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TO RUEHC/SECSTATE WASHDC 0384
INFO RUEATRS/DEPARTMENT OF TREASURY WASHDC
RUEKJCS/SECDEF WASHDC
RUEHRL/AMEMBASSY BERLIN 6676
RUEHSW/AMEMBASSY BERN 2030
RUEHBS/AMEMBASSY BRUSSELS 6509
RUEHCP/AMEMBASSY COPENHAGEN 1500
RUEHLO/AMEMBASSY LONDON 6703
RUEHMD/AMEMBASSY MADRID 2713
RUEHMO/AMEMBASSY MOSCOW 5974
RUEHNY/AMEMBASSY OSLO 1521
RUEHRO/AMEMBASSY ROME 8603
RUEHSM/AMEMBASSY STOCKHOLM 1551
RUEHTC/AMEMBASSY THE HAGUE 2888
RUEHKO/AMEMBASSY TOKYO 2566
RUEHBS/USEU BRUSSELS 2083
RUEHBUL/AMEMBASSY KABUL 0542
RUEHLU/AMEMBASSY LUANDA 0882
RUEHPL/AMEMBASSY PORT LOUIS 0908
RUEHLC/AMEMBASSY LIBREVILLE 1253
RUEHWN/AMEMBASSY BRIDGETOWN 0289
RUEHGB/AMEMBASSY BAGHDAD 0666
RUEHAM/AMEMBASSY AMMAN 1016
RUEHMV/AMEMBASSY MONROVIA 7293
RUEHBW/AMEMBASSY BELGRADE 0862
RUEHFN/AMEMBASSY FREETOWN 0484

UNCLAS PARIS 003994 
 
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 - SEPTEMBER 2007 TOUR D'HORIZON 
 
¶1.  (SBU) Summary:  At the Paris Club's September 12 Tour d'Horizon, 
creditors welcomed in principle Jordan's proposal to buy back debt 
and generally supported the Secretariat's assessment of a 6-8 
percent market discount.  In a significant move, the Secretariat and 
creditors agreed with the U.S. position that the comparability of 
treatment clause needs to be adapted for early repayment agreements 
to preserve the debtor's right to make subsequent early repayment 
offers.  Russia said it had no news to report on its bilateral 
agreement with Iraq.  The Netherlands postponed formal replies to 
the IMF's request for financing assurances for Liberia's IMF 
program, pending a September 14 IMF Board discussion and citing 
concerns that Liberia was not negotiating in good faith with its 
private creditors.  In a special presentation on so-called "vulture 
funds," UK attorney Janet Legrand briefed creditors on her 
experience defending Zambia (a HIPC) against Donegal International's 
aggressive litigation tactics.  Paris Club creditors also discussed 
relations with Angola, Antigua and Barbuda, Argentina, Central 
African Republic, Congo-Brazzaville, Ecuador, Gabon, Grenada, and 
Serbia and Montenegro, and a UK proposal on the monetization of 
Paris Club claims.  End Summary. 
 
 
------ 
Angola 
------ 
 
¶2.  (U) The Secretariat reported that Paris Club Chairman Musca had 
spoken with Angolan Vice Finance Minister de Morais (no relation to 
Finance Minister de Morais) and reiterated that creditors were 
willing to show some flexibility on late interest.  De Morais said 
his government had some questions about the late interest data 
provided by the Secretariat.  Sweden and the Netherlands still 
reported some overpayments.  The Secretariat informed creditors that 
further data reconciliation work was necessary, but that the 
situation was evolving in the right direction. 
 
------------------- 
Antigua and Barbuda 
------------------- 
 
¶3.  (U) The Secretariat circulated a draft letter urging the 
authorities to clear their arrears as soon as possible and stressing 
the importance of equity of treatment among Paris Club creditors and 
the need for an IMF program if the country seeks a Paris Club debt 
treatment.  Antigua and Barbuda owes the Paris Club $100 million, of 
which nearly half is in arrears.  The U.S. is the third largest 
creditor with $17 million in claims.  The IMF said the authorities 
have hired advisers to look into restructuring external debt, but 
have no interest in an IMF program.  The Secretariat said creditors 
could decide at a later stage that the country has no prospect of 
relations with the IMF and Paris Club, in which case the next step 
would be to consider terms of reference that would establish a 
common framework for bilateral negotiations. 
 
--------- 
Argentina 
--------- 
 
¶4.  (U) The Secretariat expressed hope that new Argentine Economy 
Minister Peirano's recent letter signifies a new phase in the effort 
to normalize financial relations with the Paris Club.  In the 
letter, Peirano announced that Argentina's Secretariat of Finance 
will be strengthened through the creation of a working group headed 
by Javier Augusto Alvaredo, who will be the point person on Paris 
Club issues.  The Secretariat also noted recent comments from 
Dominique Strauss-Kahn to journalists that Argentina should either 
tap its $43 billion in official reserves to pay its Paris Club debt, 
or reach an agreement with the IMF and seek a restructuring in the 
Paris Club. 
 
------------------------ 
Central African Republic 
------------------------ 
 
¶5.  (U) The IMF said CAR's performance on its macroeconomic reform 
program under the IMF's Poverty Reduction and Growth Facility has 
been satisfactory.  On September 28 and 29, respectively, the IMF 
and World Bank's Executive Boards are scheduled to discuss CAR 
reaching "Decision Point" under the Enhanced Heavily Indebted Poor 
Countries Initiative (HIPC).  An October 2007 pledging conference is 
expected to take place in Brussels.  The Fund calculates that all of 
CAR's creditors will need to reduce their claims by 68 percent -- 
the common reduction factor -- to bring CAR's debt to sustainable 
levels.  Germany asked about CAR's earlier plans for a $92 million 
bond issue.  The Fund said the authorities decided to drop the idea 
after staff conveyed their concerns. 
 
----------------- 
Congo-Brazzaville 
----------------- 
 
¶6.  (U) The IMF said discussions with the authorities on a new 
Poverty Reduction and Growth Facility (PRGF) program could resume by 
the end of the year, noting that a staff-monitored program was 
approved in June 2007 and an IMF staff mission was currently 
underway.  Italy was concerned that new PRC lending was posing a 
threat to debt sustainability.  The IMF said the Congolese 
parliament ratified a loan in 2006 for the purchase of three Chinese 
airplanes.  The loan was on non-concessional terms and required a 
waiver at the time of the second review of the PRGF.  The IMF did 
not have any information about any new loans that may have been 
contracted with China but agreed to research the matter further and 
provide an update at the October 2007 Paris Club meeting. 
 
------- 
Ecuador 
------- 
 
¶7.  (U) The Paris Club expressed no interest in Ecuador's proposal, 
sent on a bilateral basis to some creditors, to carry out debt swaps 
in exchange for a commitment not to develop its oil fields.  (The 
GOE estimates that the oil fields could potentially yield $700 
million per annum, and it wants donors to compensate Ecuador for at 
least 50 percent of that amount.)  The Secretariat opined that the 
proposal was consistent with the debt swap provisions of Ecuador's 
prior Paris Club agreements, noting that creditors would decide 
bilaterally about individual participation.  Italy questioned 
whether it was appropriate to discuss creditors' interest at this 
juncture since Ecuador had not sent its proposal to the Paris Club. 
 
----- 
Gabon 
----- 
 
¶8.  (U) Regarding Gabon's proposed buyback agreed in July 2007, the 
IMF said it did not have any information at this time about the 
extent to which recent financial market turbulence may have affected 
Gabon's plans to borrow money in regional and international markets 
to finance the partial buyback, at a discount, of its Paris Club 
debt.  The Secretariat asked the IMF to follow up on this question 
during the October Paris Club meeting.  A Fund mission is headed to 
Libreville at the end of September.  Brazil reported receiving a 
letter from the authorities asking Brazil to participate in the 
buyback and provide additional relief through debt swaps, similar to 
what France provided, in order to increase the overall discount from 
15 percent to 20 percent.  The Netherlands and Italy said they had 
received similar letters but had no intention of engaging in debt 
swaps.  The UK had not received such a letter but indicated it will 
participate in the discounted buyback operation.  The U.S. and Japan 
reported arrears ($500,000 and 21 million Japanese yen, 
respectively) that they expect to be cleared before the buyback 
takes place. 
 
------- 
Grenada 
------- 
 
¶9.  (U) The Secretariat circulated a draft letter to the authorities 
informing them that the second phase of Grenada's 2006 Paris Club 
agreement, covering maturities falling due in calendar year 2007, 
has not entered into force.  In the letter, creditors urge the GOG 
to make the necessary reform efforts to allow the IMF to complete 
its first review of Grenada's program under the Poverty Reduction 
and Growth Facility, which is the condition for resuming debt 
relief. 
 
---- 
Iraq 
---- 
 
¶10.  (SBU) Despite some limited expectations prior to the plenary 
session that Russia would announce the imminent conclusion of the 
long-delayed agreement, the Russian delegation said it had no news 
to report on its bilateral agreement with Iraq.  Russia gave no 
further explanation, other than to restate the "cautious optimism" 
Deputy Finance Minister Storchak expressed, at the August 6 signing 
of the Russia-Afghanistan bilateral debt agreement, that the 
agreement with Iraq could be concluded by the end of the year. 
 
------ 
Jordan 
------ 
 
¶11.  (SBU) The U.S. delegation congratulated Jordan on its strong 
economic reform initiatives and wished it continued success in 
strengthening its economy through sound policies.  In that context, 
the U.S. expressed strong support for Jordan's efforts to improve 
its debt management.  The U.S. noted Jordan's plans to use 
privatization proceeds and favorable market conditions to retire and 
refinance some of its debt to smooth payment streams and reduce 
exchange rate risks, and encouraged other creditors to participate 
in Jordan's proposal to buy back its Paris Club debt at a 
market-based discount, while noting we had legal constraints on 
participation.  The IMF said Jordan's macroeconomic performance 
remains strong and expressed support for the buyback operation, 
noting that current data on privatization proceeds were consistent 
with Jordan's claim that $1 billion, combined with as yet 
unspecified new grants and concessional loans from Arab Gulf 
countries, would be available to finance the buyback. 
 
¶12.  (SBU) The Secretariat explained its methodology for estimating 
a market discount on Jordan's debt and called for the GOJ to provide 
a formal proposal of the discount it seeks.  Many creditors welcomed 
Jordan's proposal in principle and agreed with the Secretariat's 
analysis that a 6-8 percent discount would be appropriate.  Germany 
and the UK said they had met with Jordan's financial advisers, who 
disputed the Secretariat's methodology for determining the 
appropriate market spread.  The advisers said that other 
circumstances needed to be taken into account, including interest 
rates of 10-11 percent on domestic debt, which would lead to a 
larger discount. 
 
¶13.  (SBU) The announced positions of the five largest creditors 
were as follows: 
 
-- The U.S. and Japan expressed support for the buyback, but 
indicated they could not accept discounted buybacks for legal 
reasons. 
 
-- France said it was inclined to participate, depending on the 
price. 
 
-- The UK said it was almost certain to participate if the discount 
was between 6-8 percent and might have some flexibility beyond that 
range. 
 
-- Germany said it was inclined to participate, depending on the 
price. 
 
------- 
Liberia 
------- 
 
¶15.  (SBU) The Netherlands delayed formal responses to the IMF's 
request for financing assurances, pending the September 14 IMF 
Executive Board discussion and, in particular, citing concerns that 
Liberia was not negotiating in good faith with its private 
creditors.  The Netherlands argued that the longer Liberia waits to 
negotiate with its private creditors, the more likely those 
creditors will free ride on Paris Club debt relief and hold out for 
better terms.  The IMF said the Liberian finance minister had, in 
fact, met with private creditors in New York, and that the talks 
were constructive.  The World Bank added that its International 
Development Association (IDA) had begun the process of preparing a 
buyback of Liberia's debt to commercial creditors under the IDA's 
Debt Reduction Facility.  The U.S., Denmark, Germany, Italy, Sweden, 
and the UK all said they were prepared to provide financing 
assurances immediately.  Japan said it would go along with the 
consensus but would prefer to wait for the outcome of the September 
14 discussion on financing modalities for arrears clearance.  The 
Secretariat agreed to use a written procedure to obtain financing 
 
SIPDIS 
assurances after the discussion.  (Note:  At the September 14 IMF 
meeting, Executive Directors approved the G-8 arrears clearance 
plan, although approximately $140 million remain to be pledged to 
fully finance the operation.  End Note.) 
 
--------------------- 
Serbia and Montenegro 
--------------------- 
 
¶16.  (U) Japan reported that it had reached a compromise with Serbia 
and Montenegro to apportion the debt between the two countries in a 
way that is consistent with the debtor/guarantor principle.  Germany 
said it had also concluded an agreement with the authorities in 
accordance with the debtor/guarantor principle.  Encouraged by these 
successes, the Netherlands, Sweden, and Switzerland said they were 
willing to hold off on sending a letter to the newly appointed 
Serbian finance minister.  The Paris Club will review the situation 
in November. 
 
--------------------------------------------- --- 
Comparability of Treatment in Buyback Agreements 
--------------------------------------------- --- 
 
¶17.  (SBU) The U.S. produced significant movement on the issue of 
comparability of treatment.  Following circulation of the U.S. 
working paper, the Secretariat and a surprising number of creditors 
(Belgium, Canada, Japan, Netherlands, Germany, and Russia) supported 
the U.S. position that the COT clause needs to be adapted for early 
repayment agreements to preserve the debtor's right to make 
subsequent early repayment offers.  (Japan circulated a separate 
working paper based largely on the U.S.' ideas.)  Canada and Spain 
proposed a compromise solution whereby those creditors that 
participate in an early repayment offer at market value would 
receive compensation if the debtor proposed a subsequent early 
repayment offer above market value.  The U.S. and Canada asserted 
that compensation should be contemplated only during a limited 
length of time as determined on a case-by-case basis during the 
initial buyback negotiation.  Details still need to be worked out 
regarding the time period during which the debtor would be obligated 
to provide compensation.  This movement toward a compromise solution 
represented a positive development that may allow the U.S. to sign 
buyback agreements in the future. 
 
--------------------------------------------- --- 
Methodological Discussion:  Litigating Creditors 
--------------------------------------------- --- 
 
¶18.  (U) Janet Legrand, an attorney from the law firm of DLA Piper, 
provided a detailed account of the highly publicized case of Donegal 
International Limited vs. the Republic of Zambia, in which Donegal 
attempted to sue Zambia for $55 million based on a claim purchased 
from Romania for $3.2 million.  Legrand's presentation shed light on 
the secretive activities of so-called "vulture funds" against HIPC 
countries and offered several insights for Paris Club creditors 
interested in addressing this problem. 
 
¶19.  (U) Strengthen Capacity Building:  Legrand said there were many 
steps the Zambian authorities could have taken to help defend 
themselves, and that Zambia's early legal missteps, such as waiving 
its sovereign immunity and accepting the British Virgin Islands' 
jurisdiction over Donegal's claims, severely weakened Zambia's 
position.  Since internal corruption usually plays a significant 
role in vulture fund cases, according to Legrand, measures to 
promote transparency and good governance can be part of the 
solution.  Highlighting her cooperation with the African Development 
Bank, Legrand noted that seminars to train finance ministers and 
attorneys general would be useful.  Funding travel for such 
technical assistance could be one way for donors to address the 
threat of litigating creditors. 
 
¶20.  (U) Expert Testimony can be Helpful:  In the case of Zambia, 
where there were questions surrounding the legitimacy of the debt, 
expert testimony on the HIPC initiative by a former IMF general 
counsel proved very damaging to Donegal's case that Zambia was 
simply unwilling to pay its debts.  However, Legrand said expert 
testimony on the HIPC initiative would probably have no impact in a 
situation where the debt is recognized to be legitimate. 
 
¶21.  (U) "Vulture Funds" Dislike Publicity:  Legrand underscored how 
the attention of media and non-governmental organizations was an 
effective weapon in the case of Zambia, since Donegal did not want 
to draw public scrutiny of its activities.  Distinguishing a 
"Vulture Fund" from a legitimate litigating creditor, however, can 
be difficult.  Donegal was an extreme case.  Legrand said there are 
many other organizations that seek to make a financial return by 
buying and selling distressed debt, but whose objective is not to 
bleed a country dry. 
 
¶22.  (U) Legrand declined to comment on the scope of problem of 
litigating creditors against HIPC countries, saying she didn't have 
hard numbers.  But she warned that there was a potential for the 
problem to grow given the magnitude of the potential financial 
returns.  Despite Donegal's failure to collect the full $55 million 
sought, Zambia is paying Donegal on a judgment of $15.7 million for 
claims Donegal originally purchased for $3.2 million. 
 
--------------------------------- 
Methodological Discussion: 
Monetization of Paris Club Claims 
--------------------------------- 
 
23.(U) The UK's Export Credits Guarantee Department (ECGD) presented 
a proposal it is studying to improve the management of a limited 
portion of its non-HIPC Paris Club debt through monetization. The 
ECGD arrangement would transfer to a private commercial bank a 
proportion of the cash flows it receives from the debtor country. 
In exchange, ECGD would conclude a sub-participation agreement with 
the private bank and receive a discounted cash settlement.  ECGD 
would remain the lender of record (consistent with Paris Club 
principles) and would retain control over the implementation and any 
renegotiation of the debt agreements in the Paris Club.  Provided 
that HIPC claims were excluded, the Secretariat expressed general 
support for the UK's concept of monetization, noting that creditors 
must adhere to the guidelines of the 1999 Working Paper on 
securitization of Paris Club claims.  Unlike securitization, 
however, monetization would be a private transaction that would not 
involve the issuance of any notes or paper.  The Secretariat and 
Japan expressed concern that, under the scheme described, the 
sub-participant could influence the UK's positions at the Paris Club 
concerning debt relief.  The ECGD asserted that the sub-participant 
would bear all risks (the price of which were reflected in the 
discounted cash settlement) associated with the particular repayment 
stream the bank took over, including the risk of a future Paris Club 
action. 
 
STAPLETON