This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 21 PARIS 004901 
 
SIPDIS 
 
SENSITIVE 
 
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 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EAID XM XA XH XB XF FR
SUBJECT: PARIS CLUB - JUNE 2005 TOUR D'HORIZON 
 
 
SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET DISTRIBUTION 
 
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SUMMARY 
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¶1. (U) Following are summaries of country discussions during the 
June 15, 2005 Paris Club session.  Country negotiations will be 
reported septels.  The Paris Club's President, Jean-Pierre 
Jouyet, chaired the session.  Secretary General (SecGen) Emmanuel 
Moulin represented the Secretariat.  The next session of the 
Paris Club is a special meeting to discuss Nigeria scheduled for 
June 29, 2005. 
 
¶2. (U) NOTE: INDIVIDUAL CREDITOR POSITIONS REPORTED IN THIS 
MESSAGE SHOULD BE TREATED AS "PARIS CLUB CONFIDENTIAL" AND 
NOT/NOT DISCUSSED WITH DEBTOR COUNTRY REPRESENTATIVES, NOR WITH 
NON-PARIS CLUB PARTICIPANTS. 
 
¶3. (SBU) Discussed in this session: 
 
TOUR D'HORIZON: 
Afghanistan -- IMF update / bilateral agreement 
Algeria - report from Secretariat / bilateral agreement 
Angola - report from the Secretariat (Brazil) 
Argentina -- Upcoming negotiation (Israel) 
Burundi -- IMF update / decision point 
China -- possible accession 
Dominican Republic -- comparability of treatment 
Grenada -- IMF update 
Indonesia -- MoU, bilateral agreements 
Iraq -- IMF update / bilateral negotiations 
Malawi-- IMF update 
 
Nigeria -- treatment proposal 
Paraguay -- review of arrears (Belgium) 
Peru -- prepayment proposal signing 
Russia -- debt prepayment / bilateral agreement (France) 
Sao Tome and Principe -- IMF update / financing assurances 
Serbia and Montenegro -- IMF update / second phase of the AM 
Sri Lanka -- MoU signing 
Zimbabwe -- arrears 
 
METHODOLOGY: 
Additional bilateral debt relief beyond HIPC 
Breakage costs 
Status of Brazil 
¶4. (U) ACTION/FOLLOW-UP/UPCOMING ITEMS 
 
June 29 special meeting--Nigeria proposal 
 
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AFGHANISTAN 
------------ 
¶5.  (SBU) The IMF reported a request to extend the SMP in 
Afghanistan until March 2006.  Preparation for a PRSP is underway 
and the IMF would be open to a clear discussion of a PRGF if the 
authorities request.  The GOA has performed strongly under the 
current SMP, meeting all benchmarks except reconciliation of 
external debt.  The macroeconomic outlook for the near future is 
favorable.  The principal challenge is increased spending 
pressure.  The GOA has had difficulty in contacting creditors and 
may ask the IMF for help in contacting non-PC creditors. 
 
¶6. (SBU) The IBRD added that the security situation is degrading 
especially in light of approaching September elections.  Half of 
the funding to the GOA is in performance grants.  There is also a 
reconstruction trust fund, which has received $850 million from 
donors in three years.  From these funds, the IBRD has dispersed 
$235 million for the GOA operating budget. 
 
¶7. (SBU) Russia reported that the progress on bilateral debt 
resolution with Afghanistan has been difficult due to mistrust 
between accounting agencies.  Russia is the largest creditor to 
Afghanistan.  The GOR hopes to resolve the issue by the end of 
¶2005.  While the problem is mainly bilateral, Russia prefers to 
use the Paris Club channel and its standard procedures.  On the 
subject of debt treatment for the GOA, the situation is far from 
1997 methodology.  Germany remarked that it is in favor of an IMF 
accord but would need a stronger basis.  The GOG proposed further 
Paris Club negotiation in due time. 
 
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ALGERIA 
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¶8. (SBU) On Algeria/Russia relations, a bilateral accord calls 
for the reimbursement of Algerian debt to Russia beyond the 10% 
debt swap ceiling.  The Secretariat emphasized the importance of 
a buyback at market values: Algeria should not anticipate which 
creditors would participate in a buyback before confirming the 
offer. 
 
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ANGOLA 
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¶9. (SBU) Brazil had been invited to talk about its loans to the 
GOA, but was not present.  The IMF reported that discussions on a 
SMP resumed in April.  The framework has been established but no 
agreement has yet been produced, although negotiations are still 
open.  A delegation may go to Washington, D.C. in July to 
continue this process.  The IBRD noted that it expects to 
conclude details of a PRSP in July. The agency has monitored 
transparency in accounts and public resource management.  Other 
SMP preparatory actions include workshops on oil revenue 
management.  The IBRD will translate the finance account review 
with a wide distribution to take place in August. 
 
¶10. (SBU) The Secretariat reported that it only had vague 
information on the Brazilian loan to Angola.  It also clarified 
that the credit from Israel in 2003 was private. Denmark asked if 
the Secretariat intended to make a data call.  The Secretariat 
has encouraged Angola to seek an accord with the IMF. 
 
¶11. (SBU) Belgium asserted that current Angolan policies are all 
based on oil/petroleum.  Germany stated that Angolan action to 
get new money (such as financing for oil projects) is positive, 
as it stabilizes the financial situation and thus the ability to 
pay off debt.  This action is therefore not against PC rules and 
is moreover the decision of the country.  Spain added that new 
loans might help the GOA, making it less dependant on the PC. 
However, loans and bilateral agreements would decrease the 
incentive to go to IMF for a SMP.  Thus, the PC creditors should 
grant debt relief on the basis of an IMF SMP.  Spain 
characterized the current situation as an unstable equilibrium, 
mixing international and bilateral aid. 
 
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ARGENTINA 
--------- 
¶12. (SBU) The IMF reported an extension of $1.5 billion to the 
GOA.  Discussions on Argentina will resume after an Article IV 
review on June 22, after which the IMF will decide what program 
should go forward.  The IMF is not conducting a program 
negotiation but rather a forecast consultation.  The IBRD noted 
that Argentina should be processed under a streamlined method for 
IBRD loans but GOA economic programs have produced concerns.  As 
a result, examination of programs continues on a case-by-case 
basis.  The World Bank reported that Argentina continues to make 
net repayments to the IBRD with a recent payment of $400 million. 
The GOA is facing $17 billion in arbitration claims, largely 
before ICSID.  Some members of the GOA have argued that 
arbitration awards against Argentina are unconstitutional unless 
the Argentine courts review them and approve that they are 
consistent with public policy. 
 
¶13. (SBU) The Secretariat stated that the scenario presented by 
the GOA (including a cancellation of arrears) is unrealistic. 
The scenario shows a currently unsupportable debt burden and 
plans to reduce debt to zero in 2009.  Overall, there is a gap 
between the views of the IMF staff and the Argentine authorities. 
The GOA does not share IMF staff views of policy impacts and 
changes. 
 
¶14. (SBU) The Italian delegation had a question on the place of 
holdouts and requested hard data on a forward-looking strategy. 
 
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BURUNDI 
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¶15. (SBU) The IMF reported on a mission visit during mid-May. 
The mission found fiscal programs to be on track under the PRSP 
and Cologne methodology.  A financial gap exists due to the 
demobilization.  A decision point document will be issued July 
¶13.  The IBRD had nothing to add and so the Secretariat opined 
that the decision point would be reached. 
 
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CHINA 
----- 
¶16. (SBU) The Secretariat noted that the Paris Club cannot ignore 
China and must consider PC/China relations. 
 
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DOMINICAN REPUBLIC 
------------------ 
¶17. (SBU) The IMF reported a Mission visited the DR for the first 
review and to discuss the Stand-By and Article IV.  Talks 
continued in DC on fiscal policy and structural reforms.  The 
authorities are committed to implementing their program, and are 
moving along at a reasonable pace on their external financing 
strategy.  The GoDR is considering re-opening the bond exchange, 
despite the already high participation rate, to reduce their debt 
by another USD 14 million.  Negotiations with non-Paris Club 
creditors are advancing.  The IBRD said its Board had discussed a 
new country assistance strategy on May 9. 
 
¶18. (SBU) The Secretariat said bilateral agreements awaiting 
signatures include France, Japan, Germany, and the USA, so the 
GoDR wants an extension.  Those creditors all reported good 
progress in their bilateral agreements, although Japan asked the 
Secretariat to remind the GoDR about 2.7 million USD arrears 
 
SIPDIS 
which had accrued as of May 20.  The Secretariat reported that on 
comparability of treatment (CoT), the London Club and the GoDR 
the day before had signed an agreement.  The Secretariat 
presented a working paper in which it concluded that CoT is being 
met, and noted that debt reduction may not be needed for 2006-7 
because the GoDR is close to eliminating its financing gaps.  The 
President noted the consensus to grant an extension until August 
30, with a target date of September for the negotiation on debt 
rescheduling for payments due in 2005. 
 
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GRENADA 
------- 
¶19. (SBU) The President noted significant arrears, totaling USD 
27 million, to countries including Belgium, France, USA, UK, and 
the Netherlands.  The IMF reported that GoG authorities say they 
are continuing talks with private creditors and with donors.  An 
Article IV discussion is set for the Board on July 13.  The GoG 
is eager to cooperate, but has not advanced very far.  The IBRD 
reported its programs in Grenada are on track.  Russia noted one 
claim not included in the data call, and the USDEL promised to 
double-check its figures as well. 
 
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INDONESIA 
-------- 
¶20. (SBU) The Paris Club discussed the progress on a MoU for 
Indonesia.  The IMF informed the PC of ongoing Article IV and 
past program monitoring.  The May staff report will highlight 
fiscal banking practices and post-tsunami reconstruction efforts 
as well as coordination of relief.  The IBRD added that 
reconstruction agency and a $500 million trust fund are 
supporting Indonesian relief efforts.  An IBRD update is in 
process and should be out by the week of June 20. 
 
¶21. (SBU) Earlier bilateral issues included outstanding financial 
obligation to Germany and the UK - both situations were 
bilaterally resolved before the June Tour d'Horizon.  The US 
announced that it had signed a bilateral agreement with 
Indonesia.  Finland noted that it has not signed a bilateral with 
the GOI, but the MoU would not cover the sums involved.  Japan 
noted for the record that as a small creditor, it sees no problem 
with the terms of the MoU. 
 
---- 
IRAQ 
---- 
¶22. (SBU) The IMF reported that it had concluded discussions with 
Iraq, marking the first Article IV consultation with the nation 
in twenty-five years.  The IMF views this as an important step in 
normalizing Iraqi relations with the international community. 
Although there are some delays on structural reforms, the 
macroeconomic situation is under control.  The IMF also noted 
that the Iraqi Finance minister would like reforms.  Iraq is 
generally on track with its EPCA reforms.  Progress had been made 
in contacting PC and non-PC creditors.  The authorities request 
an extension to sign bilateral agreements. 
 
¶23. (SBU) The PC Secretariat announced that it is in contact with 
the Iraqi cabinet.  The GOI has made progress since February, 
contacting non-PC creditors (48 states) based on new accords. 
The Secretariat provided an update on the bilateral agreements of 
these non-PC creditors with Iraq.  Although Italy requested that 
the list be distributed, the confidential nature does not allow 
the PC to provide a copy of this list. 
-- Malta announced $7 million in credit to Iraq 
-- Argentina has small claims 
-- Greece presents a more problematic case as the military 
credits involved are subject to a 2003 decision 
-- China does not recognize Iraqi authority 
-- The Secretariat must verify Libyan credits--contact with the 
GOL established 
-- Bosnia, Croatia, Luxembourg, Mexico, Lithuania do not have 
sovereign debt.  No contact has been established with Bosnia and 
Croatia.  The Czech Republic is an important creditor, but the 
GOC has not yet declared its claims.  The PC also does not have 
information for the Gulf States (Saudi Arabia, etc). 
-- The Maghreb (North African former French colonies) countries 
have no clear interlocutor, and Egypt prefers direct contact with 
the GOI instead of the PC channel. 
-- Vietnam is a particular case as it is both a creditor and a 
debtor to Iraq. 
The Secretariat reiterated that it has offered its assistance in 
establishing bilateral contacts. 
 
¶24. (SBU) Spain addressed the interpretation of the AM, reminding 
members that the Paris Club had agreed that a letter to the GOI 
(sent in May) should be interpreted according to the spirit in 
which it was written.  Spain requested that this previous 
consensus should be specified. 
 
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MALAWI 
------ 
¶25. (SBU) The Secretariat noted positive developments in Malawi's 
debt sustainability.  In September 2004, the authorities 
requested a SMP.  The GOM has made satisfactory progress, 
tightening fiscal spending and implementing structural reforms. 
The IMF is requesting a retroactive extension in order to 
continue a PRGF with Malawi.  (Note: The PRGF expired in December 
2004 after only one review due to inadequate implementation.  End 
note.) The IMF proposed the Paris Club send a letter to the Board 
for this extension. 
 
¶26. (SBU) The IMF began to negotiate a potential PRGF in February 
2005, and with creditors' approval will present this plan to the 
Board in July.  The program would require fiscal efforts to 
reduce domestic debt (after a 25% crop failure) as well as 
modifications to the 2005-2006 budget & pension systems.  Once 
approved, the PRGF could be started in 2006 for three years. 
Malawi only has small amount debt to the IBRD. 
 
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NIGERIA 
------- 
¶27. (SBU) The IMF staff report on Nigeria will be issued in July. 
Concerning Nigerian macroeconomic policy, the IMF found that an 
appropriate act was signed in April, relaxing fiscal policy and 
minimizing risk for the GON.  This act contains measures to 
contain fiscal spending and maintains a monetary policy 
consistent with 7-9% inflation.  The most recent Article IV 
consultation and DSA found Nigerian debt to be sustainable at 
current oil prices but vulnerable to an oil price shock.  The 
Secretariat stated that with Nigeria on the reform path, the PC 
 
SIPDIS 
could either let the country go its own way, or recognize the 
current problems with the status quo and give assistance. 
 
¶28. (SBU) The GON has expressed a desire for a non-financial 
arrangement with the IMF.  The new instrument proposed is a PSI 
(policy support instrument).  This tool is not yet approved and 
will be considered by the IMF executive board on July 6 (note: 
the IMF subsequently pushed back the date, as yet unspecified). 
The PSI was also submitted last year for another country but not 
accepted at that time.  This tool is designed to aid countries 
without financial need that would welcome an assessment of their 
policy and budget by the IMF.  .  The program would entail an IMF 
endorsement and monitoring of programs designed by authorities. 
 
¶29. (SBU) The IBRD clarified that Nigeria has been reclassified 
under IDA classifications: the country fits the criteria of low 
GDP per capita, yet is not eligible for IDA grants (under Article 
14).  Moreover, Nigeria does not have an international credit 
rating from a major international institution.  The IBRD reported 
the presentation of a new country assistance strategy to the 
Board June 26 by UK Aid (DFID) and IBRD staff. 
 
¶30. (SBU) The Secretariat announced the structure of principal PC 
claims on Nigeria: the UK is the principal creditor (26%), 
followed by France (21%), Germany (18%).and the US (3%).  The 
current repayment profile (as of Dec 2000) shows debt 
unsustainability until 2019, with debt then stabilized around $2 
billion.  Following a positive evolution in Nigerian finances, 
the GON has submitted an informal proposal to use oil windfalls 
to fund an exit treatment.  Oil revenues would cover a buyback of 
Paris Club debt at a 75% discount.  The Secretariat stated that 
the political context for such a proposal is favorable; with a 
Presidential election in 2007, current internal polarization on 
debt, and an ambitious reform team taking on structural and 
economic reforms in place since 2003.  Also, the GON has made 
efforts to normalize relations with PC by means of allocation 
payments and increased transparency.  Overall, the proposal is 
subject to a unique and short window of opportunity because of 
possible changes in oil prices, pressure on the finance minister 
and upcoming elections.  The Secretariat asserted that there is 
no alternative solution in normal Paris Club treatment options. 
However, elements of the Nigerian proposal conflict with PC 
rules.  First, the PC cannot offer a buyback, as Nigeria is not a 
graduate of Paris Club treatment and is in partial default. 
Nigeria has not been eligible for HIPC or Naples terms. 
Accepting the current proposal would provide no incentive for the 
GON to implement good long-term policies.  Secondly, the level of 
discount is not justifiable. It should be set according to market 
prices.  Nigeria has been reclassified as IDA-only, making it 
eligible for Naples terms.  The Secretariat suggested a Naples 
stock treatment.  Statistics provided by the Secretariat showed 
that faced with a permanent petroleum shock, the GON debt ratio 
would be unsustainable from 2018.  Even with a 67% debt reduction 
on PC claims, debt unsustainability would only be pushed back to 
¶2025.  A treatment of Nigeria would also provide an opportunity 
to meet MDG. 
 
¶31. (SBU) The Secretariat noted that the current debt situation 
of Nigeria is highly vulnerable; even prudent country-specific 
scenario shows probable debt unsustainability.  Under its 
proposal, the GON would repay all arrears given a substantial 
debt reduction.  This repayment would occur immediately with 
creditors receiving 40% claims in cash over six months (USD 4.48 
billion).  A possible architecture for this offer includes: 
-- Signing a PSI with the IMF; 
-- Clearing of all arrears plus late interest (USD 5.8 billion) 
by Nigeria, plus payment of "leveling up" obligations to eligible 
creditors (USD 1.75 billion); 
-- After successful review under the PSI at six months, payment 
by Nigeria of its Post-COD debt at par and ($367 million) and 
delivery by the Paris Club of a second phase of debt reduction 
equal to 37 percent of the outstanding debt stock; 
-- Buyback by Nigeria of the balance of debt owed to creditors at 
a 41% discount; 
-- Total payments by Nigeria would amount to $12.4 billion under 
the scheme. 
 
¶32. (SBU) The proposed PC treatment of Nigerian debt depends on 
the imminent creation by IMF of a new monitoring instrument 
(PSI). The Secretariat noted that a PSI as a basis for a debt 
treatment is a significant move for the PC.  However, the 
Secretariat also noted that a PSI would be strong on 
 
SIPDIS 
conditionality (like a SBA or a PRGF). 
 
¶33. (SBU) The UK supported the proposal with IMF help, viewing it 
as a way to move forward and signal support of the GON.  There 
would be gains for all: Nigeria would receive debt relief and 
creditors would receive cash payments within 6 months.  The PC 
proposal is a fair, sustainable solution. 
 
¶34. (SBU) The USDEL argued that the plan constituted a major 
advance; Nigerian acceptance of a serious monitoring arrangement 
with the IMF implied serious continued commitment to reform 
efforts and removed a major obstacle to being able to agree to a 
debt deal.  In the US view, the Secretariat's presentation had 
adequately addressed issues of precedent and principle presented 
by the notion of a debt workout for Nigeria, and the US was 
exploring ways to enable its participation in such a deal. . 
 
¶35. (SBU) Germany announced that it would go along with the 
proposal but has some reservations.  The proposal represents new 
ground and must be approached carefully with further IMF 
exploration.  Germany reminded the PC members that for all 
previous arrangements with Nigeria (2000 arrangement as the most 
recent), Nigeria had never drawn credits.  A point of 
comparability (CoT) was highlighted, noting that the private 
sector would notice this charitable move.  The GOG's final 
position is to accept the plan only if the GON accepts it. 
¶36. (SBU) Italy subscribed totally to the Secretariat's proposal, 
as it treats both economic and political issues.  The PC 
creditors should take this opportunity to be reimbursed or the 
oil windfalls will be spent domestically.  The GOI acknowledged 
the unknown element of a PSI but suggested that it be subject to 
evaluation in future, after being monitored in action.  Overall, 
accepting the request from Nigeria would show the capability of 
the PC to aid large countries. 
 
¶37. (SBU) Spain welcomed a flexible, pragmatic solution but had 
doubts about this proposal.  The Spanish delegation questioned 
the 40% figure and the contradictory package of debt relief with 
a buyback.  Other Spanish concerns related to the rapid timetable 
of the proposal.  Spain was concerned that rapid action might 
convey that the PC can be subject to debtor time constraints and 
that this timetable was generally unrealistic in comparison to 
Russian and Peruvian buyback proposal implementation time.  The 
GOS could not take a position and requested a working paper to 
study.  Denmark shared the Spanish point of view, suggesting a 
written proposal. 
 
¶38. (SBU) The Netherlands reacted negatively against the 
proposal, stating that the creditability of PC and its process 
was at stake.  Such action by the PC might hurt the private 
sector.  The Netherlands declared that it would be difficult to 
accept the proposal, as it was never formally approached and had 
no mandate to accept one without profound explanation.  The 
Netherlands criticized the G-7 members of the PC for excluding 
the rest of the club from the preliminary Nigeria discussion, 
stating that this is the second incident of G-7 members working 
on a PC issue without all PC members' participation.   The 
importance of transparency in PC practices was asserted. 
 
¶39. (SBU) Austria remarked that the proposal was a political 
decision that could change the PC underpinnings.  The Austrian 
delegation also expressed doubts that Nigeria could now offer USD 
12 billion when previous offers did not surpass USD 1 billion. 
Time concerns were also voiced, with Austria suggesting that a 
mandate in July would be premature. 
 
¶40. (SBU) Australia clarified that it was not a Nigerian creditor 
but had interests in the procedure and nature of proposal as a 
small creditor in the Paris Club.  The delegation drew parallels 
between Indonesia and Nigeria, highlighting that Indonesia is 
important to Australia.  As a non-G-7 member, Australia echoed 
the criticism of the Netherlands, saying that the PC is not a two- 
track process - the non-G-7 countries are not there to rubber 
stamp G-7 proposals.  Australia proposed a working paper treating 
possible changes to the PC structure, including ad-hoc 
ministerial meetings and a politicization of the PC and debt 
relief.  Australia also cited the hybrid nature of the proposal 
(debt treatment and buyback) and asked why the Evian approach was 
not considered.  The only justification Australian perceived for 
the proposal seemed to be the current oil prices. 
 
¶41. (SBU) Norway and Sweden echoed the concerns of Australia. 
Norway expressed doubts that the proposal would be in line with 
the Evian approach.  The Norwegian delegation also cautioned the 
PC against using a new combination, especially an exit treatment 
for country that never "entered".  Sweden asserted that the 
proposal was highly political and the situation held the same 
problems as that of Iraq. 
 
¶42. (SBU) Switzerland asked if solid economic analysis existed 
for the proposal, or if it was purely political.  The delegation 
suggested an analysis of the IMF's PSI and a projection of 
buyback conditions.  Switzerland also requested a working paper 
with market reference rates. 
 
¶43. (SBU) Belgium noted that it favors a constructive solution 
but would need a precision on conditionality as well as the 
statute and role of a PSI.  The Belgian delegation asserted that 
it favors CoT regarding third parties and stated that the PC 
should look at different categories of debt and the risk of 
precedent in this case. 
 
¶44. (SBU) Canada stated that while it is not involved with 
Nigeria, it supports this proposal because Nigeria is the key to 
success in Africa.  While Canada recognized the concerns of other 
members, it defended the adoption of an appropriately designed 
PSI tool.  Canada saw no problem in granting a debt treatment to 
Nigeria. 
 
¶45. (SBU) Russia and Finland both stated that the case is 
complicated and may need further consideration.  Russia announced 
its supports the idea because the package makes sense. 
 
¶46. (SBU) France recognized that this proposal would be crucial 
for population stability in Nigeria and the surrounding region. 
PC action in this country could be a way to achieve Millennium 
objectives.  However, the French advocated an equitable solution 
in line with the PC rules.  The proposed Nigeria debt treatment 
would be the worst solution due to a risk of precedent.  The 
French delegation mentioned the possibility of also using Naples 
terms in Yemen because of liquidity there. 
 
¶47. (SBU) The Secretariat noted the questions and disagreeable 
aspects of the proposal and confirmed the importance of PC 
credibility.  Moulin expressed his personal point of view that 
the form and substance of a plan are both essential.  However, in 
this case the opportunity should be seized with content taking 
precedence over form.  In order to reach a consensus later, the 
President directed the Secretariat to prepare a working paper and 
scheduled a special meeting on Nigeria for June 29. 
 
--------- 
PARAGUAY 
--------- 
¶48. (SBU) The IMF reported it had concluded its fourth review on 
March 28.  A mission visited in April for the fifth review.  It 
has no information about arrears.  Belgium said it had asked for 
Paraguay to be put on the agenda because it has not paid late 
interest.  After reaching an accord to split the difference, 
Belgium still has not been paid.  Germany said Paraguay had had 
some arrears, but they were cleared.  France reported it had had 
arguments about late interest too, but finally had been paid. 
The President directed the Secretariat to prepare a letter on the 
arrears. 
 
---- 
PERU 
---- 
¶49. (SBU) The GOP submitted a proposal regarding the 
reimbursement of all non-ODA maturities from 2005-2009.  Both the 
IMF and the IBRD supported the proposal.  The IBRD believed it 
would be a good move for external debt management and fiscal 
control.  The Secretariat added that the accord is unique; if 
accepted, it could consolidate the 1993 accord and offer creditor 
countries up to up to $2 billion.  Japan asked to insert the 
words, "when necessary" under Article IV-1 as a signing 
condition.  Spain was still waiting on the word of the 
appropriate minister to sign.  The Secretariat decided to wait to 
send the letter. 
------ 
RUSSIA 
------ 
¶50. (SBU) On the offer of debt prepayment, the Secretariat 
described 2 options: signing a bilateral letter of implementation 
and the payment of the first installment (35.3%) on July 15, or 
setting August 20 as the date to sign the letter and pay (35.5% + 
x%).  The Secretariat noted that the decision to participate had 
to be taken at this meeting. 
 
¶51. (SBU) Regarding bilateral debt issues between France and 
Russia, a standard letter was prepared in English, with the 
French version to be signed later.  Italy commented that the GOI 
would not sign this letter; it should be addressed only to the 
GOF and GOR. 
 
--------------------- 
SAO TOME AND PRINCIPE 
--------------------- 
¶52. (SBU) The IMF reported on the June 2 change in government. 
It has put the PRGF on hold until the new government commits to 
it.  The new Prime Minister is a former central bank governor, 
which gives the IMF reason for optimism.  It is worried about 
wage increases larger than agreed.  The World Bank said its Board 
discusses a new country assistance strategy on May 21.  USD 10 
million was made available for budget support.  The main issue 
precipitating the change in government was the lack of 
transparency in the bids for the offshore oil blocks.  The UNDP 
has asked that the contracts be reviewed.  The World Bank has 
offered its assistance.  The Secretariat reported it has offered 
to meet the new government officials in Paris. 
 
--------------------- 
SERBIA AND MONTENEGRO 
--------------------- 
¶53. (SBU) The IMF reported its arrangement was to expire in May 
2005, so it granted an extension until December 31, 2005 to allow 
time to complete its review.  The Board meeting is set for June 
¶29.  The fifth review, as a result, will not be the last review. 
A sixth review will take place for the July-November period.  The 
authorities claim to have cleared arrears to Russia, but have not 
completed their bilateral agreements with Italy and Japan, and 
are requesting a suspension of 60 percent of their interest 
payments. 
 
¶54. (SBU) The World Bank reported that structural reforms have 
progressed.  When Serbia rejoined the Bank, it came in with an 
exceptional IDA allocation.  The Bank expects IBRD lending to 
begin again as Serbia rebuilds its creditworthiness. 
 
¶55. (SBU) The Secretariat noted the situation is now different 
than when it earlier rejected an extension request, as the IMF 
has granted an extension.  It now favors a Paris Club extension, 
as the capitalization of late interest is critical to the success 
of the IMF program. 
 
¶56. (SBU) Germany supported the extension request.  Japan 
expressed some discomfort, as officials just asked the Japanese 
Cabinet for approval of the bilateral agreement, and now will 
need to return to the Cabinet to approve the extension.  Italy 
said it is finalizing its bilateral agreement, and is OK with an 
extension.  Russia said Serbia has managed to pay the bulk of its 
arrears (except for USD 30 thousand, which does not present an 
obstacle to the extension), but it will need technical approval 
before it can sign off on the extension.  Other creditors agreed 
to the extension, but Austria raised a point that the figures are 
off, which the Secretariat confirmed is due to a data split 
between Serbia and Montenegro.  Sweden inquired about the 
resulting date of debt reduction, and the Secretariat replied 
that the date should not be the original date in the agreed 
minute (AM), but the date that they comply with the terms in the 
AM to simplify calculations.  The President noted the consensus 
to hold off on the extension request until all creditors could 
agree to it, and the Secretariat noted that it could wait to send 
a letter but would need to send it before the AM terms expire. 
--------- 
SRI LANKA 
--------- 
¶57. (SBU) The GOSL signed the MoU, thanking the PC creditors for 
their assistance.  The accord is designed to help SL get over the 
tsunami disaster, providing the GOSL with a margin of maneuver 
 
SIPDIS 
for its own reconstruction.  The GOSL stated that a special 
committee has been created for post-tsunami reconstruction 
development.  The committee is committed to practical and 
efficient use of monetary assistance. 
 
-------- 
ZIMBABWE 
-------- 
¶58. (SBU) The IMF reported that the economic and policy 
performance of the GOZ had worsened, especially since the last 
election.  Problems include water/power cuts and security 
concerns.  The concern is that without action, further 
deterioration will occur.  Currently, near term structural reform 
seems difficult.  Under an Article IV consultation, the IMF will 
proceed with a review of obligations and address the complaints 
about Zimbabwe actions at its August 1 staff meeting.  The IBRD 
added that expulsion by IMF automatically entails exclusion by 
the WB in a delay of 2-3 months. 
 
¶59. (SBU) The Secretariat informed the PC that the Zimbabwean 
Ministry of Finance had seized the Secretariat (???).  The GOZ 
was contesting seizure by the Bank of Tokyo. A letter to Zimbabwe 
was proposed and then defeated, as the Secretariat is not in the 
process of negotiation with GOZ.  Germany stated that action to 
recover loans was being carried out by a private bank (KFW) and 
not the GOG.  (KFW is not a public bank but an export finance 
institution.  Germany added that a judicial case to press for 
repayment is the legal right of creditor.  The Netherlands 
concurred that a creditor should use all legal means for 
recuperation of credits. 
 
----------- 
METHODOLOGY 
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ADDITIONAL DEBT RELIEF BEYOND HIPCS: 
¶60. (SBU) The President noted current efforts to provide greater 
levels of debt relief, and discussed the Working Paper prepared 
by the Secretariat canvassing current practices.  The IMF had no 
comment on the substance, but did note its desire to use the data 
for its own progress report.  The Secretariat presented its 
Working Paper, outlining various options. 
 
¶61. (SBU) Norway said it has supported the German proposal, but 
with the caveat that relief not address old debt.  It still 
strongly supports additional relief.  If the IFIs can cancel 
concessional claims, countries should do so too. 
 
¶62. (SBU) Russia said it would make its position known in July. 
Switzerland said it had no instructions, but probably would 
support additional relief.  The Netherlands said it would not 
change its position.  The Paris Club does not touch commercial 
debts, and should not play with cutoff dates, but France and 
Germany can change their domestic legislation to provide 
additional relief if that is what they desire.  Belgium 
concurred.  The Netherlands is in favor of additional debt relief 
if needed from a sustainability point of view.  Sweden was 
reluctant to give a guarantee of support without a proposal in 
writing.   The Swedish delegation also added that the PC should 
treat each country according to its needs and move each cut-off 
date case-by-case.  Sweden would be in favor of relief beyond 
Cologne terms if necessary, but would find it difficult to act 
retroactively, as it does not want to send back payments. 
 
¶63. (SBU) Spain agreed to make additional efforts for bilateral 
debt relief, but questioned the applicability of this proposal to 
multilateral debt relief.  Spain requested a working paper and 
debate on the subject of multilateral debt relief.  Germany noted 
that after preliminary discussions, a consensus would be 
difficult to achieve, but the GOG hoped that the PC would reach 
an agreement.  Germany added that the proposition is in the 
spirit of Cologne terms and clarified that the debate had only 
centered on non-ODA countries. 
 
¶64. (SBU) The UK and Finland are in favor of the proposal, which 
demonstrates increased generosity.  Denmark, Italy and Austria 
are already using this policy and support the PC use of it. 
Canada had already forgiven eligible HIPC debt and agreed with 
the proposal terms.  Japan would also agree to 100% cancellation 
of ODA debt and even cancel 100% non-ODA pre-CoD.  The USDEL also 
fully supported the measure, but suggested that the Secretariat 
provide a matrix in response to the data call. 
 
¶65. (SBU) The Secretariat clarified that this initiative would 
not be included in the Agreed Minutes but instead would be put 
into practice bilaterally.  The President noted the consensus to 
continue the discussion regarding multilateral debt relief and 
problems with the current bilateral proposal at a later date. 
 
BREAKAGE COSTS: 
¶66. (SBU) The Secretariat reviewed its findings that no creditor 
finances breakage costs directly.  The Secretariat noted the risk 
that if clauses for breakage costs are included, this creates the 
risk of not being able to de prepayments at par, which would mean 
only buybacks are possible.  As seen from the recent Russian 
negotiation, that creates political problems, and unduly limits 
the Paris Club. 
 
¶67. (SBU) Switzerland stated that breakage costs could deter a 
creditor from participation, suggesting that negotiation of 
bilateral accords outside the PC would better accommodate this 
idea.  The idea of incorporating breakage costs is not in a PC 
agreement, but could possibly be a useful tool. 
 
¶68. (SBU) Belgium suggested the refinancing of accords outside 
the PC, consolidating them in this way.  The Belgian delegation 
also insisted on the voluntary nature of creditor participation 
in agreements, stating that no creditor should be forced to 
participate in a buyback or prepayment. 
 
¶69. (SBU) Austria and Germany were opposed to the idea of 
introducing breakage costs clauses.  Germany noted that this 
clause would reduce refinancing by governments/government 
agencies.  Moreover, a prepayment would not work if breakage 
costs were attached to the agreement.  Germany added that adding 
breakage costs is a commercial bank practice, not a government 
practice. 
 
IDA-ADMINISTERED EU LOANS 
¶70. (SBU) The Secretariat offered to prepare a paper on the 
subject and circulate it in July or September.  The Secretariat 
also announced that it could work with the European Commission. 
The total debt equaled 59.56 million euros as of December 31, 
2004).  The President said the question is what to do with 
debtors that have already reached completion point, and suggested 
a letter of cancellation might be best. 
 
¶71. (SBU) The IBRD reviewed its credit administration program, 
which operates outside of the IDA envelope.  The IBRD reminded PC 
members that the program is still administered according to 
original guidelines but the IBRD is open to suggestions.  PC 
members were advised to instruct the IDA administration on how to 
carry out debt cancellations and what do between decision and 
completion points.  It also asked for PC input on dealings with 
countries that have passed the completion point before or have 
continuing multilateral debt.  The goal of the program has been 
to regularize situation post-completion point.  The current 
operation involves semi-annual payments (1 May, 1 November), 
which are converted in currency proportionate to the principal as 
well as a service charge of 0.75% (which becomes IBRD income). 
 
¶72. (SBU) Denmark argued for the simplest procedure possible. 
Another solution would be a special addition to the HIPC trust 
fund.  Denmark requested a proposal in writing. 
 
BRAZILIAN PARTICIPATION IN THE PARIS CLUB 
¶73. (SBU) The President noted the size of Brazil's economy, and 
its associate membership status since 1972, but said its recent 
behavior put into question its solidarity with the Paris Club. 
Examples cited included a lack of participation in recent accords 
and discussions (Iraq, Nicaragua, Zambia) under the pretext of 
internal legal reasons.  However, the Secretariat reminded the PC 
members of Brazil's status as an important partner and closest ad- 
hoc member.  A draft letter regarding the role of Brazil 
internationally and the possibility of giving Brazil full-member 
status in the PC were debated. 
 
¶74. (SBU) The IMF noted that Brazil is a creditor to ten HIPC 
countries.  Belgium cited cases from the 1990s and highlighted 
that the PC could now use Brazil's own arguments in those 
situations against them.  Germany questioned the validity of the 
point about Iraq in the draft letter.  Regarding the letter, the 
German delegation proposed a change of wording to reflect that 
Angolan credits are different than HIPC and Iraq.  Similarly, 
Norway proposed giving the letter a more neutral tone. 
 
¶75. (SBU) The UK expressed its strong interest that Brazil remain 
an associated member and partner of the PC.  The UK had no 
problem with the thesis of the letter, but rather with its 
tactics.  The UK also suggested that the PC give careful thought 
to full membership status for Brazil if the country fully commits 
to the HIPC initiative. 
 
¶76. (SBU) Spain explained that recent contacts with Brazil 
demonstrated that the country acted more like a debtor than a 
creditor; the PC would rather have the country in the camp of the 
creditor nations.  Yet, Spain agreed that permanent member status 
for Brazil is worth considering; this should not be mentioned in 
the letter, but the subject of future PC discussions.  Having 
Brazil as a full member would diversify the PC, giving it a Latin 
America representative. 
 
¶77. (SBU) The USDEL concurred that the letter would be a good 
idea and looked forward to hearing the views of other PC members. 
The USDEL proposed simplifying the vague phrase "confident 
relations" to clearly indicate the importance of the PC 
solidarity principle.  The Netherlands also affirmed the 
importance of Brazilian participation but maintained that full 
members must adhere to all PC rules. 
 
¶78. (SBU) Japan agreed with the letter and asked about the role 
of other Portuguese-speaking nations (Portugal and Angola). 
Belgium responded that the EU countries have pressured Portugal 
to join as measure of solidarity. 
 
¶79. (SBU) Canada questioned the effectiveness of a letter, citing 
the risk of alienating Brazil.  The Secretariat reminded the 
Paris Club that the letter was intended to remind Brazil that it 
is an important PC partner, not to reproach the country's 
behavior.  The President noted the suggested modifications, and 
directed the Secretariat to circulate a revised version before 
sending. 
 
This message was cleared by the Head of Delegation. 
Minimize considered. 
STAPLETON