VZCZCXYZ0030
RR RUEHWEB

DE RUEHFR #5024/01 2061238
ZNR UUUUU ZZH
R 251238Z JUL 06
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 9765
INFO RUEATRS/DEPARTMENT OF TREASURY WASHDC
RUEKJCS/SECDEF WASHDC
RUEHRL/AMEMBASSY BERLIN 6230
RUEHSW/AMEMBASSY BERN 1795
RUEHBR/AMEMBASSY BRASILIA 1642
RUEHBS/AMEMBASSY BRUSSELS 5789
RUEHBY/AMEMBASSY CANBERRA 1618
RUEHCP/AMEMBASSY COPENHAGEN 1361
RUEHHE/AMEMBASSY HELSINKI 1197
RUEHLO/AMEMBASSY LONDON 6185
RUEHMD/AMEMBASSY MADRID 2375
RUEHMO/AMEMBASSY MOSCOW 5494
RUEHNY/AMEMBASSY OSLO 1394
RUEHOT/AMEMBASSY OTTAWA 1948
RUEHRO/AMEMBASSY ROME 7842
RUEHUL/AMEMBASSY SEOUL 1315
RUEHSM/AMEMBASSY STOCKHOLM 1410
RUEHTC/AMEMBASSY THE HAGUE 2544
RUEHKO/AMEMBASSY TOKYO 2317
RUEHVI/AMEMBASSY VIENNA 1587
RUEHBS/USEU BRUSSELS 1698
RUEHBUL/AMEMBASSY KABUL 0378
RUEHAS/AMEMBASSY ALGIERS 0788
RUEHLU/AMEMBASSY LUANDA 0759
RUEHBU/AMEMBASSY BUENOS AIRES 1278
RUEHKI/AMEMBASSY KINSHASA 1390
RUEHSI/AMEMBASSY TBILISI 0374
RUEHGE/AMEMBASSY GEORGETOWN 0147
RUEHGB/AMEMBASSY BAGHDAD 0493
RUEHLG/AMEMBASSY LILONGWE 0493
RUEHMU/AMEMBASSY MANAGUA 0264
RUEHBW/AMEMBASSY BELGRADE 0682
RUEHPL/AMEMBASSY PORT LOUIS 0775
RUEHSB/AMEMBASSY HARARE 0402

UNCLAS PARIS 005024 
 
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 - JULY 2006 TOUR D'HORIZON AND AFGHAN DEBT 
NEGOTIATION 
 
 
SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET DISTRIBUTION 
 
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SUMMARY 
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¶1.  (SBU) At the July 18-19 meeting of the Paris Club, creditors 
agreed on exceptionally generous debt relief for Afghanistan, which 
achieved three main objectives:  (1) 92% of Afghanistan's debt stock 
will be canceled immediately; (2) all interest falling due between 
now and the end of the IMF program will be deferred; and (3) all 
three creditors reiterated their commitment to forgive 100% of the 
debt once Afghanistan completes the Heavily Indebted Poor Countries 
(HIPC) process.  The secretariat reported that Angolan Finance 
Minister de Morais told Paris Club Chairman Musca that Angola is 
seriously considering a precautionary Stand-By Arrangement with the 
IMF, presumably as a means to obtain debt relief from the Paris 
Club.  Angola owes the Paris Club $4.5 billion, of which $4.1 
billion is in arrears, and is eager for new financing.  Spain and 
Japan reported that Argentina plans to approach the Paris Club as 
early as September with a proposal for normalizing relations.  Other 
countries on the agenda included Algeria, Brazil, Democratic 
Republic of the Congo (DRC), Georgia, Guyana, Iraq, Malawi, 
Nicaragua, Serbia and Montenegro, Seychelles, and Zimbabwe. 
 
----------- 
AFGHANISTAN 
----------- 
¶2.  (SBU) Creditors agreed to a treatment that reduces Afghanistan's 
debt from $11.3 billion to $800 million - a level of cancellation in 
excess of 92%. 
 
-- Russian claims, amounting to $11.2 billion, are subject to an 
immediate 80% write-off consistent with the MOU on Russia's 
accession to the Paris Club. 
-- All remaining debt is treated under standard Naples flow terms. 
-- All interest accruing during the period of the IMF's Poverty 
Reduction and Growth Facility (PRGF) is capitalized and repaid over 
a six-year period beginning in 2011.  Interest on capitalized 
interest is also deferred until 2011. 
-- A symbolic cutoff date of June 1999 was chosen to highlight 
Afghanistan's anticipated HIPC status. 
-- The Agreed Minute contains a goodwill clause stating creditors' 
commitment to top up to Cologne terms at decision point and to 
provide additional debt relief at completion point. 
-- In the press release, creditors reiterated their commitment to 
 
forgive 100% of the debt once Afghanistan completes the HIPC 
process.  Unlike at the London Conference, Russia did not insist on 
language tying debt relief to investment opportunities. 
 
¶3.  (SBU) Earlier in the week, Afghanistan signed a long-awaited 
debt reconciliation agreement with Russia, clearing the way for 
negotiations to proceed.  The reconciliation agreement covered all 
claims in the clearing account held between Vnesheconombank and the 
Afghan central bank, resulting in a slight upward revision to the 
total debt owed to Russia.  The Afghan delegation, led by Vice 
Finance Minister Mujib, did not dispute the numbers. 
 
¶4.  (SBU) The negotiations the following day were not nearly as 
contentious or protracted as had been anticipated, largely thanks to 
the behavior of the Russian delegation.  For the most part, the 
Russians were uncharacteristically flexible and cooperative - at 
times even suggesting useful ways to address Afghan concerns.  The 
secretariat, for its part, was exceptionally helpful throughout the 
 
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process.  Most importantly, the secretariat made the case for 
capitalizing all interest payments during the three-year PRGF 
period, including interest on capitalized interest.  Moreover, the 
secretariat's repayment scheme gives Afghanistan an additional two 
 
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years to reach completion point before capitalized interest falls 
begins to fall due. 
 
¶5.  (SBU) The IMF was not as helpful as hoped on the issue of 
Afghanistan's HIPC eligibility.  The Fund said Afghanistan's HIPC 
eligibility was possible, but would not go so far as to say that 
eligibility was probable based on preliminary estimates.  The 
mission chief admitted privately that Afghanistan's export numbers 
stand to increase once the IMF includes non-factor services, which 
risks bringing the external debt-to-exports ratio close to the HIPC 
threshold. 
 
¶6.  (SBU) Afghan Finance Minister Ahady seemed delighted by the 
outcome and personally thanked the U.S. delegation for its 
assistance.  It is important that the Afghans now perform on their 
PRGF.  While it is impossible to say with certainty whether Russia 
will deliver 100% cancellation at completion point without 
conditions, at this stage it appears to be acting in good faith. 
 
------- 
ALGERIA 
------- 
¶7.  (U) Creditors reported on the status of Algeria's prepayment 
 
operation.  Italy and Switzerland continue to work with the Algerian 
authorities to complete the transaction.  All other participating 
creditors have received their prepayment. 
 
------ 
ANGOLA 
------ 
¶8.   (SBU) The secretariat reported on Paris Club Chairman Xavier 
Musca's July 13 meeting with the Angolan authorities.  Angolan 
Finance Minister de Morais told Musca that Angola is seriously 
considering a precautionary Stand-By Arrangement (SBA) with the IMF, 
and that he simply needs the approval of President dos Santos before 
formally applying to the Fund.  The IMF confirmed that a mission had 
visited Luanda to discuss the modalities of a possible SBA, but said 
negotiations had not yet begun.  Musca urged de Morais to send a 
letter to the Paris Club by the end of the month clarifying Angola's 
intentions and committing to resume debt service in full.  Musca did 
not, however, deliver the three-pronged message agreed by creditors 
in May.  (That message consisted of the following elements:  (1) 
creditors urge Angola to resume payments and to commit to clear 
arrears; (2) creditors encourage Angola to pursue an IMF program; 
and (3) a resumption of payments by Angola could lead some creditors 
to reopen credit lines. The message suggests that arrears clearance 
could take place over a period of three to six years.) 
 
¶9.  (SBU) Spain, supported by Italy, the Netherlands, Denmark, and 
Sweden, protested that Musca should have delivered the three-pronged 
message - especially the first point regarding arrears clearance and 
the resumption of debt service - while at the same time expressing 
support for an IMF program and an eventual Paris Club treatment. 
The secretariat responded that delivering the message agreed in May 
would have had the unwanted effect of convincing Angola not to 
pursue an IMF program since the message could be interpreted as 
conveying creditors' acceptance of a de facto rescheduling of 
arrears without an IMF program.  In the end, creditors agreed not to 
take any action until Club's next meeting in September, by which 
time Angola should have clarified its intentions with respect to the 
IMF.  If an IMF program does not appear likely, creditors will 
revert to the strategy developed in May. 
 
--------- 
ARGENTINA 
--------- 
¶10.  (U) Creditors reported on their bilateral contacts with the 
Argentine authorities.  Spain said President Kirchner, during a 
 
recent visit to Madrid, expressed Argentina's willingness to 
approach the Paris Club in the fall, but did not indicate what sort 
of debt treatment it would seek.  Spain denied press reports that 
Kirchner had vowed to repay the $835 million Spanish loan disbursed 
during the 2001 financial crisis.  Spain said it merely reiterated 
its position - already well known to Kirchner - that it cannot 
support a Paris Club treatment that includes this loan.  (The 
secretariat indicated that the loan should be included, but accorded 
 
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senior status because it was issued after the cutoff date for any 
rescheduling.)  The UK said it met with an Argentine finance 
ministry official based in London.  Contrary to what Kirchner told 
the Spanish, this official gave the impression that Argentina would 
not address its Paris Club debt until 2007.  Japan, on the other 
hand, said Finance Secretary MacLaughlin told Japanese embassy 
officials in Buenos Aires that Argentina planned to make a proposal 
to the Paris Club in September but would not ask for debt reduction. 
 MacLaughlin added that Argentina would reach out bilaterally to 
Germany, Japan, the Netherlands, and the U.S. 
 
------ 
BRAZIL 
------ 
¶11.  (U) Creditors reported on the status of Brazil's prepayment 
operation.  Germany and Italy said arrears were still outstanding. 
While Germany was optimistic that the issue would be settled soon, 
Italy said legal action could not be excluded.  The Netherlands and 
Canada said their arrears had been cleared since last month.  All 
other participating creditors have received their prepayment. 
 
---------------------------- 
DEMOCRATIC REPUBLIC OF CONGO 
---------------------------- 
¶12.  (U) The secretariat took stock of creditors' policies for 
invoicing the DRC now that interim HIPC relief has been suspended. 
Most creditors are not invoicing for payments coming due and do not 
expect to receive any payments.  A few creditors (Canada, France, 
Japan, US) are legally obligated to invoice, but have not received 
any payments. 
 
------- 
GEORGIA 
------- 
¶13.  (U) The vice finance minister of Kazakhstan has sent a letter 
to the Paris Club disputing the terms of a debt restructuring sought 
by Georgia.  (Georgia received a Paris Club rescheduling on Houston 
 
terms in July 2004.  Under the terms of this agreement, Georgia must 
seek comparable treatment from its non-Paris Club creditors, 
including Kazakhstan.)  Georgia maintains that late interest should 
not accrue after July 2004.  Kazakhstan, on the other hand, believes 
that any debt restructuring on Paris Club-comparable terms should 
include late interest up to the date of the restructuring.  The 
secretariat will contact both parties to try to resolve the dispute. 
 
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 The secretariat will emphasize that it is not the Paris Club's role 
to dictate whether Kazakhstan has the right to charge late interest, 
but that the club will judge comparable treatment based on the usual 
three criteria (i.e., duration, net present value, and flow 
relief). 
 
------ 
GUYANA 
------ 
¶14.  (U) The government of Guyana has sent a letter to the 
secretariat stating its intention to conclude a debt settlement with 
 
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one of its non-Paris Club creditors on terms that are not consistent 
with the club's comparability of treatment requirement.  The 
creditor in question - Citizens Bank - is Guyana's fourth largest 
commercial bank.  The government argues that if it forced Citizens 
Bank to accept a settlement on Paris Club-comparable terms, the bank 
would go bankrupt, which in turn would pose a systemic risk to the 
domestic financial system.  The secretariat said it would seek more 
information from the Guyana authorities before recommending a course 
of action to Paris Club creditors.  The secretariat suggested (and 
the USDEL agreed) that Paris Club creditors may wish to consider 
some flexibility in the assessment of comparable treatment when the 
disadvantages outweigh the advantages. 
 
¶15.  (U) In 1992, the government of Guyana assumed the liabilities 
of Guyana Mining Enterprise Limited (Guymine).  At the time, 
Guymine's debt was owed to external creditors.  In December 2003, 
Guyana reached HIPC completion point, and the following month, 
received completion point treatment in the Paris Club.  In the 
Agreed Minute, Guyana committed to restructure its non-Paris Club 
external debt - including the ex-Guymine debt - on Paris 
Club-comparable terms.  The government now argues out that the 
ex-Guymine debt, which was converted to bonds in 1994, is no longer 
owed to external creditors and therefore should no longer be subject 
to comparable treatment.  Of the $27 million in ex-Guymine debt 
outstanding, 98% is owed to Citizen Bank. 
 
---- 
 
IRAQ 
---- 
¶16.  (U) Russia said it hopes to sign its bilateral agreement with 
Iraq in Moscow next week.  Russia is the only Paris Club creditor 
that has yet to conclude a bilateral agreement with Iraq 
implementing the 2004 Paris Club Agreed Minute. 
 
------ 
MALAWI 
------ 
¶17.  (U) The IMF said HIPC completion point could come to the 
executive board at the end of August if prior actions are completed. 
 Completion point negotiations in the Paris Club could take place in 
the fall.  The U.S. does not have any claims. 
 
--------- 
NICARAGUA 
--------- 
¶18.  (U) Creditors discussed Nicaragua's difficulties in obtaining 
comparable treatment from Libya.  Nicaragua is seeking 91% 
cancellation, consistent with its January 2004 HIPC completion point 
treatment in the Paris Club, whereas Libya is offering to cancel 67% 
of its claims and is threatening litigation to recover the balance. 
In order to assist Nicaragua, creditors agreed that the secretariat 
should contact the Libyan authorities in Paris to discuss the 
situation and follow-up the discussions with a letter to the Libyan 
government, if appropriate. 
 
------------------- 
SERBIA / MONTENEGRO 
------------------- 
¶19.  (U) The secretariat noted that Serbia had reached a debt 
allocation agreement with Montenegro.  The secretariat will produce 
a working paper that discusses how the agreement will impact Paris 
Club creditors' existing bilateral contracts with Serbia. 
 
¶20.  (SBU) The secretariat also briefed creditors on the process by 
which Serbia intends to allocate a portion of its debts to Kosovo. 
The secretariat said Serbia is planning to contact Paris Club 
creditors individually to request documentation to help the 
authorities identify the final beneficiary of loans extended to 
Serbia.  Kosovo may make a similar request.  Some creditors 
(Germany, Netherlands) said they were reluctant to provide any 
information until Kosovo's final status has been determined.  The 
secretariat responded that a simple request for loan documentation 
 
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was not unreasonable, and that, moreover, the United Nations is 
overseeing the overall process.  The U.S., France, and the 
Netherlands cautioned against making any prior commitments to treat 
Kosovo's debt in the Paris Club so as to avoid creating the perverse 
incentive for Serbia to unload as much debt as possible. 
 
---------- 
SEYCHELLES 
---------- 
¶21.  (U) At the request of the UK, the secretariat will draft a 
letter to the Seychellois authorities calling on them to normalize 
relations with the Paris Club.  The letter will be sent after the 
country's presidential elections later this month.  (The U.S. is not 
a creditor.) 
 
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ZIMBABWE 
-------- 
¶22.  (U) At the request of the US, the secretariat will send a 
letter to the Zimbabwean authorities calling on them to clear 
arrears to the Paris Club.  A similar collection letter was sent in 
April 2005.  The Netherlands said it had received some payment on a 
non-ODA loan following legal action.  The IMF reported that China 
had recently extended a 1.3 billion dollar loan to Zimbabwe for a 
coal mine and power plants, collateralized by chrome exports.   The 
World Bank said that loan and a similar 50 million dollar loan 
extended by a European private bank and collateralized by nickel 
exports may violate the Bank's "negative pledge" clause and prevent 
further lending. 
 
--------------------- 
Paris Club Data Calls 
--------------------- 
¶23.   (U) In response to complaints from export credit agencies that 
the data call process is too complicated, the secretariat agreed to 
convene a technical meeting on the margins of the September 2006 
Paris Club session to try to find ways to simplify the process. 
 
STAPLETON#