US embassy cable - 05PARIS7980

UNCLAS SECTION 01 OF 06 PARIS 007980 
 
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 - NOVEMBER 2005 TOUR D'HORIZON 
 
SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET DISTRIBUTION 
 
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SUMMARY 
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1. (SBU) At the November 15 Paris Club meeting, the IMF reported 
that the Stand-By Arrangement (SBA) with Iraq that will be 
presented to the IMF Board on December 23 will probably be 
precautionary.  The Secretariat and some creditors complained 
that a precautionary arrangement belied Iraq's claim last year 
that it could not afford to make any payments to the Paris Club 
during the initial years of reconstruction (which led to an 
agreement among creditors to capitalize 100% of moratorium 
interest through 2007).  Macedonia is interested in prepaying 
previously rescheduled debt at face value.  The US is Macedonia's 
largest Paris Club creditor, with $44 million in previously 
rescheduled debt - all of which can be prepaid without penalty at 
any time.  The Secretariat intends to solicit a response from the 
Chinese authorities to a June letter expressing the Paris Club's 
interest in learning more about China's external creditor status. 
The US argued that no action was necessary, but the majority of 
creditors favored renewed outreach.  Other countries discussed 
included Angola, Argentina, Cambodia, Congo-Brazzaville, Jordan, 
Kenya, Nigeria, Sao Tome and Principe, Serbia Montenegro, and the 
Seychelles. 
 
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ANGOLA 
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2.  (SBU) The IMF said Angola has expressed renewed interested in 
a Staff Monitored Program (SMP) as a step toward getting an upper 
credit tranche arrangement, possibly a Policy Support Instrument 
(PSI), and an eventual Paris Club treatment.  The Secretariat 
surveyed creditors to see if Angola was servicing any of its 
Paris Club debt.  The US was the only creditor to report 
receiving payments from Angola.  (Out of $113 million in total 
debt to the US, just $7 million is in arrears.  Spain, by 
contrast, reported $740 million in arrears and no payments 
received in decades.)  The Secretariat will launch a data call to 
get a clearer picture of the situation. 
 
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ARGENTINA 
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3.  (SBU) Italy proposed a revision to the Secretariat's draft 
response to Argentina's letter of September 27 seeking a 
restructuring of its Paris Club debt.  The revision avoids 
reference to Paris Club arrears - which Italy believes is too 
politically sensitive back home - and instead urges Argentina to 
"cooperate with the IMF, in a manner consistent with the IMFC 
Communiqu of 16 April 2005."  (The April communiqu called on 
Argentina to resolve arrears to private creditors consistent with 
the IMF's lending into arrears policy.)  The Secretariat will 
send the letter on November 24 unless there are objections. 
 
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CAMBODIA 
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4.  (SBU) The US reported that it was working with the 
authorities to resolve longstanding data issues that have held up 
p 
completion of a bilateral agreement implementing the 1995 Paris 
Club agreement.  The US noted that, even after the 1995 agreement 
is implemented, Cambodia would still have substantial arrears to 
the US that must be addressed if Cambodia wishes to obtain a new 
Poverty Reduction and Growth Facility (PRGF) with the IMF.  The 
IMF said Cambodia would not be in a position to pay these arrears 
and would have to seek a new Paris Club treatment.  Russia said 
it had reconciled the data with Cambodia, but the bilateral has 
not been agreed due to a dispute over the interest rate to be 
charged on rescheduled post-cutoff debt.  Russia's next meeting 
with the Cambodian authorities is scheduled for January.  Russia 
clarified that, once it implements the 1995 Paris Club agreement, 
Cambodia will have no further arrears to Russia, unlike the case 
of the US.  (Russia's 1997 accession agreement with the Paris 
Club stipulates that, when implementing Paris Club deals 
concluded prior to 1997, Russia must include all arrears as of 
the date the bilateral is signed.) 
 
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CHINA 
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5.  (SBU) The Secretariat sought creditors' recommendations on 
what steps to take given China's non-response to the June 22 
letter expressing creditors' desire to learn more about China's 
status as an external creditor.  The US suggested that no action 
was necessary and questioned whether Chinese membership was in 
the interest of the club.  Most other creditors, however, favored 
a more proactive approach and were open to considering eventual 
Chinese membership, pending better information on China's 
creditor status.  Several creditors argued that, as the world of 
creditors evolves, so should the Paris Club.  The Secretariat 
said it would follow up with the Chinese through informal 
channels. 
 
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CONGO-BRAZZAVILLE 
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6.  (SBU) The IMF reported that Congo's PRGF is on track, and 
that a stand-alone decision point request under the Heavily 
Indebted Poor Countries (HIPC) program is scheduled for December 
19.  The second PRGF review is anticipated for February or March. 
 
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IRAQ 
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7.   (SBU) The IMF said an SBA will be presented to the Executive 
Board on December 23.  Iraq is expected to treat the arrangement 
as precautionary.  The precautionary nature of the program took 
some creditors by surprise.  The Secretariat noted that the lack 
of a financing gap contradicted Iraq's claim last year that it 
had no capacity to make payments to Paris Club creditors given 
severe balance of payments problems.  It said the Paris Club 
normally doesn't provide debt treatments based on precautionary 
programs, and that a disbursing program is necessary to ensure 
strong Fund surveillance.  Germany, Netherlands, and Sweden made 
similar remarks.  The US pointed out that Iraq's Emergency Post 
Conflict Assistance (EPCA) program disbursed 436 million dollars, 
and that the 2004 Agreed Minute linked the second phase of debt 
relief to an upper credit tranche program, not necessarily a 
disbursing upper credit tranche program.  The IMF helpfully added 
that a precautionary SBA has the same degree of conditionality as 
a disbursing SBA.  Moreover, the IMF's financial commitment is 
the same:  funds are placed in reserve and can be drawn by the 
program country (as has happened many times in the past).  The 
IMF noted that oil revenues in Iraq are higher than expected due 
to high oil prices, but said the situation could easily change 
given the volatility of oil prices.  Separately, the UK, the 
Netherlands, Korea, Denmark, Switzerland, and Japan indicated 
that they hope to conclude their bilateral agreements with Iraq 
by the end of the year. 
 
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JORDAN 
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8.  (SBU) The Secretariat distributed a letter from Jordan 
requesting an increase in its debt swap ceiling from 30% to 50%. 
At the G-7 debt experts meeting in October, Germany, Japan and 
Canada indicated they were still opposed to lifting the ceiling 
because they believe higher debt swap ceilings allow creditors 
who participate in swaps to receive more favorable treatment than 
those who do not.  Canada is also concerned about France's 
previous practice of using higher levels of discounts in debt for 
equity swaps to provide more favorable financing terms on 
unrelated commercial transactions and thus evade OECD export 
credit disciplines.  Jordan's letter will be discussed at the 
December Paris Club meeting. 
 
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KENYA 
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9.  (SBU) The IMF said there had been a number of delays in the 
PRGF reviews due to governance issues.  Overall macroeconomic 
performance has been stronger than expected, and the second 
review is now scheduled for December 21.  Kenya's 2004 agreement 
with the Paris Club provided that the third stage of 
rescheduling, covering maturities coming due in 2006, was 
contingent on a successful completion of the fourth review.  The 
Secretariat reminded creditors that the second phase of the 
 
SIPDIS 
current Paris Club agreement entered into force after Kenya 
completed the first review of the PRGF (rather than the second 
review, as stipulated in the agreement).  The question that must 
be decided by creditors, most likely in January, is whether the 
third phase should enter into force upon completion of the second 
review.  There were no comments from creditors at the meeting, 
suggesting that they had no objections in principle to proceeding 
in this manner. 
 
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MACEDONIA 
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10.  (SBU) Macedonia has sent a letter to the Secretariat asking 
about the feasibility of prepaying at face value all or most of 
debt previously rescheduled under the 1995 Paris Club agreement. 
Macedonia's primary motivation is to refinance the debt at a 
lower interest rate in the Eurobond market.  The timetable 
envisioned is fairly compressed:  Macedonia would like to receive 
expressions of interest by December and execute the prepayment in 
January.  According to the government's own records, Macedonia 
has $94 million in previously rescheduled debt to the Paris Club, 
nearly half of which is owed to the US.  (Ex-Im Bank has all of 
the previously rescheduled US debt.  The bilateral that 
implemented the 1995 Paris Club agreement allows for prepayment 
without penalty, but in inverse order of scheduled maturity of 
the principal installment.  The debt is broken into two loans - 
one with $36 million outstanding, the other with $8 million.) 
Most creditors expressed their support in principle for Macedonia 
prepayment proposal.  Italy, however, reported arrears related to 
a loan to the former Yugoslavia that Macedonia must clear before 
a prepayment operation can proceed. 
 
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NIGERIA 
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11.  (SBU) The Secretariat reviewed implementation procedures 
regarding the recent Paris Club agreement.  Austria was the only 
country to report not having received its pro rata payment, 
apparently due to technical reasons.  The Secretariat said it had 
circulated a bilateral agreement template that creditors were 
free to use.  IMF staff expect to complete work on a first review 
under Nigeria's Policy Support Instrument (PSI) in January and 
present it to the IMF Executive Board in April or May.  In 
response to a question from Spain, the Secretariat said the 
OECD's Development Assistance Committee had yet to decide whether 
to treat Nigeria's buyback discount as Official Development 
Assistance. 
 
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SAO TOME AND PRINCIPE 
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12.  (SBU) Due to revised data on its four creditors' books, STP 
may be asked to make a slightly larger cash payment (perhaps by 
10%) than originally thought.  The US is not a creditor. 
 
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SERBIA MONTENEGRO 
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13.  (SBU) The IMF said completion of the final review of the 
Extended Fund Facility (EFF) is still uncertain.  The review 
could come to the Executive Board in January or February, which 
would require a technical extension of the program.  Germany 
asked whether creditors should consider an extension of the 
current Paris Club arrangement (which provides for the 
capitalization of 60% of interest payments) to match any 
extension in the program.  The US argued that Serbia Montenegro 
should not be rewarded for dithering on reforms.  The Secretariat 
agreed, noting that the authorities had not requested an 
extension of the Paris Club arrangement, and that to offer such 
an extension now would give the authorities less incentive to 
complete the final review on time. 
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SEYCHELLES 
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14.  (SBU) The IMF said the Seychelles is experiencing severe BOP 
and debt problems.  Several creditors (Japan, Italy, UK, Germany, 
France, Spain, Belgium) reported arrears; some supported sending 
a letter to the authorities urging them to clear arrears and seek 
an IMF program.  The Secretariat said it would wait for the 
results of the next IMF mission to the Seychelles before 
considering next steps.  The US is not a creditor. 
 
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METHODOLOGICAL DISCUSSION:  SWAPS, WEBSITE AND HANDBOOK 
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15.  (SBU) Creditors were divided over Norway's proposal to lift 
the ceiling on debt-for-development swaps.  The US, the UK, and 
Canada were open to the proposal, as long as the debt-for- 
development swaps were not structured to provide cash to the 
creditor.  Other creditors (Germany, Japan, Italy, Russia) 
opposed lifting the ceiling, mainly on the grounds that the Paris 
Club should be a creditor forum, not a development institution. 
Germany stressed that lifting the ceiling would increase 
political pressure to do swaps.  Creditors agreed to add 
information to the Paris Club website regarding prepayment and 
buyback modalities.  Australia offered to put together a 
technical handbook, with the aim of helping future delegates, as 
well as debtor countries, familiarize themselves with the Paris 
Club process, and welcomed input from other creditors. 
STAPLETON#