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Cablegate: Paris Club - April 2007 Tour D'horizon and Car Negotiation

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RR RUEHGI RUEHPOD RUEHTRO
DE RUEHFR #1742/01 1221639
ZNR UUUUU ZZH
R 021639Z MAY 07
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 6870
INFO RUEATRS/DEPARTMENT OF TREASURY WASHDC
RUEKJCS/SECDEF WASHDC
RUEHRL/AMEMBASSY BERLIN 6553
RUEHSW/AMEMBASSY BERN 1975
RUEHBR/AMEMBASSY BRASILIA 1859
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RUEHBY/AMEMBASSY CANBERRA 1700
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RUEHSM/AMEMBASSY STOCKHOLM 1503
RUEHTC/AMEMBASSY THE HAGUE 2746
RUEHKO/AMEMBASSY TOKYO 2482
RUEHVI/AMEMBASSY VIENNA 1726
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RUEHIL/AMEMBASSY ISLAMABAD 0696
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RUEHPL/AMEMBASSY PORT LOUIS 0862
RUEHPO/AMEMBASSY PARAMARIBO 0040
RUEHHK/AMCONSUL HONG KONG 0215

UNCLAS SECTION 01 OF 11 PARIS 001742

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EB/IFD/OMA
TREASURY FOR DO/IDD AND OUSED/IMF
SECDEF FOR USDP/DSAA
HONG KONG FOR Marlene Sakaue
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 - APRIL 2007 TOUR D'HORIZON AND CAR NEGOTIATION

REF: Paris 328

SENSITIVE BUT UNCLASSIFIED. PLEASE HANDLE ACCORDINGLY.

-------
SUMMARY
-------

1. (SBU) At the April 19-20, 2007 meeting of the Paris Club,
creditors provided debt relief to the Central African Republic in
recognition of its eligibility for the Heavily Indebted Poor Country
(HIPC) Initiative and to facilitate the newly signed Poverty
Reduction and Growth Facility (PRGF) with the IMF. The Secretariat
reported on a paper that Argentina shared with only a few countries.
In it, Argentina laid out why it did not want to use reserves to
pay its Paris Club debt, and examined various scenarios for
normalizing relations. There was interest in exploring those
options that Argentina had described as undesirable - paying arrears
in one to two years by borrowing either reserves or on the markets.
Creditors reaffirmed their commitment to solidarity, though the
Netherlands and Germany expressed desire for a resolution soon. On
Iraq, the Secretariat reported its view that the Allegro/Aquila
program for securitizing non-Paris Club claims did not violate
comparability. There was some discussion of the German post-1990
claims; based on Germany's presentation, the Secretariat opined that
the issue was one of blocked transfers, not debt, and therefore not
covered by the Agreed Minute. On Peru, creditors were generally
receptive to Peru's prepayment offer, and the Secretariat will
invite Peru to negotiate next month. Other countries on the agenda
were Afghanistan, Angola, Comoros, DRC, Gabon, Gambia, Kenya, Libya,
North Korea, Pakistan, Russia, Sao Tome and Principe, Serbia,
Montenegro, Kosovo, the Seychelles, and Suriname. END SUMMARY.

Afghanistan
-----------

2. (U) The IMF reported that Afghanistan is still expected to reach
Decision Point for additional debt relief under the Heavily Indebted
Poor Country (HIPC) initiative in early July. An IMF mission will
conduct its second review of Afghanistan's program in the next week.

PARIS 00001742 002 OF 011


At Completion Point of its HIPC agreement, Afghanistan would be
eligible for USD 435 million in bilateral debt relief, USD 375
million of which would be from Russia. Multilateral debt
forgiveness would total USD 125 million; the IMF's own share would
be USD 15 million and the World Bank's USD 75 million in
net-present-value (NPV) terms. Germany and the U.S. reported having
signed their bilateral agreements, while Russia reported it had sent
another draft to the Afghans on April 11, with some minor responses
to Afghanistan's comments. (We later confirmed that Kabul had
indeed received the document and is reviewing it).

Angola
------

3. (SBU) The Secretariat summarized the recent data call, noting
that Angola's arrears were USD 150 million at the end of January
(excluding late interest). Since then Angola paid almost USD 120
million - USD 83 million for arrears and USD 36 million in excess of
arrears amounts (excluding late interest). Angola has asked the
excess amounts be returned. Two creditors still reported arrears -
Sweden (USD 15 million) and the Netherlands (USD 52 million).
(Switzerland reported receiving an additional USD 3 million arrears
the day of the meeting.) Countries receiving excess payments were
Norway (less than USD 1 million), Italy (USD 16 million), the UK
(USD 20 million), and the U.S. (USD 3 million). (Note: The United
States already returned last month an overpayment of USD 49
million.) There was general consensus that these payment problems
resulted from internal management difficulties rather than any
design by Angola.

4. (SBU) The UK stated that it had not repaid the excess because it
was still owed late interest. The Secretariat asked the UK to
reconsider this position, since it raised comparability issues. The
UK replied that it was seeking legal advice. Italy said it was
planning to return its overpayment, despite being owed late
interest. Norway indicated that it was unsure. (This is not an
issue for the U.S., since we are owed no late interest). Italy also
reported that Angolan Finance Minister de Morais indicated to its
ambassador that Angola might be able to settle the late interest
charges without requesting a reduction. The Secretariat asked

PARIS 00001742 003 OF 011


creditors not to negotiate the late interest question bilaterally,
stating it should be discussed in the Club, as indicated in the
Secretariat's recent letter to Angola.

SIPDIS

Argentina
---------

5. (SBU) The Secretariat reported on its meeting with Finance
Minister Miceli during the IMF/World Bank Spring Meetings. PC
Chairman Musca delivered the standing message that a PC
restructuring would require a Fund program, and that if Argentina
was unwilling to pursue a program, paying its arrears as quickly as
possible would be central to normalizing relations with PC
creditors. Miceli in turn had raised the prospect of using the
Article IV review process as a basis for a Paris Club treatment and
again underscored that Argentina would not use its reserves.

6. (SBU) Miceli had also provided France and Germany (but not the
Secretariat) with the same lengthy position paper that Argentina had

SIPDIS
given U.S. Treasury Department officials on the margins of the
Inter-American Development Bank meeting. France briefed other
creditors, most of whom had not received the paper, on the general
arguments made by the Argentines. The paper claims that Argentina
cannot use its arrears for both legal and economic reasons, and
proposes a nine-year rescheduling arrangement as a means to
normalize relations with Paris Club creditors. France observed that
Argentina could get around the legal problems if it wished to do so,
and that it would be unwise for the Club to attempt to assess
payment capacity or conditionality - tasks better left to the IMF.
It also noted the alternative scenarios at the end of the Argentine
paper, which discussed repayment over one to two years by borrowing
from reserves or the markets. While the paper argued against this
approach as detrimental to Argentina's economic health, France
observed that it was now "on the table" for further discussion.

7. (SBU) Germany supported the Secretariat's position, but wanted a
solution soon. The Netherlands urged flexibility, noting that time
was passing. The U.S. summarized recent bilateral meetings and its
continued support for the consensus approach. Japan asked the
Secretariat to urge Argentina to put forth an official proposal and

SIPDIS

PARIS 00001742 004.2 OF 011


keep talks focused only on technical issues. Japan also asked Club
members to remain united and not reopen export credits. Creditors
expressed considerable interest in the Argentine paper, especially
regarding the alternative scenarios as a basis of discussion. The
Secretariat agreed to ask Argentina for permission to share it with

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the entire Club.

Central African Republic
------------------------

8. (U) Paris Club creditors provide CAR, a HIPC-eligible country,
with Naples-terms debt treatment: 67% reduction of all
pre-cutoff-date non-concessional debt arrears and payments coming
due during the scheduled period of its Poverty Reduction and Growth
Facility (PRGF) reform program, as well as generous rescheduling of
all other arrears and flows. The Secretariat presented an analysis
that showed no capacity to pay. On this basis, as well as the very
fragile picture of CAR's economic situation drawn by the World Bank
and IMF representatives, creditors agreed to several extraordinary
treatment elements: full capitalization of moratorium interest and
deferred arrears payments on both post cut-off official development
assistance (ODA) and short term debts, held by Japan and France
respectively.

9. (U) The U.S. delegation asked about reports that CAR was
planning a USD 92 million bond issue and other delegations echoed
similar concerns about non-programmed borrowing. The IMF mission
chief confirmed that such a bond issuance was not part of the
program. The Secretariat reported that it had raised this with the
Finance Minister who acknowledged PC creditors' concerns and
reported that no decisions had been made. The Secretariat and
several creditors also raised concerns about CAR's ability to obtain
comparable treatment from non-Paris Club creditors given their
larger share of CAR's debt. The largest of these creditors are
China (USD 130 million), the former Yugoslavia (USD 31 million),
Argentina (USD 25 million) and Kuwait (USD 20 million).

Comoros
-------


PARIS 00001742 005 OF 011


10. (U) Comoros is a HIPC-eligible country. The IMF requested and
received financing assurances for its upcoming PRGF, expected to
reach the Board in June. The Fund reported that despite a few
slippages, progress had been satisfactory under a staff monitored
program. The major obstacle to moving forward was USD 31 million in
arrears to the African Development Bank (AfDB). (The U.S. is not a
creditor).

Democratic Republic of Congo
----------------------------

11. (SBU) The Secretariat reported on its meeting with the new DRC
Finance Minister who requested an immediate rescheduling and
continuation of a "payments moratorium." The Secretariat told him
that the Club wished to normalize relations as quickly as possible,
but would require approval of a new PRGF. The Secretariat then
noted that creditors were "allowed" to bill in the meantime, but
asked them not to apply this strictly if possible. (The U.S. is
legally required to bill.) The IMF reported on the country's weak
economic performance, although it did indicate that reserves had
risen from less than USD 100 million in February to over USD 150
million in early April, due to the receipt of oil payments. The IMF
will field an Article IV mission in May, which could lay the
groundwork for a new PRGF. This could be adopted in mid-year, at
the earliest. Under the best-case scenario, DRC would be eligible
for Completion Point debt relief under the HIPC initiative in early
2008.

Gabon
-----

12. (SBU) Following up on Gabon's February 2007 letter to the Paris
Club requesting treatment of its debt, the Secretariat reported it
had informed the Gabonese authorities of the Club's position. Gabon
could seek a possible debt treatment under the Evian approach if a
Debt Sustainability Analysis indicated a need (which seems
unlikely), or could consider early repayment within the Club's
rules. Gabon had not yet responded. The IMF confirmed that Gabon
had met all prior conditions for a Stand-By Arrangement (SBA),
allowing for a Board discussion in early May. In the absence of

PARIS 00001742 006 OF 011


further clarification by Gabon of what it wanted from the Club,
creditors did not discuss the buyback vs. prepayment options, or the
amount and appropriateness of any repayment discount.

The Gambia
----------

13. (SBU) Norway thanked the IMF for opening a dialogue with The
Gambian authorities. Since it had not started billing when The
Gambia went off track during its HIPC interim relief, Norway was
prepared to treat all arrears as "technical" in order to facilitate
the Completion Point treatment. Creditors agreed with Norway that
this could be done through a written (email) process, rather than
face-to-face in Paris. (The U.S. is not a creditor.)

Iraq
----

14. (SBU) The Secretariat and IMF both took note of the upcoming
Compact and of recent developments with non-PC creditors, including
a briefing by JPMorgan and Citigroup on the Aguila/Allegro program
for securitizing claims. The Secretariat observed that non-PC
creditors were free to sell their remaining obligations after
comparable treatment, and argued forcefully that the program met
comparability concerns and could help accelerate the settlement of
these claims. The U.S. delegation welcomed and agreed with this
assessment.

15. (SBU) The U.S. thanked Germany for its written explanation for
excluding a post-1990 debt from the scope of the Agreed Minute on
Iraq and requested the Secretariat's assessment of the facts as
Germany had presented them. The Secretariat shared its view that
this was a transfer issue, not one of debt, since the monies paid by
Iraqi companies had been paid into a Central Bank account in the
German company's name. The U.S. and U.K. delegations expressed a
coordinated view that if the Club were indeed to consider this a
transfer not subject to the Agreed Minute, it needed to make very
clear why this was the case in order to avoid creditors seeking to
exclude other claims arbitrarily. (Note: We have referred the issue
back to Iraq's legal advisors for their views and confirmation of

PARIS 00001742 007 OF 011


Germany's presentation of the facts.)

16. (SBU) Russia again reported no progress on its bilateral
agreement with Iraq. In later private discussion, the Russian
delegation denied any explicit linkage between debt relief and oil
contracts, but raised concerns that the draft Iraqi oil law would
not treat Russian companies fairly. The Russians also indicated
that the Finance Ministry could do nothing further to secure
approval to sign the bilateral agreement (which they claim is
technically ready), and advised us to consult higher-level officials
or to speak to ministries in Russia that deal with oil issues.

Kenya
-----

17. (SBU) The IMF reported on Kenya's completion of the
long-delayed second review of its PRGF. Creditors agreed with the
Secretariat's proposal to implement the third phase of Kenya's 2004

SIPDIS
debt treatment and approved a draft notification letter. In
response to concerns raised by Japan regarding justification for the
Club's retrospective entry into force of debt relief, the
Secretariat noted that by previously allowing Kenya additional time

SIPDIS
to meet its reform commitments and not formally closing the third
phase, the Club was now obliged to fulfill its side of the
agreement. But the Secretariat conceded that the decision to
provide Kenya time outside the normal consolidation period was
unusual and discretionary.

Libya
-----

18. (SBU) Russia requested Libya be placed on the agenda because of
difficulties resolving significant arrears and interest in the
experience of other creditors. The Netherlands, Denmark, Sweden,
and Switzerland reported modest arrears and problems dealing with
the Libyan authorities. The Secretariat offered its view that the
best way to approach this situation would be through an initial Club
discussion of the most effective methodology for resolving debts for
countries with no foreseeable prospects of a Paris Club treatment.
Creditors agreed with this (especially as it affects other debtor

PARIS 00001742 008 OF 011


countries, including Suriname) and the Secretariat promised to
update its 2002 paper on "Away from Paris Club countries" before
putting it on the agenda at a later date. (The U.S. is not a
creditor.)

North Korea
-----------
19. (SBU) Russia reported on recently completed inter-governmental
meetings on trade and the economy with North Korea. Since the DPRK
did not appear to want to discuss debt, Russia said it had not
raised the issue. Russia expects these meetings to continue,
perhaps as frequently as twice per year, but does not anticipate
addressing debt until bilateral relations are more advanced.

Pakistan
--------

20. (SBU) Russia had requested that Pakistan be placed on the
agenda. The IMF and World Bank gave a fairly optimistic report on
macroeconomic conditions, although the Bank warned that social
indicators remained some of the worst in the world. Russia
indicated that it had signed its bilateral in 2005, covering a total
of USD 129 million, and that it had about USD 100,000 in arrears,
which it attributed to a misunderstanding. It then raised the issue
of some USD 150-160 million that had accrued from trade deals with
the former USSR and were now frozen in the Pakistani central bank
due to USD 18 million in counter claims by Pakistani companies.
Russia said it intended to raise this problem within the IMF and
simply wanted to keep PC members informed.

Peru
----
21. (SBU) The Secretariat reported having discussed three subjects
with Peru - (1) whether it wanted to extend the mechanism of the
2005 agreement for the new prepayment, which would allow Peru to
limit the amount it prepays, (2) whether it wished to reopen the
2005 offer on maturities due through 2010, and (3) the interest by
some creditors in a market value buyback rather than prepayment.
The Peruvians replied that they did indeed want to have the ability
to limit the offer, the exact parameters of which would depend on

PARIS 00001742 009 OF 011


how much they could raise in the markets. They also said they were
ready to reopen the 2005 offer, but did not want to consider a
market-value buyback.

22. (SBU) Most creditors joined the U.S. in voicing a willingness
to accept the prepayment offer. Spain asked for clarification on
which operation would execute first given its financing limitations,
the 2010-2015 maturities or those before 2010 that were left over
from the 2005 prepayment. The Secretariat agreed that this could be
an important issue and promised to check on it. Italy noted that
its credits were at fixed interest rates, making participation in a
prepayment at par economically unattractive. For political reasons,
however, it may participate. France noted it too would prefer a
market-rate buyback, but was not inclined to block a consensus. The
Secretariat will invite Peru to negotiate at the May meeting

SIPDIS

Russia
------

23. (SBU) Russia explained its written request to the Secretariat
for the return of promissory notes and bills of exchange that had
been cancelled as a result of its prepayment operations. It named
twelve countries that it believed held such paper (the U.S. was not
included). Creditors questioned the utility of resurrecting
documents that would be difficult and costly to find since the
prepayment agreements served to cancel them. Russia countered that
while the contracts themselves had been cancelled, the notes and
bills were separate instruments issued to back them up. If they
fell into the wrong hands, Russia might have to defend itself in
court, although it would undoubtedly win. Russia noted that the
Netherlands had returned a dozen notes. The Secretariat asked all
parties to look at options for addressing Russia's legitimate
concerns.

Sao Tome and Principe
---------------------

24. (U) The Secretariat reaffirmed its intention to invite STP in
May for Completion Point debt treatment. Russia again reported that
it had not been able to conclude its bilateral agreement, while

PARIS 00001742 010 OF 011


Belgium and Italy indicated minor problems with arrears and a
lawsuit. The Secretariat said it would send a reminder to STP on
the Russia bilateral. (The U.S. is not a creditor.)

Serbia, Montenegro and Kosovo
-----------------------------

25. (SBU) PC creditors discussed division of debt between the three
countries and a recent email from Serbian Treasurer Dzinic, who
stated that all bilateral negotiations were proceeding smoothly.
Germany, the Netherlands, Japan, Sweden, and Switzerland all
disputed that assertion. The Secretariat agreed to reply to Dzinic,
reiterating that division of debt must be made according to the
debtor/guarantor principle, unless the creditor is willing to use
the final beneficiary principle (as the U.S. has done). Several
countries expressed concerns that the final beneficiary approach
could set an unhelpful precedent for a future Serbia/Kosovo
division. Russia objected even to the name "Kosovo" being listed in
the "countries under review" column of the agenda since its status
has yet to be determined. The Secretariat will also ask Serbia for
permission for creditors to provide loan agreement information to
the Kosovar authorities.

Seychelles
-----------

26. (U) The Secretariat took note of Seychelles' recent Article IV
review, which reported strong support for an IMF program. The IMF
reported that a mission could go out in July and produce a program
for the Board to consider in September. The Secretariat requested
an updated data call. (The U.S. is not a creditor.)

Suriname
--------

27. (SBU) The Secretariat reported on its request to Suriname to
clear all arrears and to provide equal treatment to all creditors.
A letter of response from Suriname's Minister of Finance, however,
reported that Suriname had already concluded bilateral deals with
Germany and Italy and was close to concluding agreements with the

PARIS 00001742 011 OF 011


U.S. and Brazil (present as an observer), the only countries to
which it owed arrears. Spain said it too had arrears. The U.S.
reported technical exchanges on amounts due (approximately USD 26
million), but emphasized there were no negotiations with Suriname.
We also expressed the view that even when a Paris Club debt
treatment appears unlikely, creditors should coordinate attempts to
obtain payments. Brazil also stated it was not negotiating with
Suriname.

28. (SBU) Germany acknowledged it had concluded an agreement
covering USD 5.2 million in short term debts. Italy also
acknowledged having concluded an agreement with Suriname last fall
and confessed it treated long-term debt on concessional terms. The
Secretariat reminded creditors to stick to the Club's rules on

SIPDIS
solidarity and committed to responding to Suriname's letter,
reminding it of those rules.

STAPLETON#

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