VZCZCXRO3477
RR RUEHGI RUEHPOD RUEHTRO
DE RUEHFR #1742/01 1221639
ZNR UUUUU ZZH
R 021639Z MAY 07
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 6870
INFO RUEATRS/DEPARTMENT OF TREASURY WASHDC
RUEKJCS/SECDEF WASHDC
RUEHRL/AMEMBASSY BERLIN 6553
RUEHSW/AMEMBASSY BERN 1975
RUEHBR/AMEMBASSY BRASILIA 1859
RUEHBS/AMEMBASSY BRUSSELS 6217
RUEHBY/AMEMBASSY CANBERRA 1700
RUEHCP/AMEMBASSY COPENHAGEN 1446
RUEHHE/AMEMBASSY HELSINKI 1285
RUEHLO/AMEMBASSY LONDON 6527
RUEHMD/AMEMBASSY MADRID 2597
RUEHMO/AMEMBASSY MOSCOW 5826
RUEHNY/AMEMBASSY OSLO 1476
RUEHOT/AMEMBASSY OTTAWA 2104
RUEHRO/AMEMBASSY ROME 8374
RUEHUL/AMEMBASSY SEOUL 1420
RUEHSM/AMEMBASSY STOCKHOLM 1503
RUEHTC/AMEMBASSY THE HAGUE 2746
RUEHKO/AMEMBASSY TOKYO 2482
RUEHVI/AMEMBASSY VIENNA 1726
RUEHBS/USEU BRUSSELS 1991
RUEHBUL/AMEMBASSY KABUL 0473
RUEHLU/AMEMBASSY LUANDA 0845
RUEHBU/AMEMBASSY BUENOS AIRES 1402
RUEHGI/AMEMBASSY BANGUI 0082
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RUEHKI/AMEMBASSY KINSHASA 1482
RUEHLC/AMEMBASSY LIBREVILLE 1192
RUEHJL/AMEMBASSY BANJUL 0317
RUEHGB/AMEMBASSY BAGHDAD 0599
RUEHNR/AMEMBASSY NAIROBI 1258
RUEHTRO/AMEMBASSY TRIPOLI 0072
RUEHIL/AMEMBASSY ISLAMABAD 0696
RUEHPE/AMEMBASSY LIMA 0509
RUEHPOD/AMEMBASSY PODGORICA 0029
RUEHBW/AMEMBASSY BELGRADE 0766
RUEHPL/AMEMBASSY PORT LOUIS 0862
RUEHPO/AMEMBASSY PARAMARIBO 0040
RUEHHK/AMCONSUL HONG KONG 0215

UNCLAS SECTION 01 OF 11 PARIS 001742 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EB/IFD/OMA 
TREASURY FOR DO/IDD AND OUSED/IMF 
SECDEF FOR USDP/DSAA 
HONG KONG FOR Marlene Sakaue 
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 - APRIL 2007 TOUR D'HORIZON AND CAR NEGOTIATION 
 
REF:  Paris 328 
 
SENSITIVE BUT UNCLASSIFIED.  PLEASE HANDLE ACCORDINGLY. 
 
------- 
SUMMARY 
------- 
 
¶1.  (SBU) At the April 19-20, 2007 meeting of the Paris Club, 
creditors provided debt relief to the Central African Republic in 
recognition of its eligibility for the Heavily Indebted Poor Country 
(HIPC) Initiative and to facilitate the newly signed Poverty 
Reduction and Growth Facility (PRGF) with the IMF.  The Secretariat 
reported on a paper that Argentina shared with only a few countries. 
 In it, Argentina laid out why it did not want to use reserves to 
pay its Paris Club debt, and examined various scenarios for 
normalizing relations.  There was interest in exploring those 
options that Argentina had described as undesirable - paying arrears 
in one to two years by borrowing either reserves or on the markets. 
Creditors reaffirmed their commitment to solidarity, though the 
Netherlands and Germany expressed desire for a resolution soon.  On 
Iraq, the Secretariat reported its view that the Allegro/Aquila 
program for securitizing non-Paris Club claims did not violate 
comparability.  There was some discussion of the German post-1990 
claims; based on Germany's presentation, the Secretariat opined that 
the issue was one of blocked transfers, not debt, and therefore not 
covered by the Agreed Minute.  On Peru, creditors were generally 
receptive to Peru's prepayment offer, and the Secretariat will 
invite Peru to negotiate next month.  Other countries on the agenda 
were Afghanistan, Angola, Comoros, DRC, Gabon, Gambia, Kenya, Libya, 
North Korea, Pakistan, Russia, Sao Tome and Principe, Serbia, 
Montenegro, Kosovo, the Seychelles, and Suriname.  END SUMMARY. 
 
Afghanistan 
----------- 
 
¶2.  (U) The IMF reported that Afghanistan is still expected to reach 
Decision Point for additional debt relief under the Heavily Indebted 
Poor Country (HIPC) initiative in early July.  An IMF mission will 
conduct its second review of Afghanistan's program in the next week. 
 
PARIS 00001742  002 OF 011 
 
 
 At Completion Point of its HIPC agreement, Afghanistan would be 
eligible for USD 435 million in bilateral debt relief, USD 375 
million of which would be from Russia.  Multilateral debt 
forgiveness would total USD 125 million; the IMF's own share would 
be USD 15 million and the World Bank's USD 75 million in 
net-present-value (NPV) terms.  Germany and the U.S. reported having 
signed their bilateral agreements, while Russia reported it had sent 
another draft to the Afghans on April 11, with some minor responses 
to Afghanistan's comments.  (We later confirmed that Kabul had 
indeed received the document and is reviewing it). 
 
Angola 
------ 
 
¶3.  (SBU) The Secretariat summarized the recent data call, noting 
that Angola's arrears were USD 150 million at the end of January 
(excluding late interest).  Since then Angola paid almost USD 120 
million - USD 83 million for arrears and USD 36 million in excess of 
arrears amounts (excluding late interest).  Angola has asked the 
excess amounts be returned.  Two creditors still reported arrears - 
Sweden (USD 15 million) and the Netherlands (USD 52 million). 
(Switzerland reported receiving an additional USD 3 million arrears 
the day of the meeting.)  Countries receiving excess payments were 
Norway (less than USD 1 million), Italy (USD 16 million), the UK 
(USD 20 million), and the U.S. (USD 3 million).  (Note: The United 
States already returned last month an overpayment of USD 49 
million.)  There was general consensus that these payment problems 
resulted from internal management difficulties rather than any 
design by Angola. 
 
¶4.  (SBU) The UK stated that it had not repaid the excess because it 
was still owed late interest.  The Secretariat asked the UK to 
reconsider this position, since it raised comparability issues.  The 
UK replied that it was seeking legal advice.  Italy said it was 
planning to return its overpayment, despite being owed late 
interest.  Norway indicated that it was unsure.  (This is not an 
issue for the U.S., since we are owed no late interest).  Italy also 
reported that Angolan Finance Minister de Morais indicated to its 
ambassador that Angola might be able to settle the late interest 
charges without requesting a reduction.  The Secretariat asked 
 
PARIS 00001742  003 OF 011 
 
 
creditors not to negotiate the late interest question bilaterally, 
stating it should be discussed in the Club, as indicated in the 
Secretariat's recent letter to Angola. 
 
SIPDIS 
 
Argentina 
--------- 
 
¶5.  (SBU) The Secretariat reported on its meeting with Finance 
Minister Miceli during the IMF/World Bank Spring Meetings.  PC 
Chairman Musca delivered the standing message that a PC 
restructuring would require a Fund program, and that if Argentina 
was unwilling to pursue a program, paying its arrears as quickly as 
possible would be central to normalizing relations with PC 
creditors.  Miceli in turn had raised the prospect of using the 
Article IV review process as a basis for a Paris Club treatment and 
again underscored that Argentina would not use its reserves. 
 
¶6.  (SBU) Miceli had also provided France and Germany (but not the 
Secretariat) with the same lengthy position paper that Argentina had 
 
SIPDIS 
given U.S. Treasury Department officials on the margins of the 
Inter-American Development Bank meeting.  France briefed other 
creditors, most of whom had not received the paper, on the general 
arguments made by the Argentines.  The paper claims that Argentina 
cannot use its arrears for both legal and economic reasons, and 
proposes a nine-year rescheduling arrangement as a means to 
normalize relations with Paris Club creditors.  France observed that 
Argentina could get around the legal problems if it wished to do so, 
and that it would be unwise for the Club to attempt to assess 
payment capacity or conditionality - tasks better left to the IMF. 
It also noted the alternative scenarios at the end of the Argentine 
paper, which discussed repayment over one to two years by borrowing 
from reserves or the markets.  While the paper argued against this 
approach as detrimental to Argentina's economic health, France 
observed that it was now "on the table" for further discussion. 
 
¶7.  (SBU) Germany supported the Secretariat's position, but wanted a 
solution soon.  The Netherlands urged flexibility, noting that time 
was passing.  The U.S. summarized recent bilateral meetings and its 
continued support for the consensus approach.  Japan asked the 
Secretariat to urge Argentina to put forth an official proposal and 
 
SIPDIS 
 
PARIS 00001742  004.2 OF 011 
 
 
keep talks focused only on technical issues.  Japan also asked Club 
members to remain united and not reopen export credits.  Creditors 
expressed considerable interest in the Argentine paper, especially 
regarding the alternative scenarios as a basis of discussion.  The 
Secretariat agreed to ask Argentina for permission to share it with 
 
SIPDIS 
the entire Club. 
 
Central African Republic 
------------------------ 
 
¶8.  (U) Paris Club creditors provide CAR, a HIPC-eligible country, 
with Naples-terms debt treatment:  67% reduction of all 
pre-cutoff-date non-concessional debt arrears and payments coming 
due during the scheduled period of its Poverty Reduction and Growth 
Facility (PRGF) reform program, as well as generous rescheduling of 
all other arrears and flows.  The Secretariat presented an analysis 
that showed no capacity to pay.  On this basis, as well as the very 
fragile picture of CAR's economic situation drawn by the World Bank 
and IMF representatives, creditors agreed to several extraordinary 
treatment elements:  full capitalization of moratorium interest and 
deferred arrears payments on both post cut-off official development 
assistance (ODA) and short term debts, held by Japan and France 
respectively. 
 
¶9.  (U) The U.S. delegation asked about reports that CAR was 
planning a USD 92 million bond issue and other delegations echoed 
similar concerns about non-programmed borrowing.  The IMF mission 
chief confirmed that such a bond issuance was not part of the 
program.  The Secretariat reported that it had raised this with the 
Finance Minister who acknowledged PC creditors' concerns and 
reported that no decisions had been made.  The Secretariat and 
several creditors also raised concerns about CAR's ability to obtain 
comparable treatment from non-Paris Club creditors given their 
larger share of CAR's debt.  The largest of these creditors are 
China (USD 130 million), the former Yugoslavia (USD 31 million), 
Argentina (USD 25 million) and Kuwait (USD 20 million). 
 
Comoros 
------- 
 
 
PARIS 00001742  005 OF 011 
 
 
¶10.  (U) Comoros is a HIPC-eligible country.  The IMF requested and 
received financing assurances for its upcoming PRGF, expected to 
reach the Board in June.  The Fund reported that despite a few 
slippages, progress had been satisfactory under a staff monitored 
program.  The major obstacle to moving forward was USD 31 million in 
arrears to the African Development Bank (AfDB).  (The U.S. is not a 
creditor). 
 
Democratic Republic of Congo 
---------------------------- 
 
¶11.  (SBU) The Secretariat reported on its meeting with the new DRC 
Finance Minister who requested an immediate rescheduling and 
continuation of a "payments moratorium."  The Secretariat told him 
that the Club wished to normalize relations as quickly as possible, 
but would require approval of a new PRGF.  The Secretariat then 
noted that creditors were "allowed" to bill in the meantime, but 
asked them not to apply this strictly if possible.  (The U.S. is 
legally required to bill.)  The IMF reported on the country's weak 
economic performance, although it did indicate that reserves had 
risen from less than USD 100 million in February to over USD 150 
million in early April, due to the receipt of oil payments.  The IMF 
will field an Article IV mission in May, which could lay the 
groundwork for a new PRGF.  This could be adopted in mid-year, at 
the earliest.  Under the best-case scenario, DRC would be eligible 
for Completion Point debt relief under the HIPC initiative in early 
¶2008. 
 
Gabon 
----- 
 
¶12.  (SBU) Following up on Gabon's February 2007 letter to the Paris 
Club requesting treatment of its debt, the Secretariat reported it 
had informed the Gabonese authorities of the Club's position.  Gabon 
could seek a possible debt treatment under the Evian approach if a 
Debt Sustainability Analysis indicated a need (which seems 
unlikely), or could consider early repayment within the Club's 
rules.  Gabon had not yet responded.  The IMF confirmed that Gabon 
had met all prior conditions for a Stand-By Arrangement (SBA), 
allowing for a Board discussion in early May.  In the absence of 
 
PARIS 00001742  006 OF 011 
 
 
further clarification by Gabon of what it wanted from the Club, 
creditors did not discuss the buyback vs. prepayment options, or the 
amount and appropriateness of any repayment discount. 
 
The Gambia 
---------- 
 
¶13.  (SBU) Norway thanked the IMF for opening a dialogue with The 
Gambian authorities.  Since it had not started billing when The 
Gambia went off track during its HIPC interim relief, Norway was 
prepared to treat all arrears as "technical" in order to facilitate 
the Completion Point treatment.  Creditors agreed with Norway that 
this could be done through a written (email) process, rather than 
face-to-face in Paris.  (The U.S. is not a creditor.) 
 
Iraq 
---- 
 
¶14.  (SBU) The Secretariat and IMF both took note of the upcoming 
Compact and of recent developments with non-PC creditors, including 
a briefing by JPMorgan and Citigroup on the Aguila/Allegro program 
for securitizing claims.  The Secretariat observed that non-PC 
creditors were free to sell their remaining obligations after 
comparable treatment, and argued forcefully that the program met 
comparability concerns and could help accelerate the settlement of 
these claims.  The U.S. delegation welcomed and agreed with this 
assessment. 
 
¶15.  (SBU) The U.S. thanked Germany for its written explanation for 
excluding a post-1990 debt from the scope of the Agreed Minute on 
Iraq and requested the Secretariat's assessment of the facts as 
Germany had presented them.  The Secretariat shared its view that 
this was a transfer issue, not one of debt, since the monies paid by 
Iraqi companies had been paid into a Central Bank account in the 
German company's name.  The U.S. and U.K. delegations expressed a 
coordinated view that if the Club were indeed to consider this a 
transfer not subject to the Agreed Minute, it needed to make very 
clear why this was the case in order to avoid creditors seeking to 
exclude other claims arbitrarily.  (Note: We have referred the issue 
back to Iraq's legal advisors for their views and confirmation of 
 
PARIS 00001742  007 OF 011 
 
 
Germany's presentation of the facts.) 
 
¶16.  (SBU) Russia again reported no progress on its bilateral 
agreement with Iraq.  In later private discussion, the Russian 
delegation denied any explicit linkage between debt relief and oil 
contracts, but raised concerns that the draft Iraqi oil law would 
not treat Russian companies fairly.  The Russians also indicated 
that the Finance Ministry could do nothing further to secure 
approval to sign the bilateral agreement (which they claim is 
technically ready), and advised us to consult higher-level officials 
or to speak to ministries in Russia that deal with oil issues. 
 
Kenya 
----- 
 
¶17.  (SBU) The IMF reported on Kenya's completion of the 
long-delayed second review of its PRGF.  Creditors agreed with the 
Secretariat's proposal to implement the third phase of Kenya's 2004 
 
SIPDIS 
debt treatment and approved a draft notification letter.  In 
response to concerns raised by Japan regarding justification for the 
Club's retrospective entry into force of debt relief, the 
Secretariat noted that by previously allowing Kenya additional time 
 
SIPDIS 
to meet its reform commitments and not formally closing the third 
phase, the Club was now obliged to fulfill its side of the 
agreement.  But the Secretariat conceded that the decision to 
provide Kenya time outside the normal consolidation period was 
unusual and discretionary. 
 
Libya 
----- 
 
¶18.  (SBU) Russia requested Libya be placed on the agenda because of 
difficulties resolving significant arrears and interest in the 
experience of other creditors.  The Netherlands, Denmark, Sweden, 
and Switzerland reported modest arrears and problems dealing with 
the Libyan authorities.  The Secretariat offered its view that the 
best way to approach this situation would be through an initial Club 
discussion of the most effective methodology for resolving debts for 
countries with no foreseeable prospects of a Paris Club treatment. 
Creditors agreed with this (especially as it affects other debtor 
 
PARIS 00001742  008 OF 011 
 
 
countries, including Suriname) and the Secretariat promised to 
update its 2002 paper on "Away from Paris Club countries" before 
putting it on the agenda at a later date.  (The U.S. is not a 
creditor.) 
 
North Korea 
----------- 
¶19.  (SBU) Russia reported on recently completed inter-governmental 
meetings on trade and the economy with North Korea.  Since the DPRK 
did not appear to want to discuss debt, Russia said it had not 
raised the issue.  Russia expects these meetings to continue, 
perhaps as frequently as twice per year, but does not anticipate 
addressing debt until bilateral relations are more advanced. 
 
Pakistan 
-------- 
 
¶20.  (SBU) Russia had requested that Pakistan be placed on the 
agenda.  The IMF and World Bank gave a fairly optimistic report on 
macroeconomic conditions, although the Bank warned that social 
indicators remained some of the worst in the world.  Russia 
indicated that it had signed its bilateral in 2005, covering a total 
of USD 129 million, and that it had about USD 100,000 in arrears, 
which it attributed to a misunderstanding.  It then raised the issue 
of some USD 150-160 million that had accrued from trade deals with 
the former USSR and were now frozen in the Pakistani central bank 
due to USD 18 million in counter claims by Pakistani companies. 
Russia said it intended to raise this problem within the IMF and 
simply wanted to keep PC members informed. 
 
Peru 
---- 
¶21.  (SBU) The Secretariat reported having discussed three subjects 
with Peru - (1) whether it wanted to extend the mechanism of the 
2005 agreement for the new prepayment, which would allow Peru to 
limit the amount it prepays, (2) whether it wished to reopen the 
2005 offer on maturities due through 2010, and (3) the interest by 
some creditors in a market value buyback rather than prepayment. 
The Peruvians replied that they did indeed want to have the ability 
to limit the offer, the exact parameters of which would depend on 
 
PARIS 00001742  009 OF 011 
 
 
how much they could raise in the markets.  They also said they were 
ready to reopen the 2005 offer, but did not want to consider a 
market-value buyback. 
 
¶22.  (SBU) Most creditors joined the U.S. in voicing a willingness 
to accept the prepayment offer.  Spain asked for clarification on 
which operation would execute first given its financing limitations, 
the 2010-2015 maturities or those before 2010 that were left over 
from the 2005 prepayment.  The Secretariat agreed that this could be 
an important issue and promised to check on it.  Italy noted that 
its credits were at fixed interest rates, making participation in a 
prepayment at par economically unattractive.  For political reasons, 
however, it may participate.  France noted it too would prefer a 
market-rate buyback, but was not inclined to block a consensus.  The 
Secretariat will invite Peru to negotiate at the May meeting 
 
SIPDIS 
 
Russia 
------ 
 
¶23.  (SBU) Russia explained its written request to the Secretariat 
for the return of promissory notes and bills of exchange that had 
been cancelled as a result of its prepayment operations.  It named 
twelve countries that it believed held such paper (the U.S. was not 
included).  Creditors questioned the utility of resurrecting 
documents that would be difficult and costly to find since the 
prepayment agreements served to cancel them.  Russia countered that 
while the contracts themselves had been cancelled, the notes and 
bills were separate instruments issued to back them up.  If they 
fell into the wrong hands, Russia might have to defend itself in 
court, although it would undoubtedly win.  Russia noted that the 
Netherlands had returned a dozen notes.  The Secretariat asked all 
parties to look at options for addressing Russia's legitimate 
concerns. 
 
Sao Tome and Principe 
--------------------- 
 
¶24.  (U) The Secretariat reaffirmed its intention to invite STP in 
May for Completion Point debt treatment.  Russia again reported that 
it had not been able to conclude its bilateral agreement, while 
 
PARIS 00001742  010 OF 011 
 
 
Belgium and Italy indicated minor problems with arrears and a 
lawsuit.  The Secretariat said it would send a reminder to STP on 
the Russia bilateral.  (The U.S. is not a creditor.) 
 
Serbia, Montenegro and Kosovo 
----------------------------- 
 
¶25.  (SBU) PC creditors discussed division of debt between the three 
countries and a recent email from Serbian Treasurer Dzinic, who 
stated that all bilateral negotiations were proceeding smoothly. 
Germany, the Netherlands, Japan, Sweden, and Switzerland all 
disputed that assertion.  The Secretariat agreed to reply to Dzinic, 
reiterating that division of debt must be made according to the 
debtor/guarantor principle, unless the creditor is willing to use 
the final beneficiary principle (as the U.S. has done).  Several 
countries expressed concerns that the final beneficiary approach 
could set an unhelpful precedent for a future Serbia/Kosovo 
division.  Russia objected even to the name "Kosovo" being listed in 
the "countries under review" column of the agenda since its status 
has yet to be determined.  The Secretariat will also ask Serbia for 
permission for creditors to provide loan agreement information to 
the Kosovar authorities. 
 
Seychelles 
----------- 
 
¶26.  (U) The Secretariat took note of Seychelles' recent Article IV 
review, which reported strong support for an IMF program.  The IMF 
reported that a mission could go out in July and produce a program 
for the Board to consider in September.  The Secretariat requested 
an updated data call.  (The U.S. is not a creditor.) 
 
Suriname 
-------- 
 
¶27.  (SBU) The Secretariat reported on its request to Suriname to 
clear all arrears and to provide equal treatment to all creditors. 
A letter of response from Suriname's Minister of Finance, however, 
reported that Suriname had already concluded bilateral deals with 
Germany and Italy and was close to concluding agreements with the 
 
PARIS 00001742  011 OF 011 
 
 
U.S. and Brazil (present as an observer), the only countries to 
which it owed arrears. Spain said it too had arrears.  The U.S. 
reported technical exchanges on amounts due (approximately USD 26 
million), but emphasized there were no negotiations with Suriname. 
We also expressed the view that even when a Paris Club debt 
treatment appears unlikely, creditors should coordinate attempts to 
obtain payments.  Brazil also stated it was not negotiating with 
Suriname. 
 
¶28.  (SBU) Germany acknowledged it had concluded an agreement 
covering USD 5.2 million in short term debts.  Italy also 
acknowledged having concluded an agreement with Suriname last fall 
and confessed it treated long-term debt on concessional terms.  The 
Secretariat reminded creditors to stick to the Club's rules on 
 
SIPDIS 
solidarity and committed to responding to Suriname's letter, 
reminding it of those rules. 
 
STAPLETON#