VZCZCXRO6022
RR RUEHPOD
DE RUEHFR #2374/01 1561652
ZNR UUUUU ZZH
R 051652Z JUN 07
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 7926
INFO RUEATRS/DEPARTMENT OF TREASURY WASHDC
RUEKJCS/SECDEF WASHDC
RUEHRL/AMEMBASSY BERLIN 6588
RUEHSW/AMEMBASSY BERN 1997
RUEHBS/AMEMBASSY BRUSSELS 6281
RUEHCP/AMEMBASSY COPENHAGEN 1458
RUEHLO/AMEMBASSY LONDON 6571
RUEHMD/AMEMBASSY MADRID 2626
RUEHMO/AMEMBASSY MOSCOW 5863
RUEHNY/AMEMBASSY OSLO 1496
RUEHRO/AMEMBASSY ROME 8411
RUEHSM/AMEMBASSY STOCKHOLM 1526
RUEHTC/AMEMBASSY THE HAGUE 2787
RUEHKO/AMEMBASSY TOKYO 2510
RUEHBS/USEU BRUSSELS 2016
RUEHLU/AMEMBASSY LUANDA 0859
RUEHBU/AMEMBASSY BUENOS AIRES 1422
RUEHGB/AMEMBASSY BAGHDAD 0621
RUEHPE/AMEMBASSY LIMA 0520
RUEHPOD/AMEMBASSY PODGORICA 0040
RUEHBW/AMEMBASSY BELGRADE 0778
RUEHLC/AMEMBASSY LIBREVILLE 1213
RUEHSB/AMEMBASSY HARARE 0422
RUEHAN/AMEMBASSY ANTANANARIVO 1004
RUEHBE/AMEMBASSY BELMOPAN 0001

UNCLAS SECTION 01 OF 06 PARIS 002374 
 
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 - MAY 2007 TOUR D'HORIZON AND PERU AGREEMENT 
 
 
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SUMMARY 
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¶1.  (SBU)  At the May 22-24 meeting of the Paris Club, creditors 
agreed to allow Peru to prepay at face value as much as $2.5 billion 
in previously rescheduled non-concessional debt in order to support 
its efforts to implement sound debt management policies.  The 
Secretariat reported on technical talks with Argentina, which asked 
 
SIPDIS 
for concessions on late interest and access to new export credits in 
exchange for clearing its arrears.  Paris Club creditors agreed that 
continued technical talks should be encouraged, but were reluctant 
to consider any concessions until Argentina makes a serious offer. 
Creditors also discussed how to proceed in normalizing financial 
relations with Angola, which has almost fully cleared its arrears to 
the Paris Club, but continues to owe late interest.  In recognition 
of its progress on economic reform and reaching the "Completion 
Point" of the Heavily Indebted Poor Country (HIPC) initiative, Paris 
Club creditors granted Sao Tome and Principe the final phase of HIPC 
debt relief.  Turning to a debt issue currently drawing press and 
political attention in several countries, the Paris Club discussed 
what, if any, actions creditors should take to counter threats to 
HIPC debt relief posed by litigating creditors.  During its 7th 
annual session with the private sector, the Paris Club exchanged 
views on best practices for advancing our debt treatment objectives 
for low-income countries (LICs).  The Paris Club also reviewed 
progress on debt issues for the Comoros (pre-HIPC eligibility), Iraq 
(progress on various bilateral debt deals), Serbia and Montenegro 
(division of former Yugoslavia debt), and Zimbabwe (legal action to 
collect debt). 
 
------ 
Angola 
------ 
 
¶2.  (SBU) The Netherlands and Sweden reported that Angola still had 
not cleared all arrears.  In light of ongoing dialogue with Angola, 
however, both countries said they believed the continued delays 
reflected weak debt management capacity rather than an unwillingness 
to pay.  The Paris Club Secretariat said Angolan Finance Minister de 
Morais had promised to continue working with the Club to clear these 
remaining arrears (excluding late interest).  The United States 
informed the Club it had refunded a $3 million overpayment to 
Angola.  Japan, the Netherlands, and Norway said their export credit 
agencies (ECAs) were under increasing pressure to reopen in Angola, 
but remained off-cover for now to maintain Paris Club solidarity. 
Spain confirmed that its ECA was open for short-term financing, but 
said Angola thus far has been interested only in medium- and 
long-term financing. 
 
¶3.  (SBU) Japan requested that, once all arrears are cleared, the 
Club proceed swiftly to implement its previously agreed plan of 
action.  (According to this plan, set out by the PC Chair in March, 
once arrears are cleared, Angola should unilaterally pay 40-60% of 
late interest due, and then propose a schedule for paying off the 
balance over time.  In return, Paris Club members' ECAs, at their 
discretion, could decide to go on-cover.  As an additional 
 
PARIS 00002374  002 OF 006 
 
 
inducement, creditors might offer, on a bilateral basis but subject 
to Paris Club coordination, to reduce the late interest rate or any 
penalty charges.  Creditors could also offer debt-for-aid and 
debt-for-equity swaps, based on existing limitations.)  The United 
States cautioned that offering concessions on late interest could be 
interpreted as rescheduling without an IMF agreement, and also have 
a spillover effect on Argentina.  The Secretariat countered that 
Angola and Argentina were different cases. 
 
--------- 
Argentina 
--------- 
 
¶4.  (SBU) Summarizing recent technical discussions with Argentine 
Finance Secretary Chodos, the Secretariat reported having 
underscored and explained the reason for requiring an IMF program as 
a condition of a Paris Club rescheduling.  As an alternative, 
Argentina could propose a unilateral plan for clearing its arrears. 
Chodos asked if Paris Club creditors, in return, would be willing to 
stop the clock on late interest and begin offering ECA financing 
before arrears were completely cleared.  Creditors were generally 
united in their reaction, agreeing that technical discussions should 
continue, but remaining reluctant to consider any concessions until 
Argentina makes a concrete proposal, possibly including initial 
unilateral payments on arrears. 
 
¶5.  (SBU) The Secretariat encouraged creditors to start thinking 
about what sort of arrears payment plan they would find acceptable 
and what flexibility their ECAs might have after Argentina made the 
first move.  The United States said it had no flexibility on late 
interest or ECA cover policy (i.e., arrears must be fully cleared), 
and urged creditors to stand firm.  Japan and Italy, citing the 
alternative scenarios included in the GOA's recent non-paper, 
stressed that Argentina was capable of clearing its arrears.  (The 
IMF reported that Argentina continues to accumulate reserves but 
believes the government has no plans to alter its unsustainable 
economic policy mix.)  Japan said waiving interest was tantamount to 
a rescheduling and therefore was a non-starter.  The Secretariat 
noted that there appeared to be no enthusiasm among creditors to 
stop the clock on late interest. 
 
¶6.  (SBU) During an earlier G7 debt-experts discussion, Germany 
indicated its ECA was not under pressure to reopen and said any 
decision to go back on cover before arrears were fully cleared would 
be a political one.  Several participants questioned whether 
Argentina was indeed serious about arranging to clear its Paris Club 
arrears before national elections in October.  France thought this 
pre-election period might be a window of opportunity for the Paris 
Club, but cautioned that taking advantage of it would not be 
cost-free.  France underscored the need to adhere to Paris Club 
principles in trying to find a way forward on Argentina, but also 
suggested that once Argentina starts to clear its arrears, ECAs 
could reopen export cover at their discretion. 
 
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Comoros 
------- 
 
PARIS 00002374  003 OF 006 
 
 
 
¶7.  (U) The IMF reported its Board's discussion of Comoros' Poverty 
Reduction and Growth Facility (PRGF) request had been postponed 
pending financing assurances from the African Development Bank 
(AfDB).  Because Comoros is $31 million in arrears, the AfDB must 
reclassify it as a post-conflict country to give it access to an 
arrears clearance facility.  The IMF said this will not happen until 
end-June.  Given this delay, the Secretariat will hold off inviting 
Comoros to negotiate the terms of a Naples flow treatment. 
 
---- 
Iraq 
---- 
 
¶8.  (SBU) The Secretariat announced the "good news" that Saudi 
Arabia had agreed to provide Iraq debt relief on Paris Club 
comparable terms.  Responding to an Iraqi letter to the Secretariat 
asserting that Russia was attempting to tie debt relief to oil 
contracts (a breach of Paris Club principles), the Russian 
delegation said it understood Club concerns, which its Finance 
Minister had shared with the government, but had no official 
reaction at this time.  Italy urged Russia not to wait another month 
to respond to such a serious allegation. 
 
¶9.  (SBU) Referring to another Iraqi letter asking for assistance in 
sorting out a contested post-1990 claim by Germany, the Secretariat 
requested that discussions be postponed until next month given the 
complexity of the case.  Germany asserts the $68 million claim 
involves a transfer of funds stranded in the Iraqi central bank that 
should be excluded from the Paris Club debt treatment. 
Documentation provided by Iraq indicates this is a complicated, 
unsettled transaction covered by the PC deal, rather than a simple 
transfer case.  In an exchange on the margins of the meeting, 
Germany told us that, under the terms of the contract, it is seeking 
arbitration with Iraq to determine whether the claim should be 
treated under the PC Agreed Minute. 
 
---- 
Peru 
---- 
 
¶10.  (U) Creditors concluded an agreement that will allow Peru to 
prepay at face value the entirety of its previously rescheduled 
non-concessional debt falling due between 2007 and 2015.  Peru was 
confident that it could raise enough money in the market to finance 
prepayment of all eligible debt, and did not request a withdrawal 
clause in the agreement as it had done for a similar prepayment 
operation last year.  All creditors except France and Italy 
announced their intention to allow all of their eligible claims to 
be prepaid.  Italy said it would offer a portion (yet to be decided) 
of its claims, while France said it was still undecided (a decision 
for its new Finance Minister).  Both France and Italy said high 
fixed interest rate contracts meant prepayment at face value 
entailed a large budgetary cost, but joined other PC creditors in 
voicing support for Peru's proposal as sound debt management policy. 
 Total Paris Club debt to be prepaid could amount to as much as $2.5 
billion, of which $450 million is owed to the US. 
 
PARIS 00002374  004 OF 006 
 
 
 
--------------------- 
Sao Tome and Principe 
--------------------- 
 
¶11.  (U) STP's Completion Point agreement under the Heavily Indebted 
Poor Country (HIPC) initiative paves the way for 100% cancellation 
of its Paris Club debt.  Belgium, France, Germany, Spain, and Russia 
agreed to cancel $23.9 million in nominal terms, representing their 
share of HIPC debt relief.  The remaining $0.6 million in official 
development assistance (ODA) claims will be canceled on a voluntary 
basis. (The United States is not a creditor.) 
 
--------------------- 
Serbia and Montenegro 
--------------------- 
 
¶12.  (U) Citing the recent installation of a new government, 
creditors agreed to give the Serbian authorities another month to 
respond to the letter, sent by the Secretariat on behalf of Germany, 
Japan, the Netherlands, Sweden, and Switzerland, reiterating that 
Serbia and Montenegro must sign new bilateral agreements with Paris 
Club creditors based on the debtor/guarantor principle, unless the 
creditor agrees otherwise.  In the meantime, the Secretariat will 
draft a letter to the newly appointed Finance Minister explaining 
the current situation. 
 
-------- 
Zimbabwe 
-------- 
 
¶13.  (SBU) The United States reported that its export credit agency 
(Exim Bank) was using legal recourse (consistent with the Paris 
Club's July 2005 letter to Zimbabwe) to preserve its rights that 
were set to expire under the six-year U.S. statute of limitations. 
Faced with threat of a suit in early May, Zimbabwe paid the US a $5 
million arrears installment.  The United States intended to pursue 
the claim in court in July if Zimbabwe did not pay off the entire 
remaining $40 million debt.  The Netherlands revealed that it had 
taken similar action in 2005-2006 and was able to recover EUR 5 
million.  The UK reported it had recently gone to court to extend 
the statute of limitation on its claims.  (Note: Since this meeting, 
the government of Zimbabwe made an additional $40 million payment to 
settle the bulk of its debt to ExIm.  Zimbabwe still has debt in 
arrears to other USG agencies.) 
 
--------------------------------------- 
Selling Claims and Litigating Creditors 
--------------------------------------- 
 
¶14.  (SBU) The Paris Club issued a press release stating that 
creditors "are committed to avoid selling their claims on HIPC 
countries to other creditors who do not intend to provide debt 
relief under the HIPC initiative, and urge other creditors to follow 
suit."  The press release was the result of a protracted and at 
times acrimonious debate in the Club.  The Secretariat was intent on 
highlighting the "threat" posed by litigating creditors to HIPC 
 
PARIS 00002374  005 OF 006 
 
 
countries and received strong support from Denmark, the Netherlands, 
and the UK, all of whom stressed that the Paris Club needed to react 
to this increasingly important domestic political issue.  Offering 
what seemed to be a lone dissenting voice, the United States argued 
that an emphasis on litigation was misplaced, and that the press 
release should instead call on all non-Paris Club creditors to 
provide comparable treatment under the HIPC initiative. 
 
¶15.  (SBU) The press release also stated that "creditors have agreed 
to intensify their work on this issue with a view to identify 
concrete measures to tackle the problem," reflecting a strong desire 
by most Club members to act.  There was limited debate on what 
measures might be taken or could be effective, but the Netherlands 
captured the general mood in noting that there was political 
momentum the Club should use.  At the same time, some creditors 
acknowledged that the issue of litigating creditors was a complex 
one, the Club's tools were limited, and litigation and trading debt 
on secondary markets were important tools of a well functioning 
international financial system. 
 
-------------------------------------- 
Annual Meeting with the Private Sector 
-------------------------------------- 
 
¶16.  (U) Private sector HIPC restructuring:  This was the first of 
three themes discussed as part of the Paris Club's 7th annual 
meeting with the private sector.  A BNP Paribas representative made 
the case that, contrary to popular perception, commercial creditors 
were committed to providing debt relief under the HIPC initiative. 
He blamed delays on the failure of debtor countries to initiate a 
dialogue with creditor committees.  The World Bank and a Lazard 
representative gave presentations on the merits of the Bank's Debt 
Reduction Facility (DRF).  The Bank has extended the DRF to 2012 in 
order to help resolve commercial debt, which represents a large 
share of the total debt burden for several HIPC cases.  Both parties 
characterized the decision in 2004 to restrict the DRF to countries 
having reached Decision Point as a key improvement. 
 
¶17.  (U) Responding to a concerned raised about the negative impact 
of litigation on resolving HIPC debt, a Greylock Capital 
representative argued convincingly that litigation plays a useful 
and legitimate role in financial markets.  He claimed that so-called 
"vulture funds," which he defined as those whose business model is 
to extract large gains through litigation, were in fact a very small 
subset of all creditors. For the vast majority, litigation was a 
last resort when debtors failed to enter into good-faith 
negotiations.  Another private sector representative added that, in 
the wake of Argentina's default, those who were previously reluctant 
to litigate had been forced to reevaluate their strategy. 
 
¶18.  (U) New lending and debt sustainability in low-income countries 
(LICs):  On this second topic, the IMF provided an overview of the 
joint Bank-Fund Debt Sustainability Framework (DSF) for LICs, a tool 
designed to identify debt-related vulnerabilities.  Using a 20-year 
baseline scenario, the DSF looks at the impact of shocks on debt 
sustainability, evaluates institutional and policy capacity to 
manage debt, sets debt level and policy benchmarks, and recommends 
 
PARIS 00002374  006 OF 006 
 
 
borrowing strategies for LICs.  A representative from Fitch Ratings 
discussed debt sustainability in Sub-Sahara African countries, 
explaining the limited impact debt relief has on its country ratings 
in the absence of substantial policy changes. 
 
¶19.  (U) Update on debt restructurings in the private sector and in 
the Paris Club:  A representative from Houlihan Lokey reviewed 
Belize's recent debt restructuring experience in which private 
sector collective action played a critical role in negotiating a 
deal that extended maturities and put Belize on a sustainable debt 
path.  The Institute for International Finance applauded Belize (and 
separately the Dominican Republic) for following the IIF's 
"Principles" as a guide for working with creditors in an open, 
transparent, and fair manner.  Representatives from Greylock Capital 
and the Global Committee of Argentina Bondholders presented the 
contrary case of Argentina.  They highlighted its strong economic 
recovery and warned against the negative impact on financial markets 
of allowing Argentina's unilateral debt restructuring to stand as a 
precedent. 
 
STAPLETON