph 6), the Dominican Republic 
has met the comparability of treatment requirement (i.e., equal 
treatment by all creditors) and is therefore not required to seek 
further debt relief from its private sector creditors. 
 
6.  (SBU) The Dominican Republic argued strenuously for a 
rescheduling of both 2005 and 2006 maturities, pointing to 
vulnerabilities in the economy and a projected financing gap in 
2006, as identified by the IMF.  Short of a combined 2005-2006 
rescheduling, the DR tried to include a clause in the agreement 
whereby a 2006 rescheduling would be triggered automatically upon 
validation of a financing need by the IMF at the time of the 
third review of the SBA.  The DR warned that failure to secure a 
2006 rescheduling - or some sort of guarantee that a 2006 
rescheduling was forthcoming - would jeopardize a recently 
concluded MOU with commercial bank creditors to reschedule $198 
million in debt falling due in 2005-2006.  (The MOU lists, among 
other conditions, that the DR must reach an agreement with the 
Paris Club in 2005 providing support for the duration of the IMF 
program.)  More broadly, the DR warned that the Paris Club's 
refusal to provide an immediate 2005-2006 rescheduling would 
cause fear in the financial sector that any future Paris Club 
debt relief would reopen the comparability of treatment issue and 
lead to future commercial debt restructurings. 
 
7.  (SBU) The USDEL expressed serious doubts about the need for 
debt relief in 2006 given the improvement in the economy, the 
increase in reserves, and other possible sources of financing 
(e.g., a $50 million World Bank disbursement currently held up 
due to the DR's failure to meet conditionality).  Moreover, the 
USDEL argued that the Paris Club was not in the business of 
providing precautionary rescheduling to guard against potential 
financing difficulties on the horizon.  The USDEL opposed 
attempts by the DR to craft language in the goodwill clause 
committing creditors to provide debt relief in 2006 should the 
IMF identify a financing gap at the next SBA review.  (Although 
the IMF regularly requests financing assurances from the Paris 
Club, an affirmative response from creditors is not guaranteed.) 
France, Japan, and Germany joined the USDEL in opposing a 2006 
rescheduling, but appeared indifferent to the wording of the 
goodwill clause.  Spain, on the other hand, actively supported 
the DR's positions throughout the negotiations. 
 
Afghanistan 
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8.  (SBU) The IMF said a low-access (i.e., 10 percent of its 
quota) Poverty Reduction and Growth Facility (PRGF) could be in 
place by April 2006.  Regarding an eventual treatment of 
Afghanistan's debt in the Paris Club, the Secretariat outlined 
two possible ways forward.  If Afghanistan qualifies for 
treatment as a Heavily Indebted Poor Country (HIPC), it would be 
entitled to an initial debt treatment on Naples terms (i.e., 67 
percent reduction).  If, on the other hand, Afghanistan 
approached the Paris Club as a non-HIPC, under the Evian 
approach, creditors would provide debt relief on the basis of a 
Debt Sustainability Analysis (DSA) by the IMF.  In either 
scenario, creditors could choose to provide, on a voluntary 
basis, additional relief beyond what was called for in the Paris 
Club agreement. 
 
9.  (SBU) Russia said that, for domestic considerations, it 
wished to treat Afghanistan's debt in a multilateral framework 
(i.e., at the Paris Club).  Russia argued, furthermore, that a 
Paris Club deal would be beneficial to Afghanistan insofar as it 
helped to leverage comparable debt relief from non-Paris Club 
creditors.  Russia reported claims totaling $10.2 billion, of 
which $9.8 billion is in arrears.  Germany said it had already 
canceled Afghanistan's Official Development Assistance (ODA) 
debt, but needed a legal basis (that is, dealing with it at the 
Paris Club) to cancel the remaining 36 million Euros in non-ODA 
debt.  If Afghanistan becomes a HIPC, Germany is prepared to 
cancel 100 percent of its remaining claims.  If Afghanistan is 
treated as a non-HIPC, Germany will not have the legal authority 
to cancel 100 percent.  For its part, the US suggested that the 
three concerned creditors consider reaching a multilateral 
agreement outside of the Paris Club, given that the three were 
Afghanistan's only Paris Club creditors. 
10.  (SBU) During a subsequent side discussion, the head of the 
Russian delegation reiterated that Russia had no flexibility to 
deal with Afghanistan outside the Club, adding that nothing less 
than a "standard Paris Club agreement" would allow Russia to 
sidestep its legislature, the Duma.  He stressed that Russia had 
never reached an agreement in principle with Afghanistan on the 
so-called zero option (whereby nearly all of its debt to Russia 
would be forgiven, with grants provided to offset small debt 
service payments), and that press releases suggesting otherwise 
were erroneous.  He also said only 50 percent of its debt with 
Afghanistan has been reconciled, with no progress made for about 
a year.  If Afghanistan approaches the Paris Club as a HIPC, he 
said Russia would not be in a position to cancel 100 percent of 
its debt at completion point unless its broader HIPC policy has 
changed by that time.  If Afghanistan approaches the Paris Club 
as a non-HIPC, Russia might have more flexibility under the Evian 
approach. 
 
Argentina 
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11.  (SBU) At Argentina's request, the Secretariat met with 
Finance Minister Nielsen during the IMF/World Bank meetings in 
Washington.  Nielsen claimed that certain Paris Club creditors - 
namely Germany and Austria - were eager to extend new financing 
to Argentina.  (Both Germany and Austria denied this claim and 
said that a Paris Club deal was necessary before any new 
financing could be considered.)  Nielsen expressed interest in 
getting a Paris Club deal without an IMF program.  In a 
subsequent letter to the Club, Nielsen explained that Argentina 
was not in a position to pay its arrears.  The majority of 
creditors voiced support for sending a written response to the 
authorities asking them to pay arrears and reiterating that an 
IMF program was a requirement for any Paris Club deal.  Italy, 
however, continued to block such a letter, stating that it has 
not yet decided on an appropriate position.  The Secretariat will 
draft a letter for discussion at the November Paris Club session. 
 
Cameroon 
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12.  (SBU) A new PRGF is scheduled to be presented to the IMF 
Board on October 24 (note: the IMF approved Cameroon's PRGF on 
October 24).  Creditors agreed to resume their provision of HIPC 
interim relief to Cameroon by extending the consolidation period 
of the previous agreement once the PRGF is approved. 
 
Iraq 
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13.  (SBU) The IMF said Iraq had satisfied the preconditions for 
initiating SBA negotiations.  A mission is currently in the 
field, and staff believe that a program could be presented to the 
Executive Board sometime in December.  (In a side discussion, the 
IMF said staff is considering a precautionary SBA.)  The 
Secretariat reported on Iraq's progress in concluding bilateral 
 
SIPDIS 
agreements with both its Paris Club and non-Paris Club official 
creditors.  Regarding Iraq's offer to its commercial creditors, 
the Secretariat said the preliminary results were "very 
encouraging."  The Secretariat noted that it had received several 
letters from the LCCG and the KCCC criticizing the unilateral 
nature of Iraq's commercial offer.  The Secretariat's only 
comment was that, in its view, Iraq's commercial offer was 
strictly comparable.  There was no further discussion. 
 
Jordan 
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14.  (SBU) The G-7 remains divided over whether to increase 
Jordan's non-ODA debt swap limit to 50 percent from its current 
30 percent ceiling, with the US, UK, France, and Italy continuing 
to support Jordan's request while Canada, Japan, and Germany 
continue to oppose. 
 
Moldova 
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15.  (SBU) The IMF said negotiations on a new PRGF could begin in 
December.  The Secretariat reported that Moldova has made some 
progress in restructuring its external debt, but arrears to the 
Paris Club continue to accumulate.  It remains to be seen whether 
Moldova will approach the Club. 
 
Russia 
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16.  (SBU) Russia raised a technical issue with certain creditors 
regarding the conclusion of bilateral agreements implementing 
Russia's prepayment operations carried out in July and August 
2005.  The US was not one of the creditors concerned. 
 
Serbia and Montenegro 
--------------------- 
17.  (SBU) The IMF said it was unclear whether the final review 
of the current program will be completed before the program 
expires at the end of 2005.  The final tranche (15 percent) of 
Paris Club debt reduction is contingent on completion of the 
final review. 
 
Methodological discussion:  Potential HIPC Countries 
--------------------------------------------- ------- 
18.  (SBU) The IMF asked the Paris Club to conduct data calls for 
Bangladesh, Sri Lanka, Nepal, Eritrea, and Haiti in order to help 
the Fund determine whether these countries qualify for HIPC. 
STAPLETON#