Cablegate: Paris Club November 2009 Meeting and Negotiations With
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SUBJECT: Paris Club November 2009 Meeting and Negotiations with
1. (SBU) SUMMARY: During the November 18, 2009, Paris Club "Tour
d'Horizon," the IMF requested financing assurances for the Democratic
Republic of Congo's (DRC) new IMF program. Canada, troubled by the
revocation of a mining license held by a Canadian-led consortium,
waited until November 24 to join the consensus in favor of providing
assurances. The IMF and World Bank said that the Republic of Congo's
failure to provide details on a $939 million payment to vulture funds
did not jeopardize the IMF lending program, though the U.S. argued
that the Paris Club should explore ways to respond to the payment,
which was a major breach of comparability commitments. The U.S.
informed the IMF and World Bank that it expected full implementation
of the performance criteria for completing the Heavily Indebted Poor
Countries (HIPC) initiative.
2. (SBU) Antigua and Barbuda is negotiating an IMF lending program,
which would involve sweeping fiscal actions and debt relief. The
U.S. noted that any debt treatment could only involve rescheduling
debts, since the U.S. was not in a position to provide debt
cancellation to Antigua. Argentina had indicated to the Secretariat
that it would not address Paris Club arrears until after the
reopening of the offer to private sector holdout creditors. The IMF
said that the proposed lending program for Moldova did not envisage
Paris Club debt relief. Australia wanted to restructure some $10
million of long-standing debt owed by Cuba. The Paris Club was firm
and unanimous that this would violate solidarity among creditors.
November 19 negotiations with Comoros went smoothly. Paris Club
creditors provided exceptional treatment of short-term debt and
included a clause providing for additional reduction of payments
coming due after Comoros reaches HIPC decision point, as an
additional incentive to begin the HIPC process.
3. (SBU) Creditors also discussed methodological issues concerning
outreach to non-Paris Club creditors and held another meeting of the
working group on treatment of loan guarantees. End Summary.
Antigua and Barbuda
4. (SBU) The IMF reported that the Antiguan government had publicly
announced that it was seeking an IMF Stand-By Arrangement (SBA)
lending program. An IMF staff mission in December would continue
discussions, and the Fund expected to seek financing assurances from
Paris Club creditors at the January 2010 meeting. The IMF Executive
Board could be asked to approve the SBA in early February. The
program would aim to shift the primary deficit to surplus in 2010,
and involve an array of tax changes, cuts in wages and transfers,
outsourcing, and rationalization. The package would be announced in
the 2010 budget to be presented to Parliament later in November.
Fiscal actions would not be sufficient, however, and a debt
restructuring - of both domestic and international debt - would be
required. The country had hired advisors (which were unnamed).
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5. (SBU) The Secretariat indicated that it expected only a
rescheduling but that debt sustainability under that scenario would
need to be assessed. The U.S. indicated (as it had done to the Fund
mission the previous week) that it was not in a position to go beyond
rescheduling due to the lack of congressional authorization and
appropriations. Debt data reconciliation is underway.
6. (SBU) Paris Club Chairwoman Delphine d'Amarzit reported on her
meeting with Finance Secretary Lorenzino during a G-20 meeting in St.
Andrews, at which he had told her that Argentina would not address
Paris Club arrears until the new offer to holdout bondholders had
been made. She had asked whether Argentina would seek a discount
from the Paris Club, and Lorenzino had replied that it would not.
She noted that the recently floated - then denied - idea of paying
Paris Club arrears by issuing a bond contradicted what Argentina had
said, and what Argentine law provided for, on payment using reserves.
7. (SBU) The IMF reported that GDP was expected to decline 2.5
percent in 2009, then to grow 1.5 percent in 2010, with a pickup in
export demand and agricultural production (following a drought). The
peso had stabilized vis-a-vis the dollar, after depreciating 15
percent since September 2008, and in fact the central bank had been
buying dollars to stem peso appreciation. The current account
surplus was strengthening due to weak imports and strong export
demand, while capital flight by residents had slowed in the third
quarter, with confidence growing. As a result, gross reserves at
the end of October were $46 billion, with net reserves estimated at
about $30 billion.
8. (SBU) The offer to holdout bondholders was expected to be made in
early-2010, with a haircut of 66 percent of principal, and repayment
of PDI with a 7-year bond yielding market interest rates.
Institutional creditors would be required to put in new money.
Interest in an IMF Article IV consultation appeared to have waned,
perhaps because of the focus on the offer to holdouts. The Fund
insisted that an Article IV had to be "normal" in every respect.
9. (SBU) Negotiations on so-called "Naples terms" treatment for
Comoros were amicable, marked by a couple of oddities: (1) France
alone accounted for almost 90 percent of the total debt owed to the
Paris Club, with Italy accounting for almost all of the rest; and (2)
over 70 percent of the total Paris Club debt was short-term, which is
normally not restructured under Paris Club debt relief agreements.
Total Paris Club exposure was just under $16 million, perhaps a
record low. The Paris Club accounted for a very small share of
Comoros' total debt, so the Secretariat had tried (unsuccessfully) to
persuade Comoros' Gulf creditors, which accounted for over $40
million, to participate in the negotiations.
10. (SBU) The Paris Club's offer to the Comoros contained two
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unusual elements: (1) deferral of the short-term debt, and (2) a
commitment to reduce debt service coming due by a further 50 percent
after decision point - the latter designed to provide an incentive to
reach decision point, which would otherwise have provided almost no
Democratic Republic of Congo
11. (SBU) The IMF requested financing assurances for a new 3-year
Poverty Reduction and Growth Facility (PRGF) lending program, which
the IMF Executive Board eventually approved on December 11. All
creditors except Canada agreed to provide the financing assurances,
although many raised concerns, including unpaid short-term debts
(Russia and Brazil), the fiscal effects of Chinese-funded investments
and particularly their maintenance costs (Japan), and monetary policy
and the general comfort level with the program (Netherlands).
12. (SBU) Canada's concerns revolved around the DRC authorities'
decision to revoke the license of a mine controlled by a Canadian
company, and in which the World Bank's International Finance
Corporation (IFC) had an investment. Canada insisted that its
motives were not commercial in nature, but driven by concerns about
the investment environment.
13. (SBU) Paris Club Chairwoman D'Amarzit was particularly critical
of the Canadian position, arguing that the investment climate was an
issue for the IMF and World Bank, not for the Paris Club; that the
Paris Club should not be used for leverage in the way Canada was
attempting; and that DRC had made all of the concessions that had
been demanded by the international community.
14. (SBU) The Fund argued that it could not wait long for the Paris
Club's financing assurances, since the PRGF program included
end-December targets, and a delay beyond December would create a
requirement to renegotiate the program. Finally, Paris Club
creditors agreed to give Canada "a few days" to provide assurances.
Canada provided its assurances on November 24, and the Paris Club's
collective assurances were communicated to the IMF on November 25.
15. (SBU) The PRGF program will target average annual growth of 6.5
percent, single-digit inflation, and international reserves rising to
12 weeks of non-aid imports by 2012. The lending program will aim to
mobilize domestic revenues, improve financial management,
recapitalize and reorganize the Central Bank, and to improve public
enterprises, the financial sector and the regulatory environment.
16. (SBU) The IMF confirmed that Sino-Congolese loan package carried
a fixed rate of 4.4 percent, yielding a grant element of 42 percent
(or 46 percent if the signing bonus was included). The second
infrastructure tranche had been cancelled, and the mining portion
carried no state guarantee. The joint IMF/World Bank debt
sustainability analysis concluded that the Sino-Congolese deal would
increase the DRC's debt burden in the medium term but would not have
a major impact on debt sustainability over the long term.
17. (SBU) HIPC completion point could come as soon as mid-2010, at
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the time of the first PRGF review. The Netherlands again raised the
idea of initially rescheduling, rather than cancelling, DRC's
arrears. There was general sympathy for the idea of not cancelling
arrears until the DRC reaches HIPC completion point. The U.S.
delegation stated that it was considering this proposal.
Republic of Congo (Brazzaville)
18. (SBU) The IMF reported that the Republic of Congo (ROC) had
declined to provide additional information on the recent $939 million
payment to vulture funds, citing confidentiality clauses in the
settlement. The IMF believed the information was not critical to the
country's macroeconomic outcomes and that the payments did not
threaten the PRGF program. The Fund judged that the initial
miscalculation of the discount was not misreporting under the PRGF
program or under the HIPC initiative. The ROC had met all
quantitative criteria, along with all but one of the June benchmarks
(a strategic study of the oil sector, expected to be completed in
2010). The IMF Executive Board later approved the PRGF review on
19. (SBU) A number of conditions for completing the HIPC initiative
(so-called "completion point triggers") had already been met. A
joint Fund/Bank mission to Brazzaville planned for early December had
been postponed to allow more time for implementation of unmet
triggers - including on oil commercialization and the procurement
code. If these are met, the IMF and World Bank boards could approve
completion point as early as January 2010. The World Bank echoed the
IMF's assessment, noting that the delays were mostly on the oil
commercialization trigger, though the Bank too envisaged a January
completion point. The U.S. delegation stated, both in plenary and to
Fund and Bank representatives on the margins, that the U.S. would
expect to see stringent implementation of the triggers before the ROC
advances to completion point.
20. (SBU) Paris Club creditors also agreed to send a letter to the
Institute for International Finance (IIF) complaining about the
vulture payment, and to reply to the ROC's October 15 letter to the
Secretariat. The reply will point out the ROC's violation of its
commitment to obtain comparable treatment from all creditors,
highlight the ROC's failure to take advantage of the international
assistance that was available concerning negotiations with vulture
funds, and emphasize the Paris Club's desire to receive more
information before launching new negotiations to provide completion
point debt cancellation.
21. (SBU) The U.S. delegation stressed that while more information
would be helpful, the Paris Club already had enough to know that the
payment represented a serious departure from comparable treatment and
that Paris Club members should consider what actions might be taken
in response. The U.S. delegation stated that it was considering
withholding the voluntary additional debt cancellation, beyond the
minimum required under the HIPC treatment, that the U.S. normally
provides to HIPCs that reach completion point.
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22. (SBU) Australia had placed Cuba on the agenda, indicating that
it was seeking to reengage with the country and as part of that
effort wanted to renegotiate about EUR 6-7 million in debt, all of
which was in arrears. While Australia preferred to join a
multilateral effort, it had a "realistic" view, was considering "all
options," and sought the Paris Club's input. Australia was not
attempting to collect payment, however, and would not seek to be paid
when other Paris Club members were not being paid.
23. (SBU) The Secretariat replied that the Paris Club (and the
"Group of Creditors of Cuba," which excludes the U.S.) had agreed to
a multilateral approach and on maintaining creditor solidarity.
Paris Club Secretary General Cheremetinski reminded members that
there had been an attempt to make contact with Cuba after 2008
storms, but that the Cuban authorities had not replied. However, the
Paris Club/Group had agreed that there could be bilateral agreements
on short-term loans, which the Australian ones were not.
24. (SBU) Other creditors unanimously argued that Australia should
not proceed, with the UK warning that an Australian deal could put
pressure on other creditors also to cancel debt. The U.S. delegation
made clear that its policy had not changed, and that there had been
no change in Cuban behavior to warrant a change in the multilateral
consensus. Any future debt relief should come, as for all countries,
with a firm commitment to economic reform, and with membership in the
Fund and an appropriate program. The Secretariat concluded that "the
message from creditors is clear." The Secretariat also indicated it
might attempt again to make contact with the Cuban authorities.
25. (SBU) The IMF reported that the government and Fund staff had
reached preliminary agreement on a lending program, which the IMF
Executive Board could be asked to approve in January. The program
did not envisage Paris Club debt relief, since financing from other
sources would be adequate. The World Bank reported that it planned
to provide some $40 million in budget support.
26. (SBU) The IMF reported that the Stand-By Arrangement (SBA),
including total disbursements of $10.9 billion, had helped stabilize
Ukraine's economy. The recession seemed to have bottomed out in the
first quarter, though GDP was still expected to fall 14 percent in
2009 before rising 3 percent in 2010. The IMF had delayed the
planned SBA program review, however, due to the political situation.
Following an October IMF staff mission, the Fund concluded that the
governing coalition had effectively collapsed, and that there was no
broad ownership of the program ahead of upcoming presidential
elections. Whereas the SBA program targeted a budget deficit
equivalent to 3 percent of GDP, the parliament approved a budget that
creates a deficit equivalent to 8 percent of GDP. Additionally, the
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President had declined to veto a wage and pensions bill one of the
governing coalition partners had put forward which would increase
spending by an additional 2.5-6.0 percent of GDP. The World Bank
indicated that it could provide no further policy-based lending in
the current environment.
Outreach to non-Paris Club Creditors
27. (SBU) The Secretariat presented initial ideas for a new strategy
to secure comparable treatment, particularly for HIPCs, from
non-Paris Club creditors. Based on incomplete data from the IMF and
World Bank's September 2009 HIPC implementation report, the
Secretariat concluded that some non-Paris Club members were creditors
of as many as eighteen (Kuwait) or twenty (China) HIPCs. Most
non-Paris Club creditors did not provide debt relief comparable to
HIPC terms. The Secretariat's proposed strategy divided the
creditors into four groups: (1) Gulf states, (2) EU members, (3)
emerging or middle-income economies (India, China, Venezuela, Libya,
Taiwan), and (4) "difficult" countries (Iran, Angola, Honduras). The
strategy suggested a joint diplomatic initiative to the Gulf
countries, proceeding through EU channels to contact EU-member
creditors, and ad hoc diplomatic efforts to engage emerging or
28. (SBU) The U.S. suggested that it would be wise to discuss in
advance with Embassies and others the likely reaction from Gulf
governments and other creditors to any joint diplomatic approaches,
and recommended working with IMF Executive Directors, who should
understand HIPC and comparable treatment issues. While others
supported these suggestions, the Paris Club took no decisions.
Working Group on Guarantees
29. (SBU) The dynamics of the working group on treatment of loan
guarantees meeting were different than in previous months. Four
creditors - Italy (which had sent its export credit agency's (SACE)
legal advisor for the meeting), the U.S., Russia, and Canada - spoke
strongly against automatic inclusion of non-indemnified guarantees,
while only the UK spoke strongly in favor. The Secretariat/France
was left in the middle.
30. (SBU) Italy and Germany even argued against automatically
including in data calls guaranteed loans that were being serviced on
schedule; nevertheless, it was again agreed that creditors would
attempt to include them to the extent possible. Denmark argued that
such data was already provided to the OECD; the Secretariat agreed to
31. (SBU) Italy argued that until claims are indemnified they do not
belong to the government, and therefore cannot be treated, which the
Secretariat noted could in itself provide an incentive to default.
The U.S. responded that while this might be theoretically true, there
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was no evidence of this incentive in practice - and indeed, no
evidence that the non-indemnified claims were a practical problem at
32. (SBU) The UK noted that the standard language of Agreed Minutes
implied the inclusion of all guarantees, whether indemnified or not,
in Paris Club treatment. The Secretariat observed that even if
non-indemnified claims were excluded from a treatment, the debtor was
obligated to seek comparable treatment on such claims - which argued
for including them in the Paris Club treatment in the first place.
Germany, despite its concerns over inclusion in data calls, opined
that legally-constrained creditors should not be allowed to free ride
on those without such constraints.
33. (SBU) Participants agreed to the following steps:
-- Paris Club members that do not have problems restructuring
non-indemnified loan guarantees will check whether the restructuring
of such debts is official policy, and whether the guarantor asks the
commercial lender for authorization to restructure the debt (as the
UK's export credit agency does).
-- Paris Club members that do not restructure such contingent
liabilities would determine the extent of subsequent default on
guaranteed loans that were performing at the time of the Paris Club
treatment, how members reacted to such defaults if any occurred, and
whether members could ask the commercial lenders to allow treatment.
-- All Paris Club members would examine the debt treatments provided
to Indonesia (May 2005) and Pakistan (December 2001) to determine how
such non-indemnified commercial loans were dealt with in actual
34. (U) For additional information on any of the countries or issues
mentioned above, please contact EEB/IFD/OMA David Freudenwald at
email@example.com or Nicholle Manz at firstname.lastname@example.org.