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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 
 
----------- 
Summary 
----------- 
¶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. 
 
----------- 
AFGHANISTAN 
----------- 
¶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.) 
 
------ 
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. 
 
--------- 
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. 
 
-------- 
CAMBODIA 
-------- 
¶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.) 
 
----------------- 
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. 
 
------- 
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. 
 
------- 
 
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. 
 
----- 
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. 
 
---- 
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. 
 
----- 
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. 
 
------ 
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. 
 
---------- 
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.) 
 
------ 
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.