VZCZCXRO1295
RR RUEHGI RUEHPOD
DE RUEHFR #0328/01 0291222
ZNR UUUUU ZZH
R 291222Z JAN 07 ZDK
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 4493
INFO RUEATRS/DEPARTMENT OF TREASURY WASHDC
RUEKJCS/SECDEF WASHDC
RUEHRL/AMEMBASSY BERLIN 6492
RUEHSW/AMEMBASSY BERN 1906
RUEHBR/AMEMBASSY BRASILIA 1754
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RUEHBY/AMEMBASSY CANBERRA 1666
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RUEHLO/AMEMBASSY LONDON 6407
RUEHMD/AMEMBASSY MADRID 2516
RUEHMO/AMEMBASSY MOSCOW 5723
RUEHNY/AMEMBASSY OSLO 1445
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RUEHRO/AMEMBASSY ROME 8221
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RUEHTC/AMEMBASSY THE HAGUE 2649
RUEHKO/AMEMBASSY TOKYO 2430
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RUEHBS/USEU BRUSSELS 1907
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RUEHLU/AMEMBASSY LUANDA 0810
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RUEHPF/AMEMBASSY PHNOM PENH 0199
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RUEHIL/AMEMBASSY ISLAMABAD 0665
RUEHLC/AMEMBASSY LIBREVILLE 1157
RUEHPOD/AMEMBASSY PODGORICA 0007
RUEHBW/AMEMBASSY BELGRADE 0730
RUEHFN/AMEMBASSY FREETOWN 0437
RUEHSV/AMEMBASSY SUVA 0049

UNCLAS SECTION 01 OF 10 PARIS 000328 
 
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 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EAID XM XA XH XB XF FR
SUBJECT: PARIS CLUB - JANUARY 2007 TOUR D'HORIZON AND MACEDONIA & 
SIERRA LEONE NEGOTIATIONS 
 
 
PARIS 00000328  001.2 OF 010 
 
 
SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET DISTRIBUTION 
 
------- 
SUMMARY 
------- 
 
¶1. (SBU) During the January 23-24 meeting of the Paris Club, 
creditors granted Sierra Leone completion point treatment under the 
enhanced HIPC initiative, cancelling 100 percent ($363 million) of 
Sierra Leone's bilateral debt to the Club.  The United States wrote 
off $44 million in USDA concessional loans.  Creditors also accepted 
Macedonia's offer to prepay its previously rescheduled debt. 
Macedonia plans to prepay about $36 million in Export-Import Bank 
claims.  The Secretariat confirmed again that Argentina has not 
submitted a formal proposal to the Paris Club.  Creditors remained 
in agreement that Argentina should immediately use its reserves ($33 
billion) to clear its Paris Club arrears ($5.5 billion), though 
Germany - the largest creditor, accounting for over a quarter of the 
debt - expressed a willingness to consider "innovative" solutions. 
Russia announced a new policy to forgive 100 percent of debts owed 
by HIPC countries that reach completion point.   Other countries on 
the agenda included Afghanistan, Angola, Cambodia, Cameroon, Central 
African Republic, Comoros, Republic of Congo, Democratic Republic of 
the Congo, Ecuador, The Gambia, Iraq, Jordan, Kenya, Lebanon, 
Pakistan, Sao Tome and Principe, Serbia Montenegro, and Tonga. 
 
----------- 
AFGHANISTAN 
----------- 
 
¶2. (U) The U.S. reported it had signed its bilateral agreement with 
Afghanistan implementing the July 2006 Paris Club agreed minute. 
Germany said it had sent a draft bilateral agreement to Kabul and 
was waiting for a reply.  Russia said it was working on a draft with 
Afghanistan's advisors and noted that, at the request of the Afghan 
authorities, it had agreed to implement the debt reduction option 
rather than the debt service reduction option (the agreed minute 
 
PARIS 00000328  002 OF 010 
 
 
allows for both).  Under the debt reduction option, Russia will 
cancel 67 percent of Afghanistan's consolidated non-ODA debt 
outright, rather than reschedule the debt at a concessional interest 
rate so as to achieve the same reduction in net present value (NPV) 
terms.  The IMF also reported that it had developed a new 
methodology for estimating Afghanistan's services exports, an 
important element in assessing the country's debt sustainability 
before reaching HIPC Decision Point. 
 
------ 
ANGOLA 
------ 
 
¶3. (U) Following a flurry of payments in recent weeks, Angola has 
cleared 97 percent of its $2.3 billion in arrears to the Paris Club, 
not including late interest.  Some creditors (Belgium, Denmark, 
Switzerland) expressed annoyance at being underpaid while others 
have been overpaid.  The Secretariat pointed out that this unequal 
treatment is likely a reflection of disorganization in Luanda rather 
than a deliberate policy to discriminate among creditors.  The U.S. 
reported that Angola prepaid without notice the entire debt to USDA, 
apparently overpaying the outstanding balance by some $11 million. 
No other creditor reported receiving a similar overpayment.  In a 
telephone conversation with the Secretariat, Finance Minister de 
Morais said he will ask the Paris Club to treat the $1.8 billion in 
late interest once Angola has an IMF program in place.  The 
prospects for concluding such a program, however, remain unclear. 
In the meantime, the Secretariat will send a letter to the 
authorities commending them on clearing the bulk of their arrears, 
asking them to clear remaining arrears, and holding out the prospect 
of a Paris Club treatment of late interest once Angola has arranged 
an appropriate IMF program. 
 
--------- 
ARGENTINA 
--------- 
 
 
PARIS 00000328  003 OF 010 
 
 
¶4. (SBU) The Secretariat said it still has not received an official 
proposal from Argentina, despite numerous press reports to the 
contrary as well as an Argentine press release following January 23 
meetings in Berlin with Germany's Minister of Economics and 
Planning.  According to creditor data as of November 2006, Argentina 
owed the Paris Club $6.5 billion, consisting of $3.8 billion in 
arrears (excluding late interest), $2.1 billion in outstanding 
principal, and $0.7 billion in late interest.  These figures do not 
include the $835 million Spanish loan granted in 2001, all of which 
is in arrears.  Germany, the Netherlands, and Sweden, expressed a 
willingness to consider innovative solutions if necessary to 
conclude a deal.  Japan, the UK, Canada, and the U.S. countered that 
the Paris Club should remain firm in its position that Argentina 
must clear arrears immediately, especially considering the current 
level of Argentine reserves, which the IMF estimated to be close to 
$33 billion.  Italy reiterated that Argentina needed to settle with 
holdout bondholders; Germany responded that the holdouts were a 
separate issue.  Sweden and Denmark said the cover policy of their 
export credit agencies could not be dictated by the Paris Club - a 
possible indication that some creditors will resume export financing 
to Argentina even before arrears have been completely cleared.  The 
Secretariat will continue to urge Argentina to make a realistic 
 
SIPDIS 
proposal to the Club. 
 
-------- 
CAMBODIA 
-------- 
 
¶5. (SBU) Russia still has not concluded a bilateral agreement with 
Cambodia implementing the 1995 Paris Club agreed minute.  Russia and 
Cambodia continue to disagree on what interest rate should apply to 
rescheduled post-cutoff date debt.  Japan reported that Cambodia 
unexpectedly prepaid the entire balance ($4.2 million) of its 
previously rescheduled debt.  As a result, Japan would not be 
affected by any future Paris Club treatment of Cambodia's debt as 
long as no post-cutoff date debt is treated.  On the margins of the 
meeting, the U.S. reassured the Japanese delegation that the U.S. 
 
PARIS 00000328  004 OF 010 
 
 
does not intend to promote use of a different cutoff date in a 
future Paris Club negotiation with Cambodia.  The U.S. noted it was 
awaiting a response from the authorities to the draft bilateral 
agreement.  The Secretariat will send a letter to Cambodia pointing 
out that unilateral prepayments violate Paris Club solidarity and 
urging Cambodia to normalize relations with its creditors. 
 
-------- 
CAMEROON 
-------- 
 
¶6. (U) The Secretariat will send a letter to Cameroon granting its 
request to extend until June 30, 2007, the deadline for concluding 
bilateral agreements.  The Secretariat will also urge the GOC to 
respond promptly to creditors in implementing the Cambodia's June 
2006 Completion Point treatment.  Thus far, only five creditors 
(Austria, Japan, Italy, Spain, and the U.S.) have concluded 
bilateral agreements. 
 
------------------------ 
CENTRAL AFRICAN REPUBLIC 
------------------------ 
 
¶7. (U) The Secretariat will invite CAR to come to the Paris Club in 
April for negotiations, rather than in March as originally thought. 
CAR is eligible for a flow treatment on "Naples terms" (67 percent 
reduction of debt service on non-concessional loans, with a 
rescheduling of the remaining amounts; and rescheduling of upcoming 
installments on concessional loans).  The postponement is due to a 
delay in the preparation of CAR's preliminary HIPC document, which 
the IMF now expects to present to its Executive Board in early 
March. 
 
------- 
COMOROS 
------- 
 
 
PARIS 00000328  005 OF 010 
 
 
¶8. (U) Comoros will be HIPC-eligible once it starts an IMF program. 
France and Italy are the only Paris Club creditors (The U.S. holds 
no debt.)  Once a Poverty Reduction and Growth Facility (PRGF) is 
approved, possibly as early as March, France intends to invite 
Comoros together with its two principal non-Paris Club creditors, 
Kuwait and the United Arab Emirates, to the Paris Club for 
negotiations.  Comoros stands to receive a flow treatment on "Naples 
terms." 
 
----------------- 
CONGO-BRAZZAVILLE 
----------------- 
 
¶9. (U) The Secretariat will send a letter to the authorities 
notifying them that the third phase of the April 2006 Paris Club 
agreement, which topped up Congo-B's "Naples" treatment to "Cologne" 
terms (increasing to 90 percent the ratio of non-ODA debt service 
treated), will not enter into force.  The third phase covers 
principal and interest payments falling due from October 2006 
through September 2007 and is conditioned on completion of a fourth 
review of Congo-B's PRGF before January 31, 2007.  The IMF said 
that, as a result of major fiscal slippages, it cannot recommend 
completion of the third review of the program, and that the 
authorities will need to establish a track record of at least six 
months on a Staff Monitored Program before a PRGF can resume.  The 
U.S. will suspend interim HIPC relief in accordance with its HIPC 
policy. 
 
-------------------------------- 
DEMOCRATIC REPUBLIC OF THE CONGO 
-------------------------------- 
 
¶10. (U) The IMF said a new PRGF could be in place by the summer.  In 
the best case scenario, the DRC could reach completion point as 
early as six months later, at the time of the first review of the 
program.  The Secretariat will send a letter to the DRC authorities 
stating that the consolidation period of the current agreement 
 
PARIS 00000328  006 OF 010 
 
 
cannot be extended in the absence of a PRGF and will respond to a 
letter from the DRC's debt management office asking for information 
about 2007 debt service to Paris Club creditors.  The Secretariat 
also said it will soon ask creditors for data on DRC debt since the 
country has reported great difficulties in knowing what debt is owed 
to the Club. 
 
------- 
ECUADOR 
------- 
 
¶11. (U) According to the IMF, the authorities have not yet decided 
what their debt management strategy will be, notwithstanding public 
statements that they intend to restructure "illegitimate" debts and 
debts to private sector creditors.  IMF staff told the authorities 
that a unilateral restructuring would yield little benefit.  The 
World Bank noted that Ecuadorian bonds are now the riskiest among 
emerging markets, with spreads having increased to 950 basis 
points. 
 
---------- 
THE GAMBIA 
---------- 
 
¶12. (U) The Secretariat will inform the authorities that creditors 
provided assurances for Gambia's new PRGF and urge them to clear all 
arrears.  If performance under the program is satisfactory, Gambia 
could reach completion point at the time of the first review.  The 
bulk of Gambia's $1.6 million Paris Club debt is owed to Norway. 
(The U.S. is not a creditor.) 
 
---- 
IRAQ 
---- 
 
¶13. (SBU) The U.S. followed up on its previous request that Germany 
explain its attempt to collect 100 percent of a post-1990 pre-cutoff 
 
PARIS 00000328  007 OF 010 
 
 
date claim on Iraq.  Germany gave a confusing explanation, 
characterizing the claim as a loan made by the former German 
Democratic Republic in local Iraqi currency for medical devices 
delivered through 2005.  Germany asserted that it was merely trying 
to recover German money in an Iraqi account which the Iraqi 
authorities had requested not be treated in the 2004 Paris Club 
agreement.  At the request of the U.S., Germany will provide a 
written explanation to creditors.  Russia expressed hope it might 
receive "legal authority" to sign its agreement with Iraq before the 
next Paris Club meeting in March.  In a side conversation, the head 
of the Russian delegation suggested that the delay was due to 
technical reasons inside the government.  (Russia remains the only 
Paris Club creditor that has yet to conclude its bilateral agreement 
implementing the December 2004 agreed minute.) 
 
------ 
JORDAN 
------ 
 
¶14. (U) Once it has received a comfort letter from the IMF (required 
because Jordan has completed its IMF program), the Secretariat will 
inform the authorities that the fifth and final phase of Jordan's 
2002 rescheduling, covering principal and interest payments falling 
due in 2007, has entered into force.  The IMF said the comfort 
letter is in production and will be sent to the Secretariat 
shortly. 
 
----- 
KENYA 
----- 
 
¶15. (U) Kenya's PRGF has been extended until February 28 to allow 
time for completion of the second review.  Creditors will decide at 
the March meeting whether to enter into force the third and final 
phase of Kenya's 2004 rescheduling, which is conditioned on 
completion of the review.  The third phase covers principal and 
interest payments falling due in 2006. 
 
PARIS 00000328  008 OF 010 
 
 
 
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LEBANON 
------- 
 
¶16. (U) The IMF said the authorities have requested Emergency 
Post-Conflict Assistance (EPCA) and announced an ambitious reform 
program designed to reduce external debt from its current level of 
188 to 50 percent of GDP by 2011 through fiscal adjustment and 
privatization.  IMF staff believes these measures alone will not be 
sufficient to restore debt sustainability and must be combined with 
robust grant support from donors.  The U.S. and France said they 
would announce substantial assistance packages at the donors' 
conference. 
 
--------- 
MACEDONIA 
--------- 
 
¶17. (U) Creditors accepted Macedonia's offer to prepay at face value 
its previously rescheduled Paris Club debt (both ODA and non-ODA). 
The total amount eligible to be prepaid is $104 million.  The U.S. 
is Macedonia's largest creditor, with Ex-Im holding $36 million in 
previously rescheduled non-ODA debt, all of which is prepayable 
without penalty.  Macedonia said the prepayment was motivated by a 
desire to use surplus revenues generated by recent privatizations to 
reduce debt service costs and improve the country's credit rating. 
 
-------- 
PAKISTAN 
-------- 
 
¶18. (U) Belgium announced that it intends to conclude a debt-for-aid 
swap with Pakistan, which will fund several Asian Development 
Bank-led health and education projects worth 30 million euros. 
Russia reported $4.7 million in arrears, but said it would not try 
to block the debt swap.  The Secretariat will remind Pakistan to 
 
PARIS 00000328  009 OF 010 
 
 
clear any arrears that may exist. 
 
------ 
RUSSIA 
------ 
 
¶19. (U) Russia summarized its new policy to forgive 100 percent of 
debts owed by HIPC countries that reach completion point.  Countries 
that will benefit immediately are Benin, Ethiopia, Guyana, 
Madagascar, Mozambique, Tanzania, and Zambia.  The combined stock of 
debt owed by these countries to Russia after reaching completion 
point amounts to $526 million.  The cancellation of this debt will 
be implemented through debt-for-aid swaps implemented in close 
cooperation with the World Bank.  Russia intends to extend this 
policy to other HIPC countries as soon as they reach completion 
point. 
 
--------------------- 
SAO TOME AND PRINCIPE 
--------------------- 
 
¶20. (U) STP is expected to reach HIPC completion point in late 
February or early March.  Negotiations in the Paris Club are 
tentatively scheduled for April.  (The U.S. is not a creditor.) 
 
--------------------- 
SERBIA AND MONTENEGRO 
--------------------- 
 
¶21. (SBU) The Secretariat contacted the authorities to convey 
concerns raised by certain creditors (Japan, Netherlands, Norway) 
regarding the decision by Serbia and Montenegro to allocate debt 
between themselves according to the final beneficiary principle. 
The authorities understood the message without giving any indication 
they would change their approach.  Serbia asserted no Paris Club 
creditor had registered problems with the final beneficiary 
principle.  (The US and France intend to use the final beneficiary 
 
PARIS 00000328  010 OF 010 
 
 
principle in their bilateral agreements.)  Japan insisted that 
Serbia and Montenegro must respect the debtor/guarantor principle 
rather than the final beneficiary principle (unless otherwise 
specified by the creditor), and asked the Secretariat to consider 
further action. 
 
------------ 
SIERRA LEONE 
------------ 
 
¶22. (U) The Paris Club, along with Kuwait, which also signed Sierra 
Leone's 2001 Paris Club agreement, cancelled 100 percent of Sierra 
Leone's bilateral debt.  The total value of the debt forgiven 
amounted to $363 million, including cancellation of $44 million in 
USDA concessional loans under the PL 480 program.  Finance Minister 
John Benjamin expressed gratitude to the Paris Club for supporting 
Sierra Leone during its civil war and for the final completion point 
treatment of its bilateral debt.  Benjamin also underscored the role 
of debt relief in freeing resources to pursue the GOSL's priorities 
of improving governance, reducing poverty, and strengthening health 
and education programs. 
 
----- 
TONGA 
----- 
 
¶23. (U) Tonga has asked Germany to extend the maturity of certain 
ODA debts.  Germany will deal with the issue bilaterally.  France is 
the only other creditor. 
 
STAPLETON#