VZCZCXYZ0000
RR RUEHWEB
DE RUEHFR #6993/01 2971406
ZNR UUUUU ZZH
R 241406Z OCT 06
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 2475
INFO RUEATRS/DEPARTMENT OF TREASURY WASHDC
RUEKJCS/SECDEF WASHDC
RUEHRL/AMEMBASSY BERLIN 6397
RUEHSW/AMEMBASSY BERN 1849
RUEHBR/AMEMBASSY BRASILIA 1696
RUEHBS/AMEMBASSY BRUSSELS 5914
RUEHBY/AMEMBASSY CANBERRA 1644
RUEHCP/AMEMBASSY COPENHAGEN 1391
RUEHHE/AMEMBASSY HELSINKI 1232
RUEHLO/AMEMBASSY LONDON 6298
RUEHMD/AMEMBASSY MADRID 2452
RUEHMO/AMEMBASSY MOSCOW 5655
RUEHNY/AMEMBASSY OSLO 1418
RUEHOT/AMEMBASSY OTTAWA 1984
RUEHRO/AMEMBASSY ROME 8055
RUEHUL/AMEMBASSY SEOUL 1358
RUEHSM/AMEMBASSY STOCKHOLM 1434
RUEHTC/AMEMBASSY THE HAGUE 2602
RUEHKO/AMEMBASSY TOKYO 2370
RUEHVI/AMEMBASSY VIENNA 1624
RUEHBS/USEU BRUSSELS 1776
RUEHBUL/AMEMBASSY KABUL 0396
RUEHLU/AMEMBASSY LUANDA 0785
RUEHBU/AMEMBASSY BUENOS AIRES 1306
RUEHPF/AMEMBASSY PHNOM PENH 0192
RUEHKI/AMEMBASSY KINSHASA 1423
RUEHQT/AMEMBASSY QUITO 0458
RUEHWN/AMEMBASSY BRIDGETOWN 0261
RUEHPU/AMEMBASSY PORT AU PRINCE 0677
RUEHGB/AMEMBASSY BAGHDAD 0523
RUEHNR/AMEMBASSY NAIROBI 1170
RUEHLG/AMEMBASSY LILONGWE 0514
RUEHLC/AMEMBASSY LIBREVILLE 1137
RUEHBW/AMEMBASSY BELGRADE 0711
RUEHPL/AMEMBASSY PORT LOUIS 0807
RUEHLS/AMEMBASSY LUSAKA 0602
UNCLAS PARIS 006993
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
BELGRADE PASS TO PODGORICA
E.O. 12958: N/A
TAGS: EFIN ECON EAID XM XA XH XB XF FR
SUBJECT: PARIS CLUB - OCTOBER 2006 TOUR D'HORIZON AND MALAWI DEBT
NEGOTIATION
SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET DISTRIBUTION
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Summary
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1. (U) At the October 18-19 meeting of the Paris Club, creditors
canceled 354 million of Malawi's 363 million dollars of Paris Club
debt as its completion point treatment under the Heavily Indebted
Poor Countries (HIPC) initiative. The US was not a creditor. The
Club provided financing assurances for Haiti's Poverty Reduction and
Growth Facility (PRGF), which is scheduled to be submitted to the
IMF Board on November 20, together with a proposed HIPC decision
point for Haiti. Negotiations in the Paris Club are expected in
December. Creditors agreed on the division of a 100 million dollar
payment Angola will make on November 1 as a good will gesture toward
clearing its 2.3 billion dollars in arrears. The US will not
receive any payment since it has no arrears. The World Bank
reported that Angola has borrowed 14 billion dollars from China on
non-concessional terms. END SUMMARY.
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AFGHANISTAN
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2. (U) The US announced that it had signed its bilateral agreement
with Afghanistan implementing the July 2006 agreed minute. Germany
said it had submitted a draft bilateral agreement to Afghanistan's
advisors. Russia said it hoped to do the same soon. The IMF urged
all three creditors to respond to a request by Afghanistan for debt
data needed to assess the country's eligibility and qualification
for HIPC. (The US has responded to the request.)
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ANGOLA
------
3. (U) Angola remains interested in a possible Stand-By Arrangement
with the IMF, but Finance Minister de Morais told the Fund that he
needs more time to build internal support. In the meantime, Angola
has agreed to resume debt service in full to its Paris Club
creditors and to make a 100 million dollar payment toward its 2.3
billion dollars in arrears as a goodwill gesture. According to a
formula agreed by creditors, the 100 million dollars will be divided
up based on each creditor's total arrears (excluding late interest)
and previous payments received. The US will not receive any of the
100 million since Angola owes neither arrears nor late interest to
the US. The secretariat will send a letter to the authorities
welcoming their commitment to normalize relations with the Club but
rejecting their request for the cancellation of 1.8 billion dollars
in late interest. Creditors remain united in the view that a Paris
Club treatment is not possible in the absence of an IMF program.
Separately, the World Bank reported that Angola is believed to have
borrowed 14 billion dollars from China on non-concessional terms.
The Bank said this is a breach of its free rider policy.
4. (SBU) In a small informal meeting called to discuss export
credit policy in Argentina, the US informed the Secretariat,
Germany, Japan and Spain of US Ex-Im Bank's credit support of an
asset-backed lease of aircraft for TAAG, the Angolan state-owned
airline. Reaction was muted, with the Secretariat commenting that
the underlying sale was old news.
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ARGENTINA
---------
5. (SBU) Argentina's ambassador to France told Paris Club President
Musca that Argentina plans to make a proposal to the club by the end
of the year. Given Argentina's 30 billion dollars in reserves and
the unlikelihood that Argentina will seek a new IMF program,
creditors remarked that the simplest way for Argentina to normalize
relations would be to clear its 3.5 billion dollars in arrears. The
UK anticipates that Argentina will ask for a 10-year rescheduling,
but no debt reduction. The US, UK, and Spain said a formal debt
restructuring would not be possible without an IMF program. The
Netherlands, joined by France and Spain, stressed that Argentina's
main incentive for normalizing relations is to access new financing
from member countries' export credit agencies (ECAs). To maintain
this leverage, the Paris Club needs to stick together as a group and
withhold new financing until relations have been normalized. France
acknowledged that the Paris Club has no authority to dictate the
policies of its members' ECAs, but encouraged member delegations to
keep their ECAs informed about Paris Club developments.
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CAMBODIA
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6. (SBU) The IMF continues to await resolution of the bilateral
debt dispute between Russia and Cambodia that is holding up approval
of a new PRGF. Russia said Cambodia still has not responded to an
earlier Russian proposal for treating post-cutoff debt (the main
point of contention). Japan asked the IMF whether only arrears
needed to be rescheduled and whether a concessional treatment was
necessary. (In an earlier meeting in Washington, Japan had
suggested that only US arrears needed to be rescheduled). The IMF
responded that its most recent Debt Sustainability Analysis made
some broad assumptions to get a general picture of Cambodia's debt
situation, but that the assumptions should not be considered
indicative of any future debt treatment in the Paris Club. The US
noted that all Paris Club creditors would have to participate in a
rescheduling. The secretariat said it was premature to discuss the
terms of a future treatment. (In a private discussion over lunch,
the head of the Japanese delegation explained that Japan cannot
proceed with a planned development assistance loan to Cambodia, to
be co-financed by the Asian Development Bank, if there is a risk
that Cambodia will receive debt reduction from the Paris Club.
Thus, Japan wishes to exclude the possibility of a concessional
treatment, on the grounds that debt reduction is not necessary to
achieve debt sustainability.)
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CONGO-BRAZZAVILLE
-----------------
7. (U) Spain, Germany, Switzerland, and Russia reported delays in
concluding their bilateral agreements implementing the March 2006
decision point agreed minute. (The US also has not completed its
bilateral agreement.) The secretariat will send a letter to the
authorities extending the deadline for concluding bilateral
agreements until end-January 2007.
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ECUADOR
-------
8. (U) The IMF said it was not aware of any formal proposals by
either of the two leading presidential candidates to restructure
Ecuador's external debt, although some interest has been expressed
in an Argentina-type bond restructuring. The IMF noted that there
was no economic justification for an external bond restructuring,
and that a bond restructuring would generate little savings since
most of Ecuador's public debt is owed to multilateral institutions.
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GRENADA
-------
9. (U) Belgium, France, Russia, and the US said they had sent their
draft bilateral agreements to the authorities implementing the May
2006 agreed minute, but had not received any response. At the
suggestion of the US, the secretariat will try to contact the
Grenadian finance minister by phone.
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HAITI
-----
10. (U) Creditors provided financing assurances for Haiti's new
PRGF, which is scheduled to come before the IMF executive board on
November 20, together with HIPC decision point. The Fund reported
that Haiti's external debt totals 1.3 billion dollars, 14 percent of
which is owed to Paris Club creditors. Negotiations with Haiti in
the Paris Club are anticipated for December.
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IRAQ
----
11. (U) Russia said it was "finalizing internal procedures"
necessary to sign its bilateral agreement with Iraq. (Russia
remains the only Paris Club creditor that has yet to conclude its
bilateral agreement implementing the December 2004 agreed minute.)
The secretariat reported that the Kuwaiti parliament has refused to
cancel debt owed by Iraq, and the finance minister has declared that
Kuwait is not a member of the Paris Club and therefore is not
obligated to provide debt relief on Paris Club terms. The
secretariat will prepare a letter to the Kuwaiti authorities urging
SIPDIS
them to provide comparable treatment.
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KENYA
-----
12. (U) The IMF said completion of the second review of Kenya's
PRGF was contingent on: (1) improved governance; (2) agreement on a
macroeconomic framework and structural reform agenda; and (3)
measures to address fiscal slippages. The secretariat confirmed
that the third phase of the current Paris Club agreement, which
provides for the rescheduling of 2006 maturities, cannot enter into
force retroactively if the second review of the PRGF is not
completed by the end of this year. The secretariat reminded
creditors that, according to a policy agreed in 2000, those
creditors that are currently billing Kenya for maturities falling
due must be prepared to reimburse any payments received should the
third phase of the agreement enter into force retroactively. (This
may be at odds with USG policy regarding re-crediting.) The
secretariat will send a previously drafted letter to the Kenyan
SIPDIS
authorities alerting them to the current state of events.
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MALAWI
------
13. (U) Malawi received its HIPC completion point treatment.
Creditors agreed to cancel 180 million dollars in claims, plus an
additional 174 million on a voluntary, bilateral basis. As a
result, Malawi's debt to the Paris Club will be reduced from 363
million to 9 million dollars. The agreed minute included a
strengthened comparability of treatment clause calling on Malawi to
establish a single point of contact for private creditors and
provide regular updates to the Paris Club on its progress in
obtaining comparable treatment from non-Paris Club creditors. (The
US is not a creditor and therefore was an observer to the
negotiations.)
--------------------------
NORWEGIAN DEBT FORGIVENESS
--------------------------
14. (SBU) Norway defended its decision to cancel, unilaterally and
without conditions, the remaining 78 million dollars in debt
incurred by Egypt, Ecuador, Peru, Jamaica, and Sierra Leone as a
result of Norway's Ship Export Campaign of 1976-1980. Norway's
action has drawn considerable attention in Europe and has been
hailed by NGOs as a victory in the campaign to cancel "illegitimate"
debt. Norway denies that the debt is illegitimate, but recognizes
the Ship Export Campaign as a development policy failure. Some
creditors (Germany, Italy, UK, US) supported Norway's contention
that unilateral debt forgiveness is not a violation of Paris Club
solidarity, since creditors stand to benefit from the debtors'
increased payment capacity. Others (Japan, Netherlands) countered
that Norway did, in fact, violate solidarity by leaving creditors
exposed to increased political pressure to forgive "odious" and
"illegitimate" debt. The Paris Club president will communicate
informally with the Norwegian authorities to convey the concerns
about the concept of illegitimate debt.
---------------------
SERBIA AND MONTENEGRO
---------------------
15. (SBU) Several creditors, led by the Netherlands and Germany,
objected to the methodology used by Serbia and Montenegro to
partition so-called "allocated debt." These creditors argued that
the methodology is inconsistent with the 2001 Paris Club agreement
with the former Yugoslavia, which defined allocated debt based on
the location of the debtor or guarantor. Serbia and Montenegro, on
the other hand, have defined allocated debt based on the location of
the final beneficiary of the loan. The secretariat will draft a
letter to the Serbian and Montenegrin authorities noting creditors'
concerns, although it is not clear whether all creditors will insist
that the two countries adopt the Paris Club methodology. The letter
will also ask the authorities to provide, for each creditor, a
loan-by-loan breakdown of the debt to be partitioned. Creditors
agreed that bilateral agreements would not be required in those
cases where the total debt owed by one of the two countries was less
than 1 million IMF Special Drawing Rights (SDR).
16. (SBU) Separately, the US delegation met bilaterally with Vesna
Dzinic, the head of the Serbian Treasury, to discuss the
government's request for debt swaps. The US delivered a letter
signed by Treasury Assistant Secretary Lowery and explained that
debt swaps were feasible only if a private third party was willing
to purchase the debt at USG book value or higher. Dzinic thanked
the US for the information and promised to be in touch. She also
provided a loan-by-loan breakdown of the allocation of debt between
Serbia and Montenegro (and an allocation between Serbia and Kosovo,
in the event of independence). She will provide a list of missing
loan documents via e-mail.
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SEYCHELLES
----------
17. (U) The secretariat will forward to the IMF a letter that it
received earlier this month from Danny Faure, the first finance
minister to be appointed in the Seychelles in 19 years. In the
letter, Minister Faure states that the new government is prepared to
make a 4 million euro payment toward its Paris Club arrears and has
restarted a dialogue with the IMF. The IMF confirmed that the
authorities have begun to implement a package of recently announced
reforms. Creditors expressed some optimism that the new government
may be more serious about seeking an IMF program, which could lead
to an eventual Paris Club treatment. The secretariat will initiate
a data call to help determine how to divide up the 4 million euro
payment. (The US is not a creditor.)
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ZAMBIA
------
18. (U) The US asked Russia to comment on reports that it had not
signed its bilateral agreement with Zambia implementing the May 2005
completion point agreed minute, and that it was continuing to bill
for maturities that should have been canceled. Russia replied that
it had, in fact, concluded its bilateral agreement with Zambia in
December 2005, and that the Zambian authorities are making payments
on maturities that were not covered by the Paris Club agreement.
(Unlike the US, Russia does not forgive 100 percent of pre-Cologne
Summit claims at completion point, although it is in the process of
reevaluating this policy.)
-------------------
FREE-RIDING LENDERS
-------------------
19. (U) The IMF and World Bank summarized recent work on the debt
sustainability framework (DSF) and free rider policy. The Fund will
release a new paper on the issue in a couple of weeks. Several
creditors (UK, Netherlands, Sweden, Italy, Norway) stressed the
importance of this work and encouraged all Paris Club members to
broaden awareness of the DSF and to support efforts underway in the
OECD Export Credit Group to promote responsible lending. China will
participate in a meeting of the Export Credit Group on November 14.
The secretariat said the Paris Club president would be willing to
participate in future meetings on the topic as a show of support.