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

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RR RUEHBZ RUEHGI RUEHTRO
DE RUEHFR #1872/01 2841459
ZNR UUUUU ZZH
R 101459Z OCT 08
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 4479
INFO RUEATRS/DEPARTMENT OF TREASURY WASHDC
RUEKJCS/SECDEF WASHINGTON DC
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RUEHKO/AMEMBASSY TOKYO 2833
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RUEHPS/AMEMBASSY PRISTINA
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RUEHDJ/AMEMBASSY DJIBOUTI 0903
RUEHBH/AMEMBASSY NASSAU 0087
RUEHUB/USINT HAVANA 0090

UNCLAS SECTION 01 OF 16 PARIS 001872


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

1. (SBU) Summary: At the Paris Club's September 17 session, Club
Chairman Musca briefed creditors on recent contacts with the
Government of Argentina (GOA), which revealed that Argentina intends
to clear arrears excluding late interest and resume debt service on
future installments. Creditors instructed Musca to urge the GOA to
follow through on Christina Fernandez de Kirchner's September 2
announcement that Argentina would pay arrears and late interest in
full, in addition to resuming debt service. Several creditors
indicated a willingness to consider concessions on late interest
similar to what the Club provided on an exceptional basis to Angola
in 2007; however, others, including the U.S., expressed opposition
to an "Angola-style" solution. All creditors other than the U.S.
voiced support for initiating technical discussions with Cuba that
could lead to a debt restructuring agreement outside of the Paris
Club framework. The IMF reported on discussions with the Democratic
Republic of Congo (DRC) aimed at revising the $9 billion
infrastructure and mining agreement with China, noting that the
Fund's concerns about debt sustainability would need to be addressed
before a new IMF program and full debt cancellation could proceed.

2. (SBU) Creditors reluctantly agreed to enter into force the
second and third phases of Grenada's 2006 debt rescheduling, despite
the country's unsatisfactory economic reform performance. Creditors
finalized the Paris Club Secretariat's submission on debt-related
aspects of the Financing for Development review conference in Doha.
There was no consensus to modify the Paris Club's long-standing
policy to exclude all leases from debt treatments, although the
Netherlands requested further clarifications. Additional countries
and methodological topics discussed included Burundi, Georgia,

PARIS 00001872 002 OF 016


Pakistan, Seychelles, the Paris Club's work program on
methodological issues, a comprehensive data call on Paris Club
claims owed by all debtor countries, policy on the entry-into-force
of phases in debt restructuring agreements, access to detailed debt
data in advance of negotiations, and the IMF/World Bank progress
report on implementation of the Heavily Indebted Poor Countries
(HIPC) and Multilateral Debt Relief Initiatives (MDRI). End
Summary.

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

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

4. (SBU) Paris Club Chairman Musca briefed creditors on his recent
talks with Argentine Finance Secretary Lorenzino. Musca sought
creditors' agreement on the Club's proposed response to Lorenzino,
procedures for dealing with the Argentine government, and
communications. Contrary to President Cristina Fernandez de
Kirchner's announcement that Argentina would pay off its Paris Club
debt in full, Argentina intends to clear arrears excluding late
interest and resume debt service on maturities falling due.
Creditors agreed that the Paris Club should demand full payment of
arrears and late interest (in addition to a resumption of current
debt service). Payment in full is the simplest and cleanest
solution.


PARIS 00001872 003 OF 016


5. (SBU) Most creditors expressed a willingness to consider some
restructuring if necessary to close a deal. The U.S. and Japan
voiced the strongest opposition to accepting less than full
repayment, although the U.S. explained that it would not block
others from offering concessions provided all creditors were repaid
on the same schedule. The pressure is now on Argentina to meet
expectations it had created for itself. Club cohesion, including
with regard to export credit agencies'(ECAs) policies toward
Argentina, is also important. Creditors agreed with Musca's
suggestion that all data reconciliation and communication with the
Argentine authorities be handled by the Secretariat.

6. (SBU) Anticipating media queries about the September 17 meeting,
the Paris Club issued a brief press release hailing the GOA's
announced intention to pay in full its debt to the Paris Club as "a
very significant step towards the normalization of Argentina's
relationship with all its external creditors."

7. (SBU) The Secretariat provided preliminary analysis of debt data
discrepancies. According to Paris Club figures, Argentina's arrears
(excluding late interest) amounted to $5.7 billion as of March 2008.
According to Argentine figures, the number is $4.9 billion. Of the
$812 million difference, the Secretariat attributed $647 million to
loans which were previously reconciled with Argentina in 2003 but
which the government apparently overlooked in its most recent
submission.


-------

PARIS 00001872 004 OF 016


Burundi
-------

8. (U) The IMF reported that Burundi could qualify in early 2009 for
completion point and full HIPC debt cancellation when the IMF
executive board considers the first review of Burundi's new Poverty
Reduction and Growth Facility (PRGF) program. An IMF mission is
scheduled to visit Burundi to conduct the review in late October or
early November 2008. Creditors agreed with the Secretariat's
proposal to resume interim HIPC debt relief by retroactively
extending the consolidation period of the previous Paris Club
agreement through mid-2009. The other option would have been to
negotiate a new agreement that folded in arrears, as in the case of
Congo-Brazzaville (see para 9). The Secretariat argued that, in
contrast to Congo-Brazzaville, Burundi had fewer Paris Club
creditors and was rapidly approaching completion point; hence, the
option to retroactively extend the consolidation period made more
sense. (The U.S. is not a creditor.)

-------------------------------
Republic of Congo (Brazzaville)
-------------------------------

9. (SBU) The IMF said staff had agreed ad referendum with the
authorities on a new PRGF. Assuming technical discussions conclude
successfully in the following weeks, the IMF will ask the Paris Club
for financing assurances at the October meeting. Negotiations with
the Paris Club are expected in November. Creditors agreed to resume
interim HIPC debt relief by negotiating a new agreement with

PARIS 00001872 005 OF 016


Congo-Brazzaville on Cologne terms, which will treat arrears that
accumulated since 2006, when Congo's previous IMF program went
off-track. The Secretariat argued that negotiating a new agreement
was preferable to retroactively extending the previous consolidation
period given the long off-track period and the fact that recrediting
payments already received posed legal difficulties for some
creditors. (When retroactively extending a previous consolidation
period, creditors are required to recredit or refund payments
received in excess of what would have been due had the previous
Paris Club agreement been in force.) The UK asked the IMF if it had
any information about three new loan agreements that
Congo-Brazzaville concluded with China. The IMF said it did not,
but noted that the new PRGF would prohibit all non-concessional
borrowing. The Secretariat said the authorities' July 25 response
to the Paris Club's letter of April 1 failed to provide any details
on agreements reached with litigating creditors.

----
Cuba
----

10. (SBU) The Cuban central bank approached the Secretariat seeking
a technical meeting with a "group of creditors," with the
possibility that such a meeting could lead to negotiations. (Note:
In 2000 and 2001, a group of creditors, excluding the U.S., held
inconclusive discussions with Cuba on a possible multilateral debt
treatment. End Note.) Cuba sought a letter from the Secretariat,
on behalf of the group of creditors, regarding a technical meeting.
Spain, Italy, Denmark, Belgium, Canada, Finland, UK, Netherlands,

PARIS 00001872 006 OF 016


Sweden, Russia, and Austria welcomed the opportunity to restart the
dialogue that stalled in 2001. Australia asked how such a "group of
creditors" would work. Given that Cuba is not a member of the IMF,
what would substitute for the IMF's role? The Secretariat said it
would review how the discussions proceeded in 2001 and mentioned use
of Economist Intelligence Unit data. Spain suggested an informal
approach, with the Cuban side initiating correspondence. Canada
noted that it was having difficulty getting Cuba to pay short-term
debt. The Netherlands supported resuming contacts, but noted that
Cuba had not paid for two years. Russia was strongly interested in
seeing the Cubans and strongly appreciated the Secretariat's
efforts. The U.S. was the only creditor to express opposition,
pointing out that any agreement to provide treatment to an
uncooperative and non-reforming Cuba would stand in stark contrast
to the economic reform performance requirements the Club imposes on
other poor countries. The Secretariat said that since Cuba is not
an IMF member, a formal Paris Club agreement would not be possible.
Coeure noted creditors' strong interest but also a need to weigh the
consequences, including how providing debt relief to Cuba in the
absence of an IMF program could impact the Club's position vis-a-vis
Argentina. As a first step, the Secretariat will circulate an
aide-memoire reminding creditors of discussions with Cuba in 2000
and 2001.

--------
Djibouti
--------

11. (U) The IMF thanked creditors for providing financing

PARIS 00001872 007 OF 016


assurances by e-mail prior to the IMF executive board's September 17
discussion of Djibouti's new PRGF. Approval of the program paves
the way for Djibouti to come to the Paris Club later this year for a
debt treatment under the Evian approach. The Secretariat summarized
its working paper, which recommends that the Paris Club provide
Djibouti an initial rescheduling of arrears and future installments,
together with a commitment by creditors to provide further relief at
a future date if necessary to restore debt sustainability.

----------------------------------
Democratic Republic of Congo (DRC)
----------------------------------

12. (SBU) The IMF outlined its concerns with the DRC's $9 billion
mining and infrastructure agreement with China. (These concerns are
described in detail in an August 29 letter from the IMF and World
Bank to DRC Prime Minister Gizenga.) The IMF said its concerns would
need to be addressed before staff could move forward with a new PRGF
program for the DRC. The primary concerns include the sheer size of
the deal, direct/indirect sovereign guarantees, earmarking of
revenues to repay the Chinese, and the non-concessional nature of
the financing. Under the latest debt sustainability analysis, the
current deal would render the DRC's debt unsustainable even after
full HIPC debt forgiveness. The IMF and DRC authorities are
discussing options to deal with these issues. The World Bank noted
that new non-concessional borrowing by the DRC would trigger a 20
percent reduction in International Development Association grants.
Japan summarized the G-7 deputy finance ministers' August 27 letter
to the IMF, which indicated that the G-7 "may have great difficulty

PARIS 00001872 008 OF 016


providing financing assurances for a future IMF program" if the
sovereign guarantees remained in place. The Secretariat stressed
that the letter was not meant to suggest that the DRC could not
borrow from China, but rather that any new borrowing must be
consistent with HIPC guidelines. Italy asked whether the IMF had
raised these matters with the Chinese; the IMF said it should not
negotiate with a creditor on behalf of a debtor. Nevertheless, the
Fund representative acknowledged the PRC is aware of the issues but
unwilling to engage on the DRC. The UK praised the IMF for taking a
strong position and suggested that the Paris Club consider sending a
letter to the DRC authorities, depending on the outcome of current
discussions between the authorities and IMF staff. The Secretariat
said the Paris Club could revisit the UK's suggestion next month.
Belgium, the only non-G-7 member to comment, noted that it would not
be easy for the DRC to renegotiate a deal that had already been
struck.

-------
Georgia
-------

13. (SBU) The IMF described the pressures that the Georgian economy
is experiencing and said a $750 million Stand-by Arrangement (SBA)
had just been approved. Russia said approval of the SBA by the
IMF's executive board "deviated from standard procedure," reflecting
high-level political interference. Russia further commented that
under Georgia's 2001 and 2004 Paris Club reschedulings, the Georgian
government committed to implement social and economic reforms,
including spending to reduce poverty, but instead ramped up military

PARIS 00001872 009 OF 016


spending. Therefore, if Georgia requested a new debt treatment, the
Paris Club would need to examine the request carefully. The
Secretariat responded that it did not anticipate that Georgia would
seek further debt relief from the Paris Club.

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

14. (SBU) Creditors agreed to enter into force the second and third
phases of Grenada's May 2006 rescheduling, covering installments
falling due in 2007 and 2008, despite the fact that Grenada's
performance on its IMF program in 2007 was unsatisfactory. Russia
said it would not block consensus, although its preference was not
to enter into force the second phase because doing so would weaken
the conditionality principle. The U.S. expressed strong
reservations about not enforcing the Paris Club's conditionality
principle but agreed to go along with Secretariat's recommendation
in this case this time on an exceptional basis. The IMF
acknowledged that it had not contemplated the possibility that the
Paris Club might not enter into force the second phase, even though
all Paris Club agreements clearly stipulate that debt relief is tied
to the debtor country's implementation of economic reforms. The IMF
said non-entry into force of the second phase would have placed
Grenada's PRGF program under stress and forced staff to reconsider
the program's financing.

--------
Pakistan

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--------

15. (SBU) The IMF reported that macroeconomic conditions had
deteriorated markedly due to adverse political and security
developments, oil and food price shocks, and policy inaction during
and after the political transition. Pakistan faces large financing
gaps, which it is trying to fill through accelerated privatizations
and bilateral support. The GOP had requested an oil facility from
Saudi Arabia, but terms and timing are uncertain. Even if the GOP
were to obtain $5 billion per year from the Saudis, more financing
would be needed for this year. It is unclear at this time whether
the government will seek an IMF program. Asked to estimate the
financing gap, the IMF rep declined, saying financing commitments
are not clear. The World Bank added that the GOP needs to take
policy actions and present a serious reform framework to donors; the
Bank can then adapt its lending strategy, and donors will need to
step up. Russia complained that a $163 million payment from
Pakistan had been blocked by the Pakistani authorities. Russia said
it planned to raise the issue in the IMF executive board.

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

16. (U) The IMF said the Seychelles was suffering from food and oil
price shocks, a foreign exchange shortage, inflation at 34 percent,
and large financing gaps. In July, the government defaulted on a 55
million euro amortizing note, prompting holders of the notes to
accelerate payments and leading S&P to downgrade its credit rating

PARIS 00001872 011 OF 016


for the Seychelles. The authorities have hired financial and legal
advisors and held an initial meeting with a creditor committee in
August. Meanwhile, the authorities have had constructive
discussions with IMF staff about a possible program. A request for
an SBA could come to the IMF executive board in November, in which
case the IMF would request financing assurances in early November.
Seychelles cleared its arrears to the World Bank last year. (The
U.S. is not a creditor.)

-------------------------------------
Methodological Discussion:
Work Program of Methodological Issues
-------------------------------------

17. (U) Creditors approved the proposed work program of
methodological issues for the remainder of 2008 and the first
quarter of 2009, including the following topics:

-- A Paris Club submission to the Doha Conference on Financing for
Development;

-- Outreach to non-Paris Club creditors and update on contacts with
private creditors regarding litigation against HIPCs;

-- A global, aggregated data call of Paris Club claims on all debtor
countries;

-- Seniority rules and their impact on Paris Club debt treatments;


PARIS 00001872 012 OF 016


-- Links between Paris Club debt treatments and the IMF;

-- Paris Club treatments for fragile states (in the absence of an
IMF program with conditionality);

-- Sustainable lending and ODA loan policies;

-- Illegitimate debt (for internal Paris Club discussion only);

-- Debt buybacks and comparable treatment; and

-- Financial leases (discussion and review of the September Working
Paper; there is no consensus to change Paris Club policy - see para
20.).

18. (SBU) Germany requested to add the topic of illegitimate debt to
the work program; Norway agreed. Italy, Netherlands, the UK, and
the U.S. all questioned why the Paris Club should spend any time on
a concept that many Paris Club member governments do not recognize.
Germany argued that it would be helpful to exchange views on how to
respond to NGOs. In the end, creditors agreed that the discussion
would be strictly internal and non-binding.

-----------------------------------
Methodological Discussion:
Paris Club Input to Doha Conference
-----------------------------------

19. (SBU) Creditors agreed to submit a Paris Club working paper to

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the Financing for Development review conference that will take place
in Doha from November 29 to December 2. The working paper provides
the Paris Club's assessment of the implementation of the Monterrey
Consensus as it relates to external debt, and articulates policy
recommendations on debt issues. The Secretariat drafted the paper
with input from Paris Club members and is broadly consistent with
USG views. Spain and Germany requested mention of the Sovereign
Debt Restructuring Mechanism (SDRM) proposal, which they had
supported in 2002; given lack of Club consensus, however, the
Secretariat devised a neutral reference to past discussion of the
concept.

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

20. (U) Based on the results of the recent questionnaire, the
Secretariat recommended that the Paris Club retain its policy of
excluding all lease arrangements from Paris Club treatments.
Germany, Norway, and the U.S. voiced support for this
recommendation. The Netherlands, however, said it needed more
information on financial leases -- in particular, their volume and
potential impact on a debtor country's capacity to pay -- before it
could give its consent. The Secretariat agreed to do more analysis
and added the topic to the work program of methodological issues.
The Netherlands asked whether a creditor could voluntarily include a
lease arrangement, or whether all lease arrangements had to be
excluded. The Secretariat said this particular point was not
addressed in the questionnaire and therefore was open to discussion.

PARIS 00001872 014 OF 016


Italy asked to include this item in the Paris Club's Work Program
(see para 17).

----------------------------------
Methodological Discussion:
Data Call on All Paris Club Claims
----------------------------------

21. (U) Creditors agreed to participate in a global data call that
will aggregate the Paris Club's claims (both non-ODA and ODA) for
each debtor country. The results will be made public and updated
periodically. The Secretariat will share the disaggregated data on
a confidential basis with Paris Club members and the IMF. The
Secretariat will prepare a chart on how creditors currently treat
such information.

--------------------------
Methodological Discussion:
Entry-into-force of Phases
in Paris Club Agreements
--------------------------

22. (U) The Secretariat proposed measures to make the Paris Club's
process of entering into force phases of debt relief more
transparent and predictable. The aim is to avoid a recurrence of
what transpired with Grenada, where the IMF was caught off guard
when the Paris Club seriously contemplated not entering into force
the second phase of Grenada's 2006 agreement. The U.S. asked the
Secretariat to clarify precisely which IMF review would trigger

PARIS 00001872 015 OF 016


entry into force of a given phase. The Secretariat's response led
to more questions, and the discussion ultimately bogged down. The
Secretariat promised to revise its working paper to try to clarify
some of the issues raised.

----------------------------
Methodological Discussion:
Sending Detailed Debt Tables
to All Creditors
----------------------------

23. (U) In response to Germany's request, the Secretariat agreed to
share detailed data call results with all Paris Club creditors ahead
of all future negotiations. (In recent years, the Secretariat has
distributed a summary of the results, rather than a loan-by-loan
breakdown for each creditor.) The Secretariat will share the
earliest version of the data call available and alert creditors if
the numbers change significantly before the negotiations.

-----------------------------
Methodological Discussion:
HIPC and MDRI Progress Report
-----------------------------

24. (U) The IMF summarized its 2008 progress report on the
implementation of HIPC and MDRI. Among the report's key findings:

-- Significant debt relief has been delivered in a flexible manner
that accommodates country circumstances while preserving core

PARIS 00001872 016 OF 016


principles. The positive results achieved include reduced debt
burdens, increased poverty reduction-related spending, and
improvements in broader macro-economic aggregates.

-- Debt relief constitutes only a small fraction of net aid inflows
to HIPCs. Additional aid flows are urgently needed to address
HIPCs' development needs.

-- About 40 percent of non-Paris Club bilateral creditors
participate in HIPC.

-- Commercial creditors' participation in HIPC has increased,
although litigation remains an issue.

-- Reaching completion point is a challenge for the remaining
HIPCs.

-- Debt sustainability remains a challenge even after debt relief.
Of the 23 post-completion point HIPCs, four are judged to have a
high risk of debt distress.

-- Debtors must maintain prudent borrowing policies, and creditors
must promote sustainable lending policies and capacity building.

STAPLETON

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