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Cablegate: Paris Club - October 2007 Reporting Cable

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RR RUEHBZ RUEHGI RUEHPOD
DE RUEHFR #4399/01 3041437
ZNR UUUUU ZZH
R 311437Z OCT 07
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 0981
INFO RUEATRS/DEPARTMENT OF TREASURY WASHDC
RUEKJCS/SECDEF WASHDC
RUEHRL/AMEMBASSY BERLIN 6705
RUEHSW/AMEMBASSY BERN 2038
RUEHBS/AMEMBASSY BRUSSELS 6543
RUEHCP/AMEMBASSY COPENHAGEN 1512
RUEHLO/AMEMBASSY LONDON 6752
RUEHMD/AMEMBASSY MADRID 2732
RUEHMO/AMEMBASSY MOSCOW 5991
RUEHNY/AMEMBASSY OSLO 1550
RUEHRO/AMEMBASSY ROME 8644
RUEHSM/AMEMBASSY STOCKHOLM 1562
RUEHTC/AMEMBASSY THE HAGUE 2910
RUEHKO/AMEMBASSY TOKYO 2591
RUEHBS/USEU BRUSSELS 2116
RUEHKI/AMEMBASSY KINSHASA 1528
RUEHLU/AMEMBASSY LUANDA 0891
RUEHLC/AMEMBASSY LIBREVILLE 1264
RUEHGB/AMEMBASSY BAGHDAD 0680
RUEHAM/AMEMBASSY AMMAN 1024
RUEHMV/AMEMBASSY MONROVIA 7302
RUEHBW/AMEMBASSY BELGRADE 0871
RUEHFN/AMEMBASSY FREETOWN 0491
RUEHBZ/AMEMBASSY BRAZZAVILLE 0060
RUEHRY/AMEMBASSY CONAKRY 1085
RUEHPOD/AMEMBASSY PODGORICA 0054
RUEHGI/AMEMBASSY BANGUI 0127

UNCLAS SECTION 01 OF 05 PARIS 004399

SIPDIS

SENSITIVE
SIPDIS

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 2007 REPORTING CABLE


1. (SBU) Summary: On October 17, the Paris Club agreed to accept a
buyback of previously rescheduled Jordanian debt at an average
discount of 11 percent off face value. This figure is significantly
above the 5-7% figure that the Paris Club Secretariat initially
estimated to be a fair market discount. The U.S. announced that it
intended to seek statutory authority to participate. The U.S. did
not sign the agreement, in large part due to our continued
opposition to the use of "comparability of treatment" clauses in
buyback agreements, but instead provided a side letter stating our
intention to participate once we received authorization. At the
tour d'horizon on October 18, the Club reviewed relations with
Angola, the Central African Republic, the Republic of Congo, the
Democratic Republic of Congo, Guinea (which may be eligible for debt
relief as soon as December), Iraq, Liberia, and
Serbia/Montenegro/Kosovo.

Angola
------

2. (SBU) Angola appears close to making a proposal to address late
interest owed to the Paris Club. Finance Minister de Morais told
Paris Club Chairman Musca that Angola is considering paying a
substantial portion of its $2.2 billion in late interest due,
provided that creditors allow Angola to make the payment in two to
four installments (perhaps over three to four years) rather than up
front. Angola is also looking for creditors to stop the late
interest charges from accruing further and to remove the penalty
interest rate component from the late interest calculation. There
would be an expectation that the Paris Club would no longer ask its
members' export credit agencies (ECAs) to remain off cover in
Angola, and that some ECAs might have the flexibility to go back on
cover even before arrears and late interest are completely cleared.
However, Angola would formally remain "in arrears" until all arrears
are cleared. The Secretariat said the Angolan government could make
an offer before the November Paris Club session.

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

3. (U) The Secretariat distributed draft agreed minutes for CAR's
HIPC Decision Point treatment, to be sent to the authorities by
mail. The U.S. said it needed more time to complete internal
procedures before it could approve the agreed minutes. The IMF
noted that creditors representing just 68% of CAR's eligible debt
had provided financing assurances, short of the 70% threshold
necessary for the Fund to disburse interim HIPC assistance.

Congo-Brazzaville
-----------------

4. (SBU) The Congolese authorities told the IMF that they had not
contracted any new non-concessional loans, but had made contacts
with China and were considering new borrowing to finance
infrastructure projects. Separately, the IMF reported major fiscal
slippages under the Staff-monitored Program (SMP). With no

PARIS 00004399 002 OF 005


immediate prospect for a new Poverty Reduction and Growth Facility
(PRGF) program, creditors will need to decide whether to let
Congo-B's current Paris Club agreement (on Cologne terms) expire,
and agreed to take stock in November.

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

5. (SBU) The IMF said the DRC's performance under its SMP has been
broadly satisfactory, and that a new PRGF could be in place in early
2008. If all goes well, the DRC could reach Completion Point at the
time of the IMF Executive Board's first review of the PRGF in the
second half of 2008. The IMF reported that the authorities had
signed a $5 billion "protocol" with China, of which $2 billion is
for the development of copper mines and $3 billion for
infrastructure projects. The authorities claim the deal does not
involve new debt; the IMF said the details are not clear. Staff
told the authorities that new non-concessional debt would complicate
discussions on a new PRGF. Creditors supported sending a letter to
the authorities expressing concern about possible new
non-concessional borrowing. However they agreed to postpone sending
the letter until after the IMF-World Bank annual meetings in October
2007, in case new information comes to light. The Netherlands and
Italy commented that the Paris Club needs to restart efforts to
engage China.

Guinea
------

6. (U) The IMF said Guinea was making progress toward a new PRGF.
The IMF is planning to ask for financing assurances in November, and
negotiations on the resumption of interim HIPC relief could take
place in December or January. Russia reported significant arrears
and asked whether Guinea was in a position to clear them. The IMF
said probably not, given that the country's foreign exchange
reserves were equal to just two weeks of imports.

Iraq
----

7. (SBU) Russia said the recent change in government in Moscow has
slowed the process of concluding a bilateral agreement with Iraq to
implement the terms of the 2004 Paris Club agreement. The Russian
ministry of finance hoped that the bilateral could be signed by the
end of the year, but the Russian delegate had no specific
information. The Secretariat asked the Russian delegate to
communicate to Moscow the Club's impatience. The Secretariat
further noted that the deadline for concluding bilateral agreements
was February 2006, and that one of the principles of the Paris Club
was to not tie debt relief to other conditions.

Jordan
------

8. (SBU) Creditors concluded an agreement with Jordan that will

PARIS 00004399 003 OF 005


allow Jordan to buy back its previously rescheduled non-ODA debt at
an average discount to face value of 11%. France, the United
Kingdom, the United States, Spain, Italy, Switzerland, Germany, and
Belgium indicated their intention to participate. (Privately,
Canada told us it would also participate.) Together, these
countries account for $2.2 billion of the $2.5 billion in eligible
debt. The United States' participation will require Congressional
authorization. Japan announced that it would not participate,
citing a domestic law that prevents it from selling claims at less
than face value to countries that are not in debt distress.

9. (SBU) The Secretariat, in its presentation to Paris Club
creditors, noted that interest rates for emerging markets had fallen
in recent weeks, implying a lower market-based discount than it had
previously recommended. Interest rate spreads above risk-free debt
for countries rated BB (similar to Jordan) were trading between
100-150 basis points above the risk-free rate, corresponding to a
discount to face value between 2% and 5%.

10. (SBU) Creditors supported the Secretariat's analysis while
indicating that they had flexibility to accept a somewhat higher
discount. After several rounds of negotiations lasting into the
early morning, Jordan accepted the Paris Club's final offer of 11
percent, which corresponded to a spread of 282 basis points over
risk-free "swap" rates -- around twice the Secretariat's initial
recommendation. The U.S. did not sign the agreement, but instead
provided a side letter (see para 13) indicating support for the
operation and its plans to seek legislative authority to
participate.

Liberia
-------

11. (SBU) The IMF said a financing shortfall remains for clearing
Liberia's arrears to the international financial institutions
(IFIs). The United States, Norway and Germany urged other countries
to help close the gap. The Netherlands continued to question
whether Liberia had a strategy in place to deal with its private
creditors, especially litigating creditors. The IMF and the World
Bank discussed the possibility of using the International
Development Association's (IDA) Debt Reduction Facility to address
the private sector debt. Both the World Bank and the Secretariat
flagged the tension between the Paris Club requirement of comparable
treatment by all creditors and the possibility that offering a
higher price to private creditors might help prevent litigation
costs from undermining the benefits of debt reduction. (The "common
reduction factor" -- the amount of cancellation necessary to bring
Liberia's debt to a "sustainable level", and the figure that will be
part of the Paris Club agreement -- is a very high 97 percent.) The
Secretariat confirmed that if, as expected, Liberia reaches HIPC

SIPDIS
Decision Point around the time the PRGF is approved, the Paris Club
will provide a flow treatment on Cologne terms (thus bypassing a
Naples treatment). Given Liberia's large arrears, a Cologne flow
treatment will result in significant stock cancellation. Short-term
and post-cutoff debt will likely have to be deferred and moratorium

PARIS 00004399 004 OF 005


interest capitalized. The World Bank noted that while it will have
provided the bulk of its HIPC relief commitments at Decision Point,
it does intend to provide grants to Liberia during the interim
relief period to help Liberia service its World Bank debts.

Serbia/Montenegro/Kosovo
------------------------

12. (SBU) Serbian Deputy Prime Minister Djelic told Paris Club
Chairman Musca that Serbia intends to stop servicing debt owed by
Kosovo if final status talks result in Kosovo's independence.
Djelic asked Musca to ask the EU-US-Russia Troika to facilitate the
debt reconciliation process, so that Serbia can determine which
debts to allocate to Kosovo. The Secretariat, noting that Kosovo
has little debt service capacity, said creditors might wish to
consider either not invoicing or perhaps granting Kosovo a deferral
similar to what creditors provided to countries affected by the
Asian tsunami. The Netherlands, supported by Japan, said it was
premature to discuss any such treatment. If Serbia discontinues
debt service before it has concluded new bilateral agreements with
its creditors, it will be in default. In addition, the Netherlands
expressed concern that Serbia will be tempted to dump most of its
debt on Kosovo. To prevent this outcome, bilateral agreements must
reflect an apportionment of the debt according to the
debtor/guarantor principle rather than the final beneficiary
principle preferred by the Serbians. The Secretariat responded that
it would be politically difficult to insist that Serbia continue to
service Kosovo's debt after final status, and noted that the
Ahtisaari report recommended dividing debt on the beneficiary
principle, but provided for other arrangements if mutually agreed.
Rather than allow Serbia to dictate the reconciliation process based
on its own debt figures, the Secretariat urged creditors to provide
loan documentation to both Belgrade and Pristina. The Secretariat
will draft a letter to the Troika requesting that it facilitate the
debt reconciliation process. The Netherlands, Sweden, and
Switzerland complained that Serbia and Montenegro still had not
concluded new bilateral agreements apportioning Serbian and
Montenegrin debt according to the debtor/guarantor principle. The
Secretariat said it stood ready to send a letter to the authorities

SIPDIS
in Belgrade and Podgorica.

Comparability of treatment
--------------------------

13. (SBU) There was no resolution to the comparability of treatment
controversy. In the end, the Jordan buyback agreement (which the
U.S. did not sign) contained the same comparability of treatment
clause that was included in the July 2007 Gabon buyback agreement
(supplemented by an internal Paris Club "Chairman's summary")
stating that no consensus could be reached and that use of the Gabon
clause a second time did not constitute a precedent. The Chairman's
summary went on to list various criteria by which "those creditors
having signed the agreement with Jordan" (e.g., not the United
States or several other countries that did not sign because they are
not creditors) would assess a future early repayment offer by

PARIS 00004399 005 OF 005


Jordan. The United States reiterated its objection to the notion
that future early repayment offers must be approved by consensus.

PEKALA

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