VZCZCXRO3634
RR RUEHBZ
DE RUEHFR #1047/01 2150812
ZNR UUUUU ZZH
R 030812Z AUG 09
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 6895
INFO RUEATRS/DEPARTMENT OF TREASURY WASHDC
RUEKJCS/SECDEF WASHINGTON DC
RUEHAB/AMEMBASSY ABIDJAN 1506
RUEHGB/AMEMBASSY BAGHDAD 0369
RUEHRL/AMEMBASSY BERLIN 7088
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RUEHLO/AMEMBASSY LONDON 7238
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RUEHBS/USEU BRUSSELS 2677
RUEHLU/AMEMBASSY LUANDA 1152
RUEHGI/AMEMBASSY BANGUI 0507
RUEHRY/AMEMBASSY CONAKRY 0326
RUEHBZ/AMEMBASSY BRAZZAVILLE 0410
RUEHAM/AMEMBASSY AMMAN 1410
RUEHMV/AMEMBASSY MONROVIA 7583
RUEHTH/AMEMBASSY ATHENS 0983
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RUEHPU/AMEMBASSY PORT AU PRINCE 1103
RUEHPC/AMEMBASSY LOME 1371
RUEHBU/AMEMBASSY BUENOS AIRES 1783
RUEHKH/AMEMBASSY KHARTOUM 0576
RUEHWR/AMEMBASSY WARSAW 1058
RUEHBR/AMEMBASSY BRASILIA 2287
RUEHCH/AMEMBASSY CHISINAU 0604
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RUEHPS/USOFFICE PRISTINA
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RUEHBUL/AMEMBASSY KABUL 0860
RUEHUM/AMEMBASSY ULAANBAATAR 0111

UNCLAS SECTION 01 OF 16 PARIS 001047 
 
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 - JULY 2009 MEETING 
 
PARIS 00001047  001.2 OF 016 
 
 
¶1. (SBU) Summary: During the July Paris Club meeting, creditors 
agreed to voluntarily go beyond the terms of the Heavily Indebted 
Poor Countries (HIPC) Initiative to forgive 100 percent of their 
claims pertaining to Haiti, which reached completion point under the 
Initiative on June 30.  The Club agreed to send a letter to Brazil 
expressing disappointment over an imminent $700 million loan related 
to sale of Embraer aircraft to Aerolineas Argentinas/Austral, and 
its potential to undermine the Club's efforts to collect from 
Argentina.  The Argentine central bank has reportedly benefitted 
from a $1.8 billion swap line from Brazil and a $10 billion swap 
line from China. 
 
¶2. (SBU) The International Monetary Fund (IMF) representative 
reported that China had agreed to drop the sovereign guarantee 
requirement for the mining project in the Democratic Republic of 
Congo (DRC), leaving concessionality of the loan for one 
infrastructure segment as the only remaining issue.  The IMF could 
seek financing assurances for a program under the IMF's Poverty 
Reduction Growth Facility (PRGF) in September or earlier.  DRC could 
reach HIPC completion point with six months of PRGF performance. 
The Central African Republic (CAR) will be invited to negotiate HIPC 
completion point treatment in September.  Paris Club creditors 
showed no interest in Angolan parliamentarians' proposal to swap its 
$400 million January 2010 payment for development, infrastructure, 
or investment. 
 
 
PARIS 00001047  002.2 OF 016 
 
 
¶3. (SBU) The Club also discussed Bahrain, Jamaica, Kazakhstan, Mali, 
Seychelles, and Togo, as well as two methodological issues: 
treatment of export credit agencies' guarantees that have not yet 
been triggered, and outreach to non-Paris Club creditors.  End 
Summary. 
 
------ 
Angola 
------ 
 
¶4. (SBU) The Club again discussed the Angolan parliamentarians' 
proposal to swap the GOA's scheduled January 2010 late interest 
payment for projects in Angola.  Despite discussions with a 
parliamentary delegation, there remained confusion about whether the 
swap would be for infrastructure and social projects, or for 
economic investments that would yield a return.  The delegation had 
characterized the swap as a "win-win" proposition and had emphasized 
that they could and would make the $400 million payment if creditors 
did not agree to the proposed swap. 
 
¶5. (SBU) Most creditors were not inclined to agree to the proposal; 
they expect payment.  Only Norway expressed openness to the proposal 
but, because it was a very small creditor, would participate only if 
others handled negotiations, management, and monitoring of the deal. 
 The Secretariat asked creditors to submit their official position 
on the swap proposal and would then draft a response letter for 
 
PARIS 00001047  003.2 OF 016 
 
 
discussion in September. 
 
¶6. (SBU) The U.S. delegation met privately with the Angolan 
parliamentarians, who were accompanied by a representative of the 
central bank and by a banker from Portugal.  The Angolan delegation 
explained its proposal.  Not a party to the deal under which the 
January payment is due, the U.S. told the Angolans that the involved 
creditors would determine whether to support the proposal. 
 
¶7. (SBU) The IMF reported that despite "commendable" progress in 
recent years, Angola had been impacted by the falls in oil and 
diamond prices, and by OPEC-driven production cuts.  After several 
years of double-digit growth, GDP was expected to fall 1.5 percent 
in 2009, with corresponding deterioration in the country's financial 
and fiscal positions.  Reserves had fallen by one-third in the first 
half of 2009, to $11.8 billion.  Angola was tightening monetary and 
fiscal policies to address the situation, with a May supplementary 
budget cutting spending by 17 percent, based on a predicted $37/bbl 
oil price.  Still, this would leave a deficit of 8 percent of GDP, 
by GOA estimates.  Angola had made significant progress in reducing 
its debt burden from 45 percent of GDP at end-2004 to 16 percent at 
end-2008; it could rise again to 25 percent by end-2009.  The 
country was rated at "moderate" risk of debt distress.  There was no 
interest in a Fund program, although the GOA was receptive to 
recommendations, sought closer dialogue with the Fund, and requested 
additional technical assistance. 
 
PARIS 00001047  004.2 OF 016 
 
 
 
---------------- 
Argentina/Brazil 
---------------- 
 
¶8. (SBU) As in June, the major subject for discussion was Brazil's 
$700 million loan to state-owned Aerolineas Argentinas (and/or its 
subsidiary, Austral) for the purchase of Embraer aircraft.  The 
Brazilian representative again failed to provide any meaningful 
responses, but did say that the agreement had not yet been signed. 
The terms and conditions were under discussion, and Embraer was to 
sign the contract soon.  The information will then be delivered at 
the next meeting of the Participants of the Aircraft Sector 
Understanding (ASU) at the Organization for Economic Cooperation and 
Development (OECD).  The delegate claimed not to know whether the 
loan involved GOB or GOA guarantees, or the general structure of the 
financing, as this was a deal between Embraer and Aerolineas 
Argentinas. 
 
¶9. (SBU) When the Brazilian representative was not present, the U.S. 
stated that Brazil should not be allowed to delay, and proposed that 
the Club prepare a letter to the GOB to convey disappointment about 
the loan, which could undermine the Club's efforts to resume normal 
relations with Argentina.  Other members agreed, and another 
creditor suggested inclusion of Brazil's failure to conclude a 
bilateral agreement with Iraq. 
 
PARIS 00001047  005.2 OF 016 
 
 
 
¶10. (SBU) The IMF reported that Argentina's bond prices had risen 
after the GOA's loss of majorities in both houses in the June 28 
election, apparently on hopes that the congress would restrain the 
administration.  End-May reserves remained robust, at $46 billion. 
The Fund noted press reports that Brazil and China had extended swap 
lines to Argentina of $1.8 billion and $10 billion, respectively. 
There had been no movement in relations with the Fund (no date for 
Article IV discussions), though the Bank reported on its new country 
strategy and on two recent loans for safety nets, valued at $840 
million and $450 million. 
 
------- 
Bahrain 
------- 
 
¶11. (SBU) The Netherlands reported arrears since late 2008.  The 
loans in question were to two separate ministries, one of which had 
cleared its arrears in early July.  Nevertheless, the total had 
reached 6 million Euros.  The Secretariat said Bahrain owed the Club 
about $84 million, two thirds of which was owed to the USG; however, 
Bahrain was current to the U.S.  The Secretariat noted that after 
creditors provided a status of payments, it would draft a letter to 
the Bahraini authorities. 
 
¶12. (SBU) The IMF reported that the macroeconomic situation was 
 
PARIS 00001047  006.2 OF 016 
 
 
"robust," reflecting GOB efforts to diversify the economy, 
especially the financial sector.  Banking assets had soared, 
exceeding 1,000 percent of GDP at end-2008.  Some banks had 
experienced losses on assets in the West.  There had been drops in 
deposits and financing, but the central bank had responded 
forcefully.  In the Fund's view, the sector was weathering the 
crisis well.  The central bank had developed a crisis response 
manual to monitor interbank activity, freeze new licenses, and 
encourage mergers; but complementary actions were required. 
 
¶13. (SBU) Real GDP had grown 8 percent in 2007 and 6 percent in 
2008, but growth was expected to fall to 2.5 percent in 2009.  The 
current account and fiscal deficit had worsened, and reserves had 
fallen from 7.5 months of coverage of non-oil imports to 5.5 months. 
 The IMF noted fiscal policy was neutral; spending increases could 
be appropriate.  Some capital expenditures had been delayed but 
public-private partnerships were being explored to avoid increasing 
public debt. 
 
------------------------ 
Central African Republic 
------------------------ 
 
¶14. (SBU) The CAR reached completion point at the end of June, after 
Argentina had provided assurances that moved participation above the 
required 80 percent threshold.  The Club agreed to negotiate 
 
PARIS 00001047  007.2 OF 016 
 
 
completion point treatment in September.  There would be a data call 
later in July.  A fifth review/Article IV IMF mission is scheduled 
for the end of September. 
 
---------------------------- 
Democratic Republic of Congo 
---------------------------- 
 
¶15. (SBU) Discussion again focused on China's proposed mining and 
infrastructure deal with the DRC, the only significant remaining 
obstacle to a PRGF program and progress toward HIPC debt relief. 
The IMF reported that China Railways had sent a letter to DRC 
authorities, on behalf of the joint venture, agreeing that there was 
no need for a sovereign guarantee for the mining portion of the 
project, but arguing that it needed to keep the sovereign guarantee 
on the remaining $3 billion infrastructure portion.  The first 
annual review of the project was rescheduled for July 10-16 in 
Beijing, at which time the partners were expected to agree to remove 
the guarantee on the mining portion, as well as drop the second 
infrastructure phase valued at $3 billion. 
 
¶16. (SBU) These moves would bring the package much closer to meeting 
the IMF's concerns about debt sustainability, although 
concessionality had not been addressed satisfactorily.  A new Debt 
Sustainability Analysis (DSA) was being prepared, along with a 
report on the DRC's progress towards satisfying its completion point 
 
PARIS 00001047  008.2 OF 016 
 
 
triggers.  Nevertheless, the IMF reported that "things could move 
relatively fast," and that the Fund could request financing 
assurances for the PRGF program in September, or sooner.  The Bank 
reported that if a PRGF program were approved, management would 
propose lifting the ceiling on interim relief from 30 percent to 50 
percent, as had been done for other countries.  Completion of the 
feasibility study for the mining project, repeatedly delayed since 
late 2008, is now set for September.  Several creditors sought 
confirmation of all the elements, including concessionality, the 
DSA, and information about litigating creditors, before addressing 
financing assurances. 
 
----- 
Haiti 
----- 
 
¶17. (SBU) In swift and cordial discussions, the Club and Haiti's 
delegation agreed on the terms of the country's completion point 
treatment.  Because of Haiti's relatively low debt burden for a HIPC 
and a modest 14.2 percent common reduction factor, the Agreed Minute 
provided for forgiveness of a total of $62.7 million, but creditors 
all agreed to more generous terms for Haiti, voluntarily going 
beyond the agreement to provide full forgiveness of all claims on 
Haiti worth an additional $152 million.  This commitment was 
reflected in the Paris Club's press release, under the heading 
"Paris Club creditors cancel 100 percent of Haiti's debt." 
 
PARIS 00001047  009.2 OF 016 
 
 
 
------- 
Jamaica 
------- 
 
¶18. (SBU) The Fund and Bank provided a briefing on the deteriorating 
situation in Jamaica, which faces challenging short- and long-term 
prospects.  Jamaica faces macroeconomic imbalances, chronic low 
growth - with a 4 percent GDP decline expected in FY09-10 due to 
falls in tourism, remittances and bauxite prices - and high public 
debt levels.  Between mid-September 2008 and February 2009, balance 
of payments pressures had brought about a 22 percent depreciation, 
while reserves had fallen by a third, to $1.6 billion, four months 
of import cover. 
 
¶19. (SBU) Despite the recession and falling inflation, authorities 
had to tighten monetary policy considerably, raising the policy rate 
to 21.5 percent.  They had also been forced to tighten fiscal policy 
in order to bolster confidence, with measures in the 2009-10 budget 
worth 2 percent of GDP, including a freeze of civil service wages 
and a fuel tax.  The target was a deficit of 6.6 percent of GDP. 
The current account deficit had narrowed to 14 percent of GDP, but 
the country still faced a $600 million financing gap in FY 2009-10 
and needed to reduce its debt overhang.  Authorities have no room 
for a counter-cyclical fiscal response and were interested in a 
Stand-By Arrangement (SBA).  Negotiations had begun during a June 
 
PARIS 00001047  010.2 OF 016 
 
 
Article IV mission and were continuing in Washington.  Priorities 
for reform included improving public expenditure management, tax 
efficiency, and civil service reform. 
 
¶20. (SBU) Jamaica's exposure to the Club was high, $481.5 million 
according to the recent global data call, but the Fund and 
authorities had not yet discussed whether the country would request 
Paris Club treatment.  Jamaica's external debt had reached 124 
percent of GDP with interest payments equaling 14 percent of GDP. 
The SBA's focus would be fiscal sustainability, and it was not clear 
whether this required debt restructuring. 
 
---------- 
Kazakhstan 
---------- 
 
¶21. (SBU) Discussion again focused on creditors' exposure to failed 
banks and the Club's proposed response.  In June the Club had agreed 
to send a letter to authorities, but creditors had disagreed on what 
it should contain.  The Secretariat's initial draft quoted the 
assertion in the recent joint letter from Export Credit Agencies 
(ECAs) that their claims should be excluded from restructuring and 
suggested that treatment of ECA claims could be a problem in any 
future Club restructuring.  The U.S. delegation had privately told 
the Secretariat that this language was troubling.  The Secretariat 
then circulated a new draft that expressed the Club's concern about 
 
PARIS 00001047  011.2 OF 016 
 
 
the situation and asked that the Club be kept informed about 
developments.  Creditors agreed to the revised text with slight 
changes, though Germany and Italy voiced their preference for the 
more assertive version.  Belgium noted that more ECAs appeared to be 
involved, perhaps as many as sixteen.  The Club agreed to launch an 
accelerated data call, which would include bank-by-bank data. 
 
---- 
Mali 
---- 
 
¶22. (SBU) The Netherlands reported that Mali, a post-completion 
point HIPC, was in arrears.  Arrears in March 2008 had been cleared, 
but had begun to accumulate again in mid-2008, reaching 500,000 
Euros.  France had also reported arrears in March 2008, but Mali was 
now current on payments.  The IMF expressed concern regarding the 
arrears in view of its non-toleration policy, and asked whether the 
Netherlands considered the arrears to be technical; otherwise, a 
waiver would have been required.  The Netherlands agreed to deem 
them technical arrears for now. 
 
¶23. (SBU) The IMF reported that Mali had entered into a program in 
2008, because of the crisis in food and fuel prices.  The program 
was designed to strengthen public finances and introduce structural 
reforms, and its second review had been completed on July 6.  Mali 
had made progress - the tax revenues/GDP ratio had risen from 9 
 
PARIS 00001047  012.2 OF 016 
 
 
percent in 2005 to 14 percent in 2007, fiscal balances were close to 
the zero target, and there had been progress on privatization. 
Nevertheless, poverty rates remained high, and progress towards the 
Millennium Development Goals (MDGs) was slow.  The impact of the 
crisis had been limited, due to high gold prices, little bank 
exposure, and unexpectedly robust remittances, all bolstered by 
receding food and fuel prices.  While the Bank opined that the 
country was very vulnerable to shocks, it was at a "low risk" of 
debt distress. 
 
---------- 
Seychelles 
---------- 
 
¶24. (SBU) The second review of Seychelles' program was completed on 
June 30, and creditors agreed that the first tranche of Seychelles' 
Evian Terms debt reduction could enter into force once the 
Secretariat had confirmed that South Africa had received its share 
of the $1 million goodwill payment.  All Club creditors to the 
Seychelles had received payments. 
 
¶25. (SBU) The IMF reported that there had been good policy 
implementation and that macroeconomic stabilization had reduced 
risks, so the Board approved a switch to a semi-annual review 
schedule.  The next review would be based on end-September data and 
accompanied by a request for a 3-year loan under an Extended Fund 
 
PARIS 00001047  013.2 OF 016 
 
 
Facility (EFF) program.  Although GDP was expected to fall 11 
percent in 2009, the Fund's view was that a virtuous cycle was in 
place with a primary surplus well above program targets, inflation 
having declined sharply, and the real exchange rate having 
appreciated.  Financing gaps remained for 2009 and 2010 however, due 
to the global recession and effects of piracy. African Development 
Bank (AfDB) and European Union (EU) support would fill some of the 
gaps. 
 
---- 
Togo 
---- 
 
¶26. (SBU) The Club agreed to enter into force the second phase of 
Togo's HIPC treatment, based on IMF completion of the second PRGF 
program review in April.  The PRGF program, approved in April 2008, 
was augmented in September to respond to food and fuel prices and 
flooding; Togo reached HIPC decision point in November. 
 
¶27. (SBU) The IMF reported "disciplined" implementation of the 
program despite multiple shocks.  GDP was expected to grow 1.7 
percent in 2009, with inflation falling below 3 percent.  Exports 
and remittances had fallen, however, offsetting increases in food 
production and domestic investment.  Revenue collections were on 
track, and spending was "disciplined."   Most structural reforms 
were on or ahead of schedule, with only one minor delay (audit of 
 
PARIS 00001047  014.2 OF 016 
 
 
the state phosphate company) because of administrative capacity. 
Progress on completion point triggers was also good, with completion 
point possible during the second half of 2010.  Nevertheless, 
capacity was weak and presidential elections in the first quarter 
posed risks. 
 
------------------------------------ 
Methodological Issues: 
Inclusion in Data Calls and 
Agreements of Un-triggered Guarantees 
------------------------------------- 
 
¶28. (SBU) The Secretariat released a paper on ECA guarantees that 
have not been triggered.  The Club's survey on existing creditor 
practices found a wide variation on whether creditors include such 
credits in data calls, and if those credits are treated.  The paper 
noted some arguments for including the credits - this seemed to be 
within the letter of Agreed Minutes, legal issues could probably be 
mitigated, and since Club treatments were designed to restore 
sustainability, all debts should be considered in order to ensure 
comparable treatment.  On the other hand, the paper noted that the 
Agreed Minute definitions were not taken literally to apply to 
private creditors, that some creditors (especially the U.S. and 
Russia) would face legal obstacles in treating them, and that 
treating them would impose additional costs on creditors. 
 
 
PARIS 00001047  015.2 OF 016 
 
 
¶29. (SBU) The paper suggested three options - (1) continuation of 
the current ad hoc approach; (2) inclusion of the guarantees in all 
data calls and bilaterals; and (3) exclusion of the claims from all 
data calls and bilateral agreements.  (A fourth possibility could be 
inclusion in data calls, but not necessarily in bilateral 
agreements.) 
 
¶30. (SBU) There was a lengthy, although inconclusive, discussion of 
the issue, including several recent precedents in which the Club 
agreed to exclude such debts in order to avoid causing economic 
disruption.  This included a tanker mortgage in the recent 
Seychelles agreement, and port loans to Grenada and Djibouti.  The 
Secretariat suggested further discussion, perhaps by a working group 
on the margins of the September meeting. 
 
-------- 
Outreach 
-------- 
 
¶31. (SBU) The Secretariat updated creditors on outreach efforts, 
reporting in particular Israel's interest in joining the Club. (At 
the June outreach meeting with the private sector and other 
creditors, an Israeli MOF official had conveyed this interest to the 
U.S. delegation.)  Club members were generally amenable to the 
approach, and the Club will proceed according to its outreach policy 
- first, requesting detailed data from Israel on its loan portfolio, 
 
PARIS 00001047  016.2 OF 016 
 
 
and then inviting Israel to observe meetings more extensively.  The 
Secretariat requested that creditors check views in capitals to 
determine their positions on a) closer association with the Club and 
b) full membership.  Israel may soon be contacting the Secretariat 
more officially. 
 
¶32. (SBU) Among other outreach countries, Malaysia had reacted 
positively to the Secretariat's approaches.  (Malaysia had asked to 
participate in the negotiations with Seychelles, but had been unable 
to make appropriate arrangements in time.)  China had requested 
information, but had not followed up.  The UAE had indicated that it 
was willing to share information and "in principle" to join 
negotiations, though it had not accepted the Club's invitation to 
the June meeting.  India had provided "little feedback." 
 
¶33. (U) For additional information on any of the countries or issues 
mentioned above, please contact EEB/IFD/OMA David Freudenwald at 
freudenwalddj@state.gov or Nicholle Manz at manznm@state.gov. 
 
PEKELA