IMF Announced

Today the IMF announced that, a week after the elections, the Interim Iraq Government has signed a Standby Agreement. This makes Iraq eligible for further IMF loans and commits it to following a list of IMF economic policies and meeting certain targets. It was a requirement of the Nov 2004 Paris Club debt agreement.

Jubilee Iraq has been consistently arguing for the last few years that:

(1) Significant longterm agreements such as this should be negotiated by a permanant elected Iraqi government.
(2) Many of the specific policy recomendations of the IMF could be disruptive, increasing poverty and unrest in Iraq.
(3) Cancelation of Saddam’s odious debt should not be linked to economic conditions which infringe on Iraq’s soverignity.

We discussed our concerns with the IMF Managing Director Rodrigo de Rato at the Autumn Meetings in Washington this October, and with other officials at the 2004 Autumn Meetings. We have also lobbied significant creditor and IMF shareholder countries on these issues.

We have not yet seen the full details of the Standby Agreement to properly comment on it. However the timing of the deal was very worrying, coming in the period after elections and before the formation of the interim government. If it had come a few weeks earlier then it may well have become an election issue and resulted in the Iraqi people expressing their views via the ballot box. If it had been delayed for a few months then the permanent elected government would have been able to negotiate it from a position of greater strength.

Even before the signing of the Standby Agreement one of the key policies it undoubtably requires was implemented. Fuel prices were dramatically increased, sparking riots in many parts of Iraq.

The FT reports that restructuring of Iraq’s outstanding debt is entering a pivotal stage this week. However, not everybody is pleased with a process that has been moving ahead at a rapid speed.

But some of the large commercial creditors say they are being treated unfairly and are getting a worse deal than government lenders.

Iraq launched the offer to the larger private creditors last month, giving them a choice of exchanging the debt owed to them for either bonds or loans. The offer, orchestrated by US banks JP Morgan and Citigroup, follows the completion of cash buyback deals with smaller commercial private creditors. Ali A. Allawi, minister of finance, said Iraq was “demonstrating its commitment to treating all creditors in a fair, transparent and even-handed way”.

Save for one meeting in Dubai in May, there have been no two-way negotiations, claim some creditors. One person close to the so-called London Club, says Iraq has pursued a take-it-or-leave-it approach that is “unilateral” and “coercive”. Another individual who is working with Hyundai said: “Iraq has not followed any principled process.”

Among the most contentious issues for private creditors is the treatment of past due interest. The interest is being calculated according to a Libor-based uniform accrual rate, not on the basis of the original contractual provisions of the claims. As a result, “The debt write-off for the private sector is well in excess of what was announced jointly by Iraq and the Paris Club,” said Richard Segal, chief strategist at Argo Capital, the hedge fund, “When it’s all over, the private sector will receive half the 20 per cent net present value proclaimed by the Paris Club.” Some private creditors argue that the assumptions that went into the Paris Club deal were flawed. They were based on IMF debt sustainability calculations that assumed a price of $26 for a barrel of oil. Oil prices are hovering just below $60.

Peter Bartlett, managing director of Exotix said: “The speed of the process may risk excluding some significant Iraqi debt holders from the restructuring process because they simply have not received or seen the exchange offer and so have not reviewed their options.” He added: “There are a lot of people who want to see a more open and consensual settlement, but due to the tight timetable and pressures for a quick and clean exchange deal that has not been part of the equation this time around.”

Lee Buchheit, partner at Cleary Gottlieb, the law firm advising the Iraqi government, said: “It is simply not possible to negotiate separate deals with each creditor or even each creditor group. Every creditor has an argument for why it, above all others, should receive a better deal. “But it is lethal to start down the road of giving preferential treatment to individual creditors or groups of creditors.”

Disgruntled creditors might still accept Iraq’s offer by today for lack of other options. Sources close to Iraq’s advisers say they expect a significant participation rate.


1.No say in loans

  • “The Iraqi people had no say, even regarding the civilian debts. All the creditors knew that Saddam was an oppressive dictator – everyone knew that, everyone.” (Waleed Al-Hilli, Al Da’wa Party)
  • “The people of Iraq shouldn’t be saddled with those debts incurred through the regime of the dictator.” (John Snow, US Treasury Secretary)
  • “If you loan to a dictatorship, don’t expect to be repaid if a democracy emerges” (Richard Perle, 11 June)

2. No benefit from loans

  • “The creditors cooperation enabled Saddam to rule for 35 years – presiding over atrocities such as Halabja and mass graves. Saddam never spent money for the benefit of the Iraqi people, but just for himself and his followers.” (Perweez Mohammed, Patriotic Union of Kurdistan)
  • “[the debt is] a result of Saddam’s economic incompetence and aggressive wars.” (Paul Bremer)
  • “About 90% of Iraq’s potential, virtual debt is war-related” (Marek Belka, former Polish Finance Minister, organiser of Madrid donor conference)

3. Creditors are the criminals

  • When Saddam executed people, he used to charge their families for the bullets used – this is precisely what the creditor countries who financed Saddam are asking of Iraqis today.” (IPO)
  • “Iraq is not responsible for any debts which supported the regime’s war machine. Really it is the creditors who should be paying compensation to Iraq.” (Hajim Al Hassani, Iraqi Islamic Party).

4. Problems with the Paris Club

  • “In the Paris Club process, the enemy is the judge, this cannot be fair. An arbitration tribunal would be the best solution.” (Sheikh Mauyad, Abu Hanifa Mosque)
  • “There is an overwhelming case, both in terms of economic expediency and justice, for writing off most of Iraq’s debts… The Paris Club will no doubt belatedly negotiate some sort of rescheduling… on the basis of what lenders judge to be Iraq’s ability to pay – which will no doubt be on the high side – not on the rightness of its having to do so.” (The Economist, 17th October 2003)
  • “The Paris Club should not be the forum for negotiations. Anything less would compound the tragedy suffered by the Iraqi people during decades of Ba’athist oppression.” (David Mulford, Chairman CSFB investment bank, Financial TImes, 22nd June 2003)
  • “The Paris Club is not about writing off, it’s not about reduction. It’s about how particular countries can and should service their debt and different mechanisms can be used to do it in a timely and appropriate manner” (Andrei Illarionov, economic adviser to Vladimir Putin, 12 April 2003)
  • The maximum amount the Paris Club has ever reduced for a developing country was a 66% reduction for the former Yugoslavia after the ouster of Milosevic. In Iraq, reducing the debt level by that amount will still result in an unsustainable burden… The United States should be wary of a standard restructuring here. Any plan that does not include reparations, and that results in Iraq owing more than $35 billion overall, is unwise. (18 December 2003, “Four Hazard Points Secretary Baker Must Address”, CSIS)

5. Debt threatens democracy

  • “To start a country off on the path of democracy while forcing it to pull along a heavy debt cart will most certainly account for greater problems and civil unrest in the future.” (Fahad Bishara, Kuwait)
  • “IMF conditions neglect the social consequences of economic policies. An IMF structural adjustment program would create more social tension and cause a social explosion which might destroy the transition to democracy.” (Dr. Saleh Yasir, Iraqi Communist Party)
  • “A new Iraqi government will struggle to establish its legitimacy. If the new government inherits a heavy debt load, it will have fewer carrots to spend on establishing its legitimacy, leaving it to rely on stick – a pattern of Iraqi governance that should not be extended.” (Prof Colin Rowat)
  • “Mountains of unpayable debt contributed heavily to the instability that paved Hitler’s path to power” (Paul Bremmer, 22 September 2003)

6. Debt threatens peace and prosperity

  • “The level of debt and claimed reparation payments is so great that they could lock a naturally wealthy economy into an inability to recover” (Clare Short, former UK International Development Sec, 10 April 2003)
  • “To saddle a government with a level of debt which will make it impossible to ever raise the living standards of its people would not provide a good base for peace and security in the region.” (John Manley, Canadian Finance Minister, 12 April 2003)

7. Debt and business

  • “If there is going to be any long-term investment, this debt will have to be dealt with.” (Phillip Merrill, President Ex-Im Bank).
  • “There is no denying that serious financial investments will not be coming into the country till some basic issues regarding the debt issues within Iraq are resolved first.” (Anwer Sher, former CEO of Union National Bank (UAE))
  • “we wouldn’t blame (Iraq’s) leaders if they decided that some of those financial obligations are indeed “odious.” And given that this is such an extreme case, international lenders probably wouldn’t hold it against them for long.” (Wall Street Journal, 30 April 2003)
  • While Kuwait may have to forego collecting tens of billions of dollars in Iraqi debt and war reparations, nevertheless, these will be more than offset by the major shot in the arm that greater security and a revived Iraqi market would give the country’s private sector.” (Henry Azzam, Arab News, 17th April 2003)

8. Opponents of debt cancellation

  • “I do not doubt, that the Iraqi government will fully honour its commitments to Russia” (Colin Powell, Russian radio, 15 May 2003)
  • “We do not only expect to get our money, we will get our money back. If a country has the possibility of repaying its debt, it must do so.” (Hans Eichel, German Finance Minister, 12 April 2003)
  • “One does not clear the slate (but) this (debt) can be progressively renegotiated. This does not mean … that the debts of should be dropped after a change in government.” (Francis Mer, French Finance Minister, 12 April 2003)
  • “President (Bush) clearly and firmly stated that the countries which helped in the joint effort are to be in the first places to get their money back.” (Simeon Saxe-Coburg Gotha, Bulgarian Prime Minister, 26 February 2003)

9. Miscellaneous

  • “Receiving even part of the debt would be a plus for Russia because no one expected Saddam Hussein would repay the money. The debt has been a dead weight all these years. (Andrei Zagorskii, Dep. director of Moscow’s Institute for Applied International Studies, 15 April 2003)

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