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DE RUEHFR #3209/01 2081543
ZNR UUUUU ZZH
R 271543Z JUL 07
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 9191
INFO RUEATRS/DEPARTMENT OF TREASURY WASHDC
RUEKJCS/SECDEF WASHDC
RUEHRL/AMEMBASSY BERLIN 6641
RUEHSW/AMEMBASSY BERN 2015
RUEHBS/AMEMBASSY BRUSSELS 6412
RUEHCP/AMEMBASSY COPENHAGEN 1486
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RUEHMD/AMEMBASSY MADRID 2668
RUEHMO/AMEMBASSY MOSCOW 5923
RUEHNY/AMEMBASSY OSLO 1512
RUEHRO/AMEMBASSY ROME 8513
RUEHSM/AMEMBASSY STOCKHOLM 1541
RUEHTC/AMEMBASSY THE HAGUE 2838
RUEHKO/AMEMBASSY TOKYO 2538
RUEHBS/USEU BRUSSELS 2054
RUEHBUL/AMEMBASSY KABUL 0517
RUEHLU/AMEMBASSY LUANDA 0873
RUEHPL/AMEMBASSY PORT LOUIS 0901
RUEHLC/AMEMBASSY LIBREVILLE 1244
RUEHSI/AMEMBASSY TBILISI 0443
RUEHGB/AMEMBASSY BAGHDAD 0647
RUEHAM/AMEMBASSY AMMAN 0978
RUEHMV/AMEMBASSY MONROVIA 7287
RUEHBW/AMEMBASSY BELGRADE 0832
RUEHFN/AMEMBASSY FREETOWN 0478

UNCLAS PARIS 003209 
 
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 - JULY 2007 TOUR D'HORIZON AND GABON DEBT 
BUYBACK NEGOTIATION 
 
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SUMMARY 
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¶1. (SBU) Summary:  At the July 17-18 meetings of the Paris Club, 
creditors accepted a stand-alone discounted debt buyback offer from 
Gabon, the first such operation by the Club.  While welcoming 
Gabon's efforts to use USD 500 million in oil revenues toward debt 
management, the USG lacked legal authority to accept a discount and 
therefore could not participate in this voluntary operation. 
Further, the USG did not sign the Agreed Minute because a 
comparability of treatment provision restricted Gabon's contractual 
right to repay U.S. debts at face value in the future.  PC creditors 
reacted favorably to the principle of a similar discounted buyback 
offer from Jordan and will seek more details on the structure of the 
operation Jordan envisions.  Time-compressed discussion of the Gabon 
deal, however, revealed a need for more thorough Club consideration 
of both policy and practical aspects of this new type of operation, 
and the Secretariat undertook to prepare a paper. 
 
¶2. (SBU) The United States, Germany, and Russia, Afghanistan's three 
PC creditors, signed an agreement to provide additional interim debt 
relief.  The Club discussed the status of debt relief implementation 
for Iraq and a future treatment for Liberia.  Based on assessments 
by the IMF, the PC concluded that Georgia does not currently need 
additional relief and that the Comoros is not ready due to ongoing 
political instability.  Creditors also reviewed plans to collect 
late interest from Angola, the status of negotiations to divide debt 
between Serbia and Montenegro, and a request by Sierra Leone to 
release funds held in escrow in the UK.  The Paris Club accepted an 
action plan for addressing the problem of private litigation by 
so-called "vulture funds," which "free rides" on debt relief given 
to Heavily Indebted Poor Countries (HIPCs).  Russia reiterated its 
request for the return of promissory notes.  Spain announced its 
decision to expand the scope of its HIPC debt relief.  End Summary. 
 
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Afghanistan 
----------- 
 
¶3.  (U) Afghanistan's three Paris Club creditors (Germany, Russia, 
and the United States) concluded an agreement providing additional 
interim relief for reaching Decision Point in the Heavily Indebted 
Poor Countries (HIPC) initiative.  The agreement calls for 90% 
cancellation of non-Official Development Assistance (non-ODA) debt 
service falling due after July 1, 2007.  The United States will go 
beyond this requirement and forgive 100% of both ODA and non-ODA 
debt service falling due.  Although the resulting debt reduction is 
modest, the agreement is nevertheless crucial in that it establishes 
a path for 100% reduction of the remaining stock of Paris Club debt 
at Completion Point in the HIPC process. 
 
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Angola 
------ 
 
¶4.  (SBU) The Netherlands and Sweden reported that Angola had 
cleared its remaining arrears to them (excluding late interest), 
paving the way for the Paris Club to pursue a previously agreed 
strategy for recovering the approximately $1.8 billion in late 
interest due.  Paris Club Chairman Xavier Musca will approach 
Angolan Finance Minister de Morais to ask for an immediate payment 
of $1 billion.  In return, as soon as the payment is made, the Paris 
Club will lift its objection to members' export credit agencies 
(ECAs) reopening in Angola.  (NOTE: Although the Paris Club has no 
direct control over ECA cover policy, creditors have tried to 
influence it and keep ECAs off cover until all Paris Club arrears 
are cleared.  In the case of Angola, this is the Paris Club's only 
immediate tool to leverage repayment.  END NOTE.)  Finally, Musca 
will ask the Minister to establish a schedule for paying off the 
balance of late interest over time.  As an alternative inducement, 
Musca can offer a reduction in the late interest rate or any penalty 
charges, as a way to "soften" but not forgive late interest charges. 
 (No late interest is owed to the United States.) 
 
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Comoros 
------- 
 
¶5.  (U) The IMF reported that the Poverty Reduction and Growth 
Facility (PRGF) program request had been withdrawn from Board 
consideration due to a sustained political crisis in the Comoros.  A 
staff mission will visit the Comoros and revise the program once the 
political situation allows.  The Comoros is a pre-HIPC Decision 
Point country. (The United States is not a creditor.) 
 
----- 
Gabon 
----- 
 
¶6.  (SBU) Creditors concluded an agreement that will allow Gabon to 
buy back its non-ODA debt from participating creditors at an average 
discount of 15% below face value.  This is the first time the Club 
has accepted a stand-alone discounted buyback.  While full Club 
approval of the operation is required, individual creditor 
participation is voluntary.  Belgium, Brazil, France, the 
Netherlands, Spain, Switzerland, and the UK signaled their likely 
participation.  These creditors represent around 80% of the $2.5 
billion in eligible debt, with France alone accounting for 60%. 
(NOTE:  France informed us on the margins that it intends to go 
beyond the Club agreement to provide an even larger discount -- 20% 
or more -- as a bilateral concession.  Embassy understands President 
Nicolas Sarkozy, who met with President Bongo on July 26, may have 
promised such terms in an initial bilateral meeting in May.  END 
NOTE.)  Canada, Germany, Italy, Japan, and the United States will 
not participate.  Creditors must confirm participation by October 
¶15. 
 
¶7.  (SBU) Gabon must commit by December 1 to the precise amount it 
intends to buy back.  This will depend on how much money it is able 
to raise in regional and international markets at advantageous 
rates.  Germany floated an alternative proposal consisting of a 
 
partial prepayment at par, combined with an undefined re-profiling 
of the balance.  While the Secretariat and Gabon did not support the 
proposal, it did serve to highlight concerns shared by several 
creditors that Gabon might have trouble raising funds in 
international capital markets on terms that would improve its debt 
profile. 
 
¶8.  (SBU) While other countries had raised concerns at the June 
meeting about the implications of this unprecedented operation,  the 
United States was the only country not to sign the Agreed Minute. 
The United States joined consensus in allowing the operation to 
proceed, but cited legal concerns surrounding the Agreed Minute's 
"comparability of treatment" provision, which restricted Gabon's 
ability to offer prepayments at face value in the future.  This 
specifically contravened prepayment provisions in U.S. debt 
contracts with Gabon. 
 
¶9.  (SBU) The U.S. delegation initially attempted to strike the 
comparability of treatment provision, arguing that it had no place 
in this voluntary operation and that Gabon should retain the right 
to prepay at face value in future if its circumstances improved. 
U.S. del later suggested, as a compromise, adding either a time 
limit or a face-value repayment exclusion to the comparability of 
treatment provision.  The Paris Club Chairman rejected these 
proposals.  Canada, Germany, and Japan supported the U.S. position 
but ultimately agreed to sign the agreement with minor changes that, 
for them, left open the possibility of a future early repayment at 
face value.  The United States provided a side letter welcoming 
Gabon's efforts to pursue sound debt management through a buyback 
operation and explaining that our lack of participation was due to 
domestic legal reasons. 
 
------- 
Georgia 
------- 
 
¶10. (U) Creditors agreed that Georgia does not require further debt 
relief from the Paris Club at this time. (Georgia's 2004 
rescheduling agreement with the Paris Club contained a goodwill 
clause expressing creditors' willingness to consider a follow-up 
debt treatment under the Evian approach, should it be necessary to 
restore debt sustainability.)  The IMF reported that Georgia's debt 
indicators have consistently improved in recent years, thanks to 
strong economic growth and prudent debt management.  The IMF's most 
recent analysis concluded that Georgia was at a low risk of debt 
distress.  Separately, the Netherlands said it had received a letter 
from the Georgian Finance Minister proposing, on a bilateral basis, 
a discounted buyback of Georgia's debt to the Netherlands.  The 
Netherlands said it would refer the minister to the Paris Club. 
 
---- 
Iraq 
---- 
 
¶11. (U) The IMF said Iraq had requested a technical extension of the 
current Stand-By Arrangement (SBA) until end-December 2007 to avoid 
 
any gap in programming.  (A gap could conceivably jeopardize the 
third and final tranche of Paris Club debt relief, which requires 
three years under an IMF program.) A successor arrangement could be 
in place by the end of the year. 
 
¶12. (SBU) Russia asserted that Iraq's May 2007 letter to the 
Secretariat complaining that Russia is attempting to tie debt relief 
 
SIPDIS 
to oil contracts presented a distorted view of the situation. 
Russia reiterated its intention to implement the terms of Iraq's 
2004 Paris Club agreement and noted that a final draft was ready for 
signature.  Treatment of Iraq's debt has received much attention in 
Moscow, including in the Duma, which explains why "internal 
procedures" have been slow and difficult.  Russia stated that an 
intergovernmental commission with the Iraqi authorities to review a 
range of bilateral issues should take place sometime after planned 
preparatory meetings in late July.  The Russian delegation was 
hopeful this would lead to signature of the bilateral agreement. 
 
¶13. (SBU) Germany circulated a paper defending its decision to 
pursue a post-1990 claim on Iraq.  The United States said creditors 
would need more time to examine the arguments made in the paper. 
Although the Secretariat suggested that Germany's claim is not a 
clear-cut case of a transfer (as opposed to a debt, and thus subject 
to treatment), it said it lacked sufficient information to determine 
the precise nature of the claim and therefore could not say 
conclusively whether the claim should fall within the scope of 
Iraq's July 2004 Paris Club agreement.  Moreover, the Secretariat 
did not think it was appropriate to take sides in a disagreement 
between a debtor and creditor or to respond to the letter from the 
Iraqi authorities on this matter. 
 
------ 
Jordan 
------ 
 
¶14. (SBU) Creditors welcomed Jordan's proposal to buy back its Paris 
Club debt at a "fair discount rate," which they viewed as an 
indication that Jordan wishes to pursue sound debt management.  The 
UK said it was prepared to consider Jordan's offer "flexibly." 
Germany expressed support and said it was looking forward to 
learning more details.  Spain noted that Jordan had exited from the 
Paris Club and was therefore a legitimate candidate for a buyback. 
Japan, which accounts for over 50% of Jordan's debt to the Paris 
Club, said it supported a discounted buyback in principle, but could 
only participate in a prepayment at face value.  The United States 
echoed this position.  Canada voiced support, but said its 
participation was unclear. 
 
¶15. (SBU) The Secretariat will collect loan data from all PC 
creditors and seek additional details from Jordan on the structure 
of its offer.  The IMF noted that an early repayment operation could 
represent prudent debt management for Jordan, provided financing is 
on appropriate terms.  Gabon's buyback operation raised a number of 
issues that will require further USG and Paris Club consideration 
before acting on Jordan's request.  The Secretariat will prepare a 
working paper to facilitate this review. 
 
 
------- 
Liberia 
------- 
 
¶16. (U) The IMF briefed creditors on the latest strategy for 
clearing Liberia's arrears to the international financial 
institutions (IFIs) and moving directly from a Staff Monitored 
Program (SMP) to a financed arrangement, followed immediately, or 
soon thereafter, by HIPC Decision Point.  The IMF asked if creditors 
were prepared to provide financing assurances during the August 
break (when no Paris Club meetings are held), if necessary. 
Creditors agreed this could be done by email.  The Netherlands asked 
if the IMF had a plan for dealing with private creditors who might 
pursue litigation to collect in full rather than provide Liberia 
debt relief on Paris Club terms.  The IMF said it had met with the 
GOL and private creditors and was hopeful that most of Liberia's 
private debt could be settled on HIPC-comparable terms. 
 
------ 
Serbia 
------ 
 
¶17. (SBU) Following further discussions with the Serbian 
authorities, Germany is no longer confident that Serbia and 
Montenegro will agree to apportion their debt to Germany based on 
the debtor/guarantor principle, rather than the final beneficiary 
principle.  The Netherlands said it had not made any progress 
either.  Japan said it was sending a delegation to Belgrade later 
this month and hoped to reach a compromise solution.  The 
Secretariat said it would wait for the results of the Japanese 
 
SIPDIS 
meeting, then circulate to creditors a revised letter to the newly 
appointed Serbian Finance Minister.  Creditors will decide in 
September whether to send the letter. 
 
------------ 
Sierra Leone 
------------ 
 
¶18. (SBU) The Secretariat asked whether any creditors objected to 
releasing to Sierra Leone the $4.5 million held in an escrow account 
at the Bank of England.  (The account was opened in 1984 to meet 
debt service payments under the 1984 Paris Club agreed minute and 
subsequent agreed minutes. Sierra Leone reached Completion Point in 
2006, at which time all of its Paris Club debt was canceled.  Sierra 
Leone's central bank governor has asked the Paris Club to release 
the funds in the account so they can be directed to other government 
obligations.)  The United States said it was in the process of 
confirming whether it could agree to release the funds and promised 
to keep the Secretariat informed.  Italy said the Paris Club should 
urge Sierra Leone to use the funds for poverty reduction. 
 
-------------------- 
Litigating Creditors 
-------------------- 
 
¶19. (SBU) Creditors endorsed without controversy a working paper 
distributed by the Secretariat aimed at identifying concrete and 
practical options for countering aggressive litigating creditors. 
Ahead of the Paris Club meeting, G7 review of the Secretariat's 
paper had forged agreement on actions that fall clearly within Paris 
Club expertise.  Germany raised the possibility of broadening 
efforts to support non-HIPC countries, but the United States and 
other creditors agreed to keep the focus on HIPCs for now.  The 
Netherlands said it was important to look at data on actual assets 
seized, as opposed to judgments awarded, to have a better 
understanding of the scope of the problem.  Italy, the UK, and the 
United States commented that amicus briefs or supplements drafted by 
the Secretariat would not be useful in their domestic courts. 
Australia and Canada stressed the importance of distinguishing 
so-called "vulture funds" from legitimate claimants seeking to 
enforce their contracts rights.  Australia added that the notion of 
changing contract design was problematic.  The United States stated 
that the Secretariat's reference to modifying legislation to limit 
amounts awarded to litigating creditors was a non-starter. 
Australia agreed that new legislation would likely be a non-starter. 
 
 
¶20. (U) The Secretariat committed to: (1) coordinate any debt 
management technical assistance with other organizations; (2) 
initiate a survey (at U.S. suggestion) of creditors' national 
legislation regarding the protection of sovereign assets, including 
central bank assets; (3) renew outreach to non-Paris Club creditors, 
including China; and (4) invite the legal team that defended Zambia 
against Donegal to brief the Paris Club at the September session. 
 
------------------------------------ 
Return of Promissory Notes to Russia 
------------------------------------ 
 
¶21. (U) Russia reiterated its April request that creditors return 
promissory notes and bills of exchange that had been cancelled as a 
result of previous prepayment operations.  If the promissory notes 
cannot be located, Russia asked creditors to provide a letter to 
Russia listing all loan agreements covered.  Russia offered to 
provide a template that would meet its needs.  (Note: The United 
States does not hold any of these promissory notes and had 
previously provided Russia a letter acknowledging repayment of its 
debts.) 
 
----------------------- 
Spain's New HIPC Policy 
----------------------- 
 
¶22. (U) Spain announced its new policy to cancel all ODA and non-ODA 
debt contracted before 2004 for HIPC countries having reached 
completion point.  The new policy will result in 380 million euros 
in additional debt reduction, to be implemented through debt swaps 
(40%) and direct budgetary aid (60%). 
 
STAPLETON