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Cablegate: Paris Club - Paris Club - April 2008 Tour D'horizon And

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RR RUEHBW RUEHBZ RUEHGI RUEHPOD
DE RUEHFR #0826/01 1200714
ZNR UUUUU ZZH
R 290714Z APR 08
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 2828
INFO RUEATRS/DEPARTMENT OF TREASURY WASHDC
RUEKJCS/SECDEF WASHDC
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RUEHBP/AMEMBASSY BAMAKO 0978

UNCLAS SECTION 01 OF 10 PARIS 000826

SIPDIS


SENSITIVE
SIPDIS

STATE FOR EEB/IFD/OMA
TREASURY FOR DO/IDD AND OUSED/IMF
SECDEF FOR USDP/DSCA
PASS EXIM FOR CLAIMS - MPAREDES
PASS USDA FOR CCC -- ALEUNG/WWILLER/JDOSTER
PASS USAID FOR CLAIMS -- WFULLER
PASS DOD FOR DSCS -- PBERG

E.O. 12958: N/A
TAGS: EFIN ECON EAID XM XA XH XB XF FR
SUBJECT: PARIS CLUB - PARIS CLUB - APRIL 2008 TOUR D'HORIZON AND
NEGOTIATION WITH LIBERIA

1. (SBU) Summary: At the Paris Club's April 16-17 session, the
U.S. and other creditors signed an accord with Liberia to begin
interim debt relief under the enhanced Heavily Indebted Poor
Countries (HIPC) initiative. During the Tour d'Horizon, France,
Germany, and the U.S. reported on recent bilateral contacts with
Argentina. Finance Secretary Secondini told the French that
Argentina hopes to reach a settlement by the end of 2008, and the
French believe that Argentina is preparing a formal proposal to the
Paris Club. The Secretariat urged Brazil to implement the 2004 debt
treatment for Iraq, and the Club discussed relations with the
Central African Republic, Cote d'Ivoire, Serbia, Seychelles, and
Togo. Despite opposition from the United States and Sweden and
concerns raised by several other creditors, France continued to push
its "fragile states" proposal for the Paris Club to provide an
unconditional debt deferral for low-income countries that are
participating in Emergency Post-Conflict Assistance (EPCA) programs
with the IMF. The Secretariat also reported on what it
characterized as promising initial technical meetings with multiple
Chinese government ministries involved in PRC aid and lending
activities. Creditors also discussed preparation of a Paris Club
annual report. End Summary.

---------
Argentina
---------

2. (SBU) France reported Argentine Finance Secretary Secondini met
Paris Club Chairman Musca on the margins of the IMF-World Bank
Spring Meetings and expressed Argentina's desire to reach a
settlement with the Paris Club by the end of the year. France said
that, contrary to press reports, Sarkozy and Fernandez de Kirchner
did not discuss debt in their April 7 meeting in Paris. According to
the Secretariat's account, Secondini did not specify terms. The
Secretariat believes the GOA, knowing it cannot obtain a traditional

SIPDIS
Paris Club rescheduling without an IMF program, is working instead
on a voluntary arrears clearance proposal. The U.S. reported that
senior Treasury and State Department officials recently met with
their Argentine counterparts and pressed them to make a serious
offer to the Club. Germany said it also met with Argentina but did
not raise Paris Club issues. Separately, the Secretariat summarized
the results of the latest data call. As of March 1, 2008, Argentina
owed the Paris Club $7.92 billion (excluding the $1 billion

PARIS 00000826 002 OF 010


restructured Spanish loan), of which $5.36 billion consisted of
arrears and $1.21 billion consisted of late interest. Japan,
Norway, and Spain said they had received modest payments on debts
contracted after the December 1983 cutoff date. The Netherlands
said it may have also received some payments but would confirm. The
Secretariat will update the data call to reflect these payments and

SIPDIS
questioned whether Argentina was paying certain creditors
selectively, which could complicate efforts to reach a settlement.
Final payments on debts rescheduled through previous Paris Club
agreements are due by the end of 2008.

------------------------------
Central African Republic (CAR)
------------------------------

3. (SBU) The IMF said a significant share of CAR's external debt is
owed to non-Paris Club creditors, some of which are considering
litigation. The IMF warned that it will be challenging for CAR to
secure financing assurances from creditors holding 80 percent of the
debt -- a requirement for reaching HIPC Completion Point. (CAR
barely reached the 70 percent threshold necessary for the IMF to
provide interim debt relief at Decision Point.) The authorities
have approached the African Development Bank for legal assistance.
The Secretariat said it was important for the Paris Club to maintain
pressure on non-Paris Club creditors. One possibility is to send
letters to CAR's non-Paris Club creditors, similar to what the Paris
Club did for Iraq. Several creditors, including the U.S., reported
that they were close to concluding bilateral agreements to implement
the Paris Club's December 2007 HIPC Decision Point debt treatment.

-------------
Cote d'Ivoire
-------------

4. (SBU) The IMF said if Cote d'Ivoire performs satisfactorily
under its second Emergency Post-Conflict Assistance (EPCA) program,
it could reach HIPC Decision Point and begin to benefit from interim
debt relief at the same time a follow-on Poverty Reduction and
Growth Facility (PRGF) program is approved. The government would
like to reach Decision Point by the end of 2008. The IMF noted,
however, that Cote d'Ivoire's track record under its first EPCA was
not encouraging; overall performance was uneven, with unproductive

PARIS 00000826 003 OF 010


spending and delays in structural reforms. The Secretariat said it
could begin to think about the terms of an eventual Paris Club
treatment and approach the London Club to discuss comparable
treatment as soon as a macroeconomic framework is in place.
Preliminary contacts with the London Club suggest willingness to
have a cooperative dialogue. The Secretariat indicated that debts
contracted after the January 1983 cutoff date may have to be
included in the debt treatment. The IMF said most of Cote
d'Ivoire's private debt is owed to the London Club and repeated
previous statements that the Fund is not aware of any Ivorian debt
held by litigating creditors. Reconciliation of debt data is well
advanced. The World Bank reported that recent arrears clearance
operations enabled the Bank to provide $35 million in budget support
and reactivate $104 million in undisbursed funds. In the coming
months, there will be approval of $122 million in grants to support
emergency urban infrastructure, government and institution building,
among other projects.

----
Iraq
----

5. (SBU) The Secretariat reported that Iraq's advisers had asked
the Secretariat to write to Algeria and Morocco and urge them to
provide comparable treatment. Creditors gave their consent. The
Secretariat asked Brazil for an update on progress toward concluding

SIPDIS
a bilateral agreement with Iraq. Brazil's delegation stated that,
although Brazil participated in the 2004 negotiations, the GOB did
not sign the Agreed Minute for three reasons: (1) it did not agree
with the terms of the treatment; (2) the majority of Iraq's
creditors was not present at the Paris Club negotiations, and Brazil
did not know how those creditors would react to the Paris Club
agreement; and (3) there were other complicating factors, including
legal issues, involving many actors in Brazil. The Brazilian
representative promised that a response to the Secretariat's letter
would be forthcoming, adding that Brazil had maintained an open
dialogue with Iraq's advisers and was working internally to find a
solution even though Iraq was a very complicated issue domestically.
The Secretariat pressed the issue, noting that the situation had
changed significantly since 2004. No longer could Brazil cite
concerns about the reaction of other creditors considering that many
of Iraq's creditors have delivered comparable treatment. The

PARIS 00000826 004 OF 010


Secretariat reiterated that the comparability of treatment principle

SIPDIS
applies to all non-Paris Club creditors and especially to a country
like Brazil that has participated in so many Paris Club meetings.

6. (SBU) The UK asked whether there had been further discussions
with Iraq's EU creditors. The Secretariat said it had initiated
contacts with Poland and Greece, but there was nothing to report
yet. The U.S. asked for an update on Iraq's discussions with China
and India. The Secretariat said an agreement with India had been
concluded, and prospects for an agreement with China were good.
[Note: our understanding is that this assessment may be a bit
simplified and overly optimistic.] Spain asked the IMF about
prospects for the third-phase review of the Stand-by Arrangement
(SBA) occurring no later than December 31, 2008. The IMF reported
that a mid-June mission will review the SBA; if performance is
satisfactory, the IMF Executive Board could discuss the review in
August or September.

-------
Liberia
-------

7. (U) During the April 17 negotiation, Paris Club creditors
provided Liberia a flow treatment on the Club's standard terms for
HIPCs at Decision Point. The Paris Club's "Agreed Minute" with
Liberia commits creditors to provide debt relief on the following
terms, although several creditors will provide more generous
relief:

-- cancellation of 67 percent of arrears on non-official development
assistance (ODA) debts contracted before the January 1983 cutoff
date and rescheduling the residual amount over 23 years, with a
6-year grace period,

-- rescheduling over 40 years (with a 16-year grace period) all
pre-cutoff ODA arrears as well as all ODA debt service payments
falling due during the three-year period of the IMF program, and

-- deferral of all post-cutoff date and short-term debt and to
capitalize all moratorium interest payments, given Liberia's
extremely limited capacity to pay.


PARIS 00000826 005 OF 010


8. (U) As a result, a minimum of $254 million of Liberia's $1.4
billion Paris Club debt stock will be cancelled immediately, and
Liberia will not have any payments due to the Paris Club during the
period of the IMF program, as long as the program remains on track.
Additional bilateral relief from the U.S. and other Paris Club
creditors will further increase the amount of up-front cancellation.
Given the large proportion of arrears involved, this means the U.S.
will cancel nearly $400 million of Liberia's $430 million debt to
the U.S. when implementing the April 17 Paris Club accord. Liberia
also committed to obtain comparable debt relief from its commercial
and other bilateral creditors.

9. (SBU) Although HIPC Decision Point treatments are typically
uncontroversial, two aspects of Liberia's request provoked debate.
First, Liberia asked for zero payments during the period of the IMF
program. The IMF's own balance of payments projections surprisingly
showed that Liberia had the capacity to pay $6 million to the Paris
Club during the 2008-2010 program period, leading the Secretariat to
suggest that Liberia apply the $6 million to a small portion of
moratorium interest on deferred post-cutoff date debt. Several
creditors supported the Secretariat's proposal.

10. (SBU) The U.S. strongly disagreed, arguing that it was critical
to provide Liberia a cushion given balance of payment risks, and
citing the symbolic importance of zero payments. We reminded
creditors of a recent precedent: when Haiti received its HIPC
Decision Point treatment in December 2006, the Paris Club had not
asked for any payments despite Haiti's larger capacity to pay.
Germany strongly supported our position; Italy, Norway, and the UK
also made helpful comments. The Secretariat did not try to defend
its proposal and agreed that providing a cushion was important. A
consensus quickly formed in favor of requiring zero payments.

11. (SBU) Liberia further asked the Paris Club to reduce pre-cutoff
date non-ODA arrears by 90 percent rather than the standard 67
percent. Belgium, Germany, Italy, Norway, and the U.S. expressed
their willingness to reduce these arrears by 90 percent; however,
other creditors held to 67 percent. The Liberians did not insist,
but rather asked creditors that intended to go beyond the terms of
the Agreed Minute to publicize this additional debt relief through
bilateral press releases.


PARIS 00000826 006 OF 010


------
Serbia
------

12. (U) Switzerland said Serbia had declared that, even though the
two countries had agreed on the text and figures of a bilateral
agreement recognizing Serbia's share of the debt of the former
Serbia and Montenegro, Serbia could not sign the bilateral agreement
until a new government takes office following May 11 elections.
France said it was in the same position. The Secretariat promised
to review the situation in May or June.

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

13. (SBU) The Seychellois finance minister told the Secretariat
that the Seychelles intends to seek an IMF program, which it
understands is a precondition for a Paris Club treatment. The IMF
said the Seychellois principal secretary of finance met with Fund
staff and also expressed interest in a program, although there has
been no official written communication. The Secretariat expressed
cautious optimism that the Seychelles is moving in the right
direction. The government understands that comparability of
treatment will require an approach to commercial creditors, and the
Seychelles has also established a new debt committee in an attempt
to exercise restraint on the central bank. (The U.S. is not a
creditor.)

----
Togo
----

14. (U) The IMF said Togo's PRGF, which the Fund's Executive Board
approved on April 21, could pave the way for debt relief under HIPC
and the Multilateral Debt Relief Initiative (MDRI). Based on
end-2007 data, Togo's high ratio of debt-to-government revenue is
likely to exceed the 250 percent threshold necessary to qualify for
HIPC. The preliminary HIPC document should be completed by late
summer, and Togo could reach Decision Point if performance is strong
when the IMF completes its first review of Togo's PRGF. The World
Bank reported arrears to its International Development Association

PARIS 00000826 007 OF 010


(IDA) and noted a May 29 Board discussion would address an arrears
clearance operation similar to Cote d'Ivoire's, with actual arrears
clearance to occur the following day. After budget support of $18
million, there would be an IDA lending envelope. No date is set yet
for clearance of arrears to the African Development Bank (AfDB),
although preparations are well advanced. Germany said it received a
letter from Togo asking for a 160,000 euros contribution toward the
clearance of Togo's arrears to the African Development Bank. France
explained that the AfDB will pay 99 percent of the arrears, leaving
Togo to cover the remaining 1 percent -- an amount equal to 160,000
euros. Togo has also asked France to pay the 160,000 euros;
discussions are ongoing. Assuming PRGF approval and arrears
clearance to the World Bank and AfDB, negotiations in the Paris Club
on a pre-HIPC debt treatment could take place in June. (U.S. claims
total just $6,000. We requested a de minimis clause at the March
2008 meeting.)

--------------------------
Methodological Discussion:
Fragile States
--------------------------

15. (SBU) Despite opposition from the U.S. and mixed reactions from
other creditors, the Secretariat continued to press ahead with the
proposal it first raised in March 2008 for the Paris Club to provide
debt relief to low-income "IDA-only" countries, based on an IMF
Emergency Post-Conflict Assistance (EPCA) program. (The proposal
calls for the Paris Club, on a case-by-case basis, to defer all
arrears and debt service falling due during the period of the EPCA,
and to capitalize moratorium interest. If the country obtains a
follow-on PRGF, creditors would reschedule deferred amounts and
cancel the accrued moratorium interest.) The U.S. said it could not
support the proposal. We reiterated our concerns about the
precedent of providing debt relief -- even for a short period of
time -- without conditionality and noted that the U.S. could face
legal and budgetary obstacles in implementing such a deferral. The
Secretariat did not appear overly concerned about potential U.S.

SIPDIS
legal difficulties, noting that the U.S. Congress had provided the
necessary legislation in the past in the context of the HIPC
initiative.

16. (SBU) Creditors asked the Secretariat to 1) omit the reference

PARIS 00000826 008 OF 010


to Iraq in the working paper (Russia); 2) insert a claw-back
provision to strengthen the link to a PRGF (Spain); 3) await the
result of IMF and IBRD deliberations on fragile states before acting
(Netherlands); and 4) provide a list of countries that could receive
such treatment (Italy).

17. (SBU) Germany argued against automatically providing a deferral
and said it could not agree to defer all categories of debt, as the
inclusion of post-cutoff-date debt could affect export credit agency
cover policy. Germany, Japan, Sweden, and the UK all expressed
concern about canceling moratorium interest without regard to the
debtor country's capacity to pay once a PRGF is approved. Sweden
seconded all these concerns, pointed out Sri Lanka was paying its
debt when the tsunami occurred, and questioned whether the
Secretariat's proposal was the right way to help fragile states.

SIPDIS

18. (SBU) No creditor other than the U.S. and Sweden, however,
challenged the premise that the Paris Club should do something to
help fragile states. (Despite its reservations, Sweden said it did
not intend to block any Paris Club decision.) Indeed, several
countries (Italy, Japan, Spain, UK) said they supported the proposal
in principle. The Secretariat picked up on this sentiment,
concluding that "no one" around the table disagreed that the Paris
Club should try to help fragile states; the question was how to
respond.

19. (SBU) Given creditors' desire to take into account the outcomes
of IMF and IBRD discussions, the Secretariat said the previous U.S.
proposal to send a letter stating the Club's willingness to provide
a debt treatment once a PRGF is in place could serve as an initial
step. The Secretariat offered to prepare a draft text for such a
letter and update the working paper to reflect creditors' comments
regarding conditionality. The Secretariat stressed that the
deferral would be applied on a case-by-case basis rather than
automatically to all IDA-only countries on EPCAs. Guinea-Bissau and
the Comoros are likely candidates; Cote d'Ivoire and Lebanon are
not. The Secretariat proposed that, as the results of IMF and IBRD
meetings emerge, the Paris Club continue its "fragile states"
discussion.

--------------------------
Methodological Discussion:

PARIS 00000826 009 OF 010


Relationships with China
--------------------------

20. (SBU) Paris Club Secretary General Courbe reported on the
Secretariat's March 31 visit to Beijing to discuss the practices of

SIPDIS
the Paris Club with PRC officials. The visit included separate
meetings with staff-level officials from the Ministry of Commerce
(MOFCOM), the Ministry of Foreign Affairs, and China Exim Bank. The
four-hour MOFCOM meeting involved twenty officials, including
Africa, external aid, research institute, MFA and central bank
experts, a sign of interest in the dialogue. Commerce officials
stressed that China's overseas aid was South-South cooperation and
not comparable to development aid OECD countries provide; Commerce
officials also strongly criticized conditionality attached to debt
relief and development aid. Questions focused on the Paris Club's
practices with respect to conditionality, debt swaps, and how
exchange rates are handled in debt treatments. MFA officials made
it clear that China could not become a member of the Paris Club,
while at the same time acknowledging the Club's efforts in Africa.
Exim Bank officials were also critical of conditionality but said
they were willing to share data and experiences concerning
particular debtor countries. They also indicated a willingness to
participate as an observer at a future Paris Club discussion;
however, the Secretariat questioned whether China Exim's statement
reflected a fully cleared position.

21. (SBU) The Secretariat was generally encouraged by these initial
contacts. While it is clear that China is not prepared to associate
itself in any formal way with the Paris Club, Chinese officials
remain open to a technical dialogue. Possible next steps include
inviting China's Ministry of Finance to discuss its own practices at
a future Paris Club meeting; inviting China to participate in the
Paris Club's annual meeting with the private sector, alongside other
invited emerging market creditors; or inviting China to a seminar on
debt not officially affiliated with the Paris Club. The Chinese
have not responded to these ideas.

--------------------------
Methodological Discussion:
Paris Club Annual Report
--------------------------


PARIS 00000826 010 OF 010


22. (U) Creditors had very few comments on the first draft of the
annual report prepared by the Secretariat. The IMF said it strongly
supported the initiative. The UK suggested -- and the Secretariat
agreed -- that it would be helpful to include a section describing
how the resources made available by debt relief are used to reduce
poverty. The Secretariat seeks proposed edits within two weeks and
aims to finalize the draft report by the beginning of May.

STAPLETON

2

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