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Cablegate: Paris Club - July 2008 Tour D'horizon and Discussions On

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DE RUEHFR #1423/01 2061653
ZNR UUUUU ZZH
R 241653Z JUL 08
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 3902
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RUEHPS/AMEMBASSY PRISTINA

UNCLAS SECTION 01 OF 11 PARIS 001423

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 - JULY 2008 TOUR D'HORIZON AND DISCUSSIONS ON
METHODOLOGICAL ISSUES

1. (SBU) Summary: At the Paris Club's July 7-8 session, the Vice
Chairman briefed creditors on his recent meetings in Kinshasa with
the Ministers of Economy and Finance, noting concern that a proposed
infrastructure deal involving a DRC sovereign guarantee was at odds
with the Paris Club's projected cancellation of $5 billion in debt
at completion point. The Secretariat reported continuing
discussions with the IMF over how to handle Grenada's poor 2007
performance on its Poverty Reduction and Growth Facility (PRGF) and
whether the second phase of the country's May 2006 rescheduling in
the Paris Club should enter into force. On Iraq, neither the IMF
nor Bank had specifics on the reported UAE/Iraq debt agreement. The
Secretariat noted the final phase of Iraq's 2004 Paris Club
agreement will enter into force in December if the country continues
to perform satisfactorily on its current IMF Stand-By Arrangement
(SBA).

2. (SBU) During the Tour d'Horizon, the U.S. and other creditors
also discussed relations with Burundi, Congo-B, Guinea, Kosovo,
Libya, the Seychelles, and Togo. Several members submitted issues
for Paris Club consideration, including illegitimate debt and a
submission to the Doha Financing for Development conference. The
Club's long-standing policy on leasing was revisited at the request
of the Italians; however, with lack of consensus on the issue, the
Secretariat agreed to send out questionnaires to creditors and
prepare a working paper for further discussion in September. End
Summary.

3. (U) For additional information on a specific country or issue,
please contact Nicholle Manz or David Freudenwald in EEB/IFD/OMA.

-------
Burundi
-------


PARIS 00001423 002 OF 011


4. (SBU) The IMF reported that a new PRGF program had been approved
on July 7, which paved the way for the Paris Club to resume interim
HIPC relief. Creditors will need to decide in September whether to
retroactively extend the consolidation period of the previous Paris
Club agreement, or negotiate a new agreement with Burundi that would
fold in arrears. For now the IMF is assuming that the Paris Club
will apply existing terms by retroactively extending the previous
consolidation period. Should Burundi require a new agreement,
negotiations would likely take place in October. The IMF said
Burundi could reach its HIPC completion point in late 2008 or early
2009.

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

5. (SBU) The Secretariat reported that Congo-B authorities have not
responded to the Paris Club Co-Chairman's April 2008 letter asking
about press reports of an agreement with litigating creditors. The
IMF said a new PRGF program could come to the Executive Board as
early as mid-October if Congo performs well on its January-June 2008
Staff-Monitored Program. PRGF discussions began in May 2008 and an
August IMF mission will assess performance. IMF and Bank Boards
will discuss HIPC triggers in September. The Bank noted work on
debt management, including data centralization and a debt management
capacity mission. A new Country Assistance Strategy should be ready
in 2009. A new PRGF program would trigger the resumption of interim
HIPC relief. As in the case of Burundi, creditors will have to
decide whether to retroactively extend the consolidation period of
the previous Paris Club agreement or negotiate a new agreement. The
Secretariat asked creditors whether they had received any payments
from Congo during the off-track period and several, including the
U.S., reported receiving a portion of amounts due.


PARIS 00001423 003 OF 011


---
DRC
---

6. (SBU) The Paris Club's Vice Chairman briefed creditors on his
recent Ministerial meetings in Kinshasa. DRC authorities
acknowledged that a new, large investment deal involves a sovereign
guarantee, but they argued that the financing is sufficiently
concessional to not significantly effect the Paris Club rescheduling
agreement. An IMF team, however, is assessing this issue because
the size of the project could impact debt sustainability. The Paris
Club is set to cancel approximately $5 billion in debt at completion
point. The authorities appear to understand the need for greater
transparency and are sharing information with the IMF and World Bank
in an attempt to finalize the deal without jeopardizing their
aspiration of reaching HIPC completion point.

-------
Grenada
-------

7. (SBU) The Secretariat reported ongoing discussions with the IMF
on Grenada. At issue is whether the Paris Club should enter into
force the second phase of Grenada's May 2006 rescheduling, which
covers maturities falling due in 2007. Given Grenada's poor
performance on its PRGF in 2007, the Paris Club is contemplating not
allowing the second phase to enter into force. The IMF expressed
concern last month that such a decision would be tantamount to
withdrawing financing assurances and could jeopardize the financing
of future IMF programs for countries in similar situations. The
Secretariat acknowledged that the Paris Club's decision on Grenada
would have implications for Paris Club policy going forward. Canada
asked whether creditors could assume that the third phase of
Grenada's agreement, covering 2008 maturities, would enter into

PARIS 00001423 004 OF 011


force. The Secretariat said yes, but planned to inform the
authorities after the Club's decision about the second phase.

------
Guinea
------

8. (SBU) The Secretariat reported that, ahead of the July 31
deadline, Guinea has concluded, or is on the verge of concluding,
with its Paris Club creditors bilateral agreements implementing the
January 2008 Agreed Minute on Cologne terms. (The US bilateral
agreement entered into force in June.) Brazil's agreement could be
completed in the next two months; Russia's would be done "pretty
soon"; Spain will sign within a few weeks; and Germany is awaiting
the GOG's response to a draft agreement. In addition, Guinea has
contacted all of its non-Paris Club creditors and thus far has
concluded bilateral agreements with Romania and Libya, while making
progress with China, the Saudi Fund for Development, and the Kuwait
Fund (these three plan to conclude an agreement after Guinea reaches
completion point). The Secretariat proposed sending letters to
Bulgaria, Egypt, Morocco, and Thailand encouraging comparable
treatment. The IMF said Guinea has largely met its PRGF program
targets, despite external shocks and domestic political instability.
The Board will hold the first PRGF program review for Guinea on
July 28; discussion of HIPC triggers and the second review will take
place in the fall; and Guinea could reach its HIPC completion point
by the end of the year.

-----
Haiti
-----

9. (SBU) Creditors supported the Secretariat's draft response to an
open letter from NGOs to European heads of state and government

PARIS 00001423 005 OF 011


calling for immediate debt cancellation for Haiti. Several creditors
suggested minor changes to the content and tone of the response. The
Secretariat will send a revised version that, taking into account
non-European Paris Club members, addresses Paris Club members'
generous support for Haiti without referring to European recipients
of the letter.

----
Iraq
----

10. (SBU) The Secretariat clarified that if Iraq continues to
perform satisfactorily on its SBA, the third and final phase of its
2004 Paris Club agreement will enter into force in December, raising
the level of cancellation from 60% to 80%. The IMF noted that the
SBA was tailored to satisfy the Paris Club's requirement of three
consecutive years of performance: the mid-June mission reached
broad ad-ref agreement on required steps; the first review will be
on September 5; the second in November/December, and the third by
the end of the year. Neither the IMF nor Bank had specifics about
reports of an UAE/Iraq debt agreement. (Brazil attended the
discussion but was not asked about its failure to provide comparable
treatment.)

------
Kosovo
------

11. (SBU) The World Bank reported that the Kosovo Debt Management
Support Program (KDMSP) was approved on July 3, in a contentious
Board decision. The World Bank noted that the US was prepared to
contribute $125 million to the IDA-administered trust fund set up to
finance the KDMSP. Debt related to Bank projects on Kosovar soil
amounts to approximately $615 million currently, i.e., nearly half

PARIS 00001423 006 OF 011


of an estimated $1.3 billion in external debt that Serbia notionally
attributes to Kosovo. To date, Serbia has been servicing Kosovo's
debt. The IMF has been providing technical assistance to Kosovo
under a 1999 Board decision. Once the IMF completes its poll to
confirm a majority of its membership recognizes Kosovo as an
independent country, the IMF planned to accept Kosovo's application
for membership (Kosovo later submitted its application to the Fund
and Bank on July 10.) Russia stated that Kosovo is not a sovereign
state, so there should not be discussion of separate issues or
documents regarding Kosovo. The US said it recognized Kosovo's
independence in February 2008, asked the Secretariat about sharing
loan documentation with the authorities in Pristina, and welcomed
the World Bank's decision to establish trust funds for budget
support and debt relief. Given that the Serbian government has
changed since the Secretariat sent its May 2007 letter about sharing
loan information, the Secretariat offered to send a new letter
regarding this issue.

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

12. (SBU) The IMF said Liberia met with its commercial creditors in
April and was likely to pursue a buyback operation through IDA's
Debt Reduction Facility (DRF). The IMF noted that Liberia had also
contacted its non-Paris Club bilateral creditors. The World Bank
said it was prepared to finance a large portion of a DRF operation
and was eager to move forward as soon as possible. The Bank is
providing $1.3 million to fund the debt advisory group, which is
negotiating with Liberia's commercial creditors; the Bank will seek
the advisors' views on the timetable. A DRF operation would involve
about $48 million, or 3% of the $1.6 billion in commercial debt
outstanding. Of the $48 million, Liberia is asking donors to
provide $25 million. President Johnson-Sirleaf wrote to seven

PARIS 00001423 007 OF 011


countries asking for contributions: Germany, Japan, Norway, Sweden,
Switzerland, UK, and the US. Norway will respond positively to a
Liberian request for a $5 million contribution.

-----
Libya
-----

13. (SBU) In June, the Secretariat promised to contact the
authorities to find out whether the finance minister intends to
respond to the Paris Club's January 2008 letter, which expressed
concern that Libya had concluded bilateral agreements with certain
creditors while remaining in default toward seven Paris Club
creditors. Libya asked to postpone a scheduled July 7 meeting with
the Secretariat.

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

14. (SBU) The IMF confirmed that the Seychellois finance minister
has written a letter to request an IMF program. The authorities were
motivated by a desire to address the country's public debt. The IMF
said the authorities have been taking steps in the right direction,
including exchange rate depreciation vis-a-vis the dollar. The Bank
is providing technical advisory services in key areas. A mission in
the field is discussing an interim strategy to support an IMF
program which, in turn, would open the door to a Paris Club debt
treatment under the Evian approach.

----
Togo
----


PARIS 00001423 008 OF 011


15. (SBU) Following Togo's Naples treatment in June, and considering
that Togo could reach HIPC decision point as early as this fall,
creditors debated whether to conclude two separate bilateral
agreements (per usual practice) or wait until decision point and
conclude a single bilateral agreement. While last month's Naples
agreement established a deadline for concluding bilateral
agreements, creditors could choose to wait until decision point to
conclude a single agreement. Since June, the Bank has provided $17
million for rural community development and food security and $3
million to offset food price increases; in September, the Board will
discuss additional steps to address the food crisis.

------------------------------
Methodological Discussions:
Paris Club's Policy on Leasing
------------------------------

16. (SBU) At Italy's request, the Paris Club discussed its
long-standing policy on leases. The Secretariat described the key
considerations that led creditors to decide two decades ago to
exclude leases from Paris Club treatments and noted that lease
activity has since increased significantly. In order to make an
accurate assessment of risk, Italy said it was important to have a
clear picture of how leases could be treated in the Paris Club and
believed the risk assessment should not be affected by the type of
financing chosen. Some creditors expressed willingness to review
the policy. The UK added its ECA's view that the current policy was
fine. The U.S. stated that the current policy was working well and
should not be changed. The Secretariat noted the merit of
conducting the exercise, despite the lack of consensus, and said it
would proceed with a questionnaire and preparation of a Working
Paper for discussion in September.

--------------------------------------------- ----

PARIS 00001423 009 OF 011


Methodological Discussions: Proposed Work Program
--------------------------------------------- ----

17. (SBU) At the invitation of the Secretariat, creditors proposed a
number of methodological issues that the Paris Club could tackle in
coming months.

-- Italy suggested submitting a written statement to the Doha
conference on Financing for Development in November 2008 to
highlight the Paris Club's contributions related to the "External
Debt" pillar (e.g., HIPC initiative, debt sustainability, Evian
approach, litigating creditors, and outreach to emerging creditors).
Italy suggested that the Paris Club meet with the OECD's Export
Credit Group and its Development Assistance Committee (DAC) in
September/October to discuss lending guidelines and soft loans,
which could be channeled into the Financing for Development process.


-- Germany called for a closer look at the concept of illegitimate
debt, noting Ecuador's debt commission and NGO, UN and other
discussions on this issue. Norway supported this idea, but the UK
warned that, given that it is a highly contentious,
politically-charged concept, there should be an ample exchange of
views before the Secretariat contemplates drafting a Working Paper.

-- Spain suggested a study of Paris Club versus non-Paris Club
lending and examination of how to deal with countries that do not
want IMF programs, citing Angola, Argentina, and Cuba.

-- The Netherlands proposed further discussion of approaches to
debtor countries, noting lack of proper instruments for dealing with
countries facing debt repayment profile problems.

-- Japan agreed generally with the proposals and suggested examining

PARIS 00001423 010 OF 011


prepayments and buybacks, the Paris Club's relations with non-Paris
Club creditors, and fragile states.

-- The US asked about the status of the two possible working groups
that Chairman Musca proposed during the June meeting with the
private sector. The Secretariat is planning an informal meeting in
October with the eight non-Paris Club creditors invited to the June
private sector meeting and other non-Paris Club official creditors
in order to solicit views on Paris Club policies. If this first
step succeeds, the Secretariat plans to organize a more formal
plenary. As for formation of a group with private creditors to
discuss vulture funds, the Secretariat has contacted the Institute
for International Finance to discuss a possible work agenda. The US
also asked to revisit comparability of treatment related to
buybacks.

18. (SBU) The Secretariat stated it could not tackle all of these
issues, noting concern about whether the Paris Club was the correct
forum to address some of them. It expressed doubt about addressing
the difficult topic of illegitimate debt (and agreed even a Working
Paper would be premature) or discussing accounting rules and soft
loan guidelines with the DAC. The Secretariat will compile a list
of all the suggestions submitted, establish an order of priority,
and identify possible deliverables, including in particular the Doha
FfD submission.

--------------------------------------------- --
Attendance of Representatives From Multilateral
Institutions at Paris Club Negotiations
--------------------------------------------- --

19. (SBU) Creditors debated whether to allow representatives from
institutions other than the IMF and World Bank to be present for the
duration of Paris Club negotiations with debtor countries.

PARIS 00001423 011 OF 011


Currently, observers from organizations other than the IMF and World
Bank leave the negotiation, along with the debtor country, when the
internal discussions among creditors begin. The Secretariat
concluded that current practice would continue.

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