VZCZCXRO3220
RR RUEHBZ RUEHGI
DE RUEHFR #0284/01 0571219
ZNR UUUUU ZZH
R 261219Z FEB 09
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 5612
INFO RUEATRS/DEPARTMENT OF TREASURY WASHDC
RUEKJCS/SECDEF WASHINGTON DC
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RUEHBUL/AMEMBASSY KABUL 0740
RUEHUM/AMEMBASSY ULAANBAATAR 0021

UNCLAS SECTION 01 OF 16 PARIS 000284 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EEB/IFD/OMA 
TREASURY FOR DO/IDD AND OUSED/IMF 
SECDEF FOR USDP/DSCA 
PASS EXIM FOR CLAIMS - MPAREDES 
PASS USDA FOR CCC -- ALEUNG/WWILLER/JDOSTER 
PASS USAID FOR CLAIMS -- WFULLER 
PASS DOD FOR DSCS -- PBERG 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EAID XM XA XH XB XF FR
SUBJECT:  PARIS CLUB - JANUARY 2009 TOUR D'HORIZON AND DISCUSSIONS 
ON METHODOLOGICAL ISSUES 
 
¶1. (SBU) Summary: During the January 2009 Paris Club Tour d'Horizon, 
creditors agreed to consider committing up front to a debt reduction 
for Seychelles, although they agreed that conditions should be 
stringent.  While Haiti's situation was challenging, the 
International Monetary Fund (IMF) believed that a review of Haiti's 
performance on its program under the Poverty Reduction Growth 
Facility (PRGF) could take place in February, with Completion Point 
later in 2009.  The IMF reported DRC's performance had been 
encouraging under very challenging circumstances and the Fund was 
proceeding with plans for a rapid access Exogenous Shock Facility 
and for a PRGF program around midyear.  The DRC has reportedly also 
made some progress renegotiating the proposed $9 billion Chinese 
loan package, but details were not available.  Guinea had been set 
to reach Completion Point in early 2009, with negotiations in March, 
but this had fallen away as a result of December's coup, with no 
current prospects for getting back on track.  The Club also 
discussed Afghanistan, Argentina, Burundi, Cote d'Ivoire, Ecuador, 
Grenada, Iraq, Mongolia, Serbia, and Sri Lanka. 
 
¶2. (SBU) Methodological issues discussed included outreach to 
non-Club creditors, the Club's Annual Report, and "new types of debt 
buyback offers and repayment profile adjustments to developing 
countries."  The U.S. delegation warned that elements of the 
proposed buyback options raised significant legal, budgetary and 
policy issues, and that the issue of comparability of treatment 
 
PARIS 00000284  002 OF 016 
 
 
clauses in voluntary operations needed to be resolved before the 
Club considers any more such operations. 
 
----------- 
Afghanistan 
----------- 
 
¶3. (SBU) The U.S. and others had asked to put Afghanistan on the 
agenda because of recent developments regarding the country's IMF 
program.  The IMF reported that the situation remained challenging, 
because of drought, increasing violence, and a weak government.  GDP 
was expected to grow 3.5% in the current fiscal year (ending 
sometime in March), with inflation above 30%.  Revenue collections 
were weak, in part because of the poor security situation, but also 
because of undervaluation of fuel imports and poor customs 
enforcement.  Performance on structural benchmarks was also poor. 
The February PRGF program review had consequently been delayed, but 
a mission would be leaving for Kabul toward the end of January and a 
review could take place in April or May if agreement were reached 
during the mission. 
 
¶4. (SBU) The Bank reported that under IDA 15, Afghanistan is set to 
receive $650 million during FY09-11, with $230 million in FY09, 
including $30 million in budget support.  There had been progress on 
triggers, but more effort was needed, including on tracking 
 
PARIS 00000284  003 OF 016 
 
 
poverty-reducing expenditures, mining, civil service reform and 
pensions.  PRSP implementation and macro performance were both weak, 
although the trigger on debt management had been met, with a 
contract having been concluded for a debt management system.  Debt 
reporting was on track, and even on a website, while Afghanistan had 
normalized relations with several creditors and been prudent with 
new borrowing. 
 
------- 
Burundi 
------- 
 
¶5. (SBU) Burundi's Completion Point remains on track, with Board 
decisions planned for late January and negotiations in March.  HIPC 
relief would be worth about $832 million in Net Present Value (NPV) 
terms, with the Multilateral Debt Relief Initiative (MDRI) adding 
another $117 million.  The ratio of NPV of public debt to exports 
would fall from 967% at end-2007 to 148% at end-2009.  Burundi would 
no longer be in debt distress, but would remain at high risk, 
needing grants and highly-concessional lending as well as a stronger 
export base. 
 
------------- 
Cote d'Ivoire 
------------- 
 
PARIS 00000284  004 OF 016 
 
 
 
¶6. (SBU) The IMF reported that the Board had discussed the 
preliminary HIPC document, which found the country eligible for HIPC 
under the revenue window on the basis of end-2007 data.  In response 
to Executive Directors' comments, the proposed triggers (e.g., 
public financial management, transparency) might be strengthened but 
also streamlined.  The Board had emphasized the importance of good 
performance under the EPCA program, if Decision Point were to be 
brought at the same time as the PRGF program. 
 
¶7. (SBU) The IMF did not yet have end-2008 data on which to judge 
performance, but it appeared that fiscal performance had been 
"mixed," with some cuts in spending on the new capital, declining 
oil and cocoa-related revenues, and issues relating to taxes on 
staples, meaning that the primary fiscal target may have been 
missed.  A mission was planned for early-February; it would review 
the EPCA performance through end-2008 and explore the PRGF and 2009 
budget.  If the mission's assessment were positive, a Board date 
could come in March, following financing assurances at the March 
Club meeting. 
 
¶8. (SBU) The Bank representative noted that the Board discussion of 
the preliminary paper had been a major step, but that significant 
challenges remained, including clearance of AfDB arrears and 
reaching agreement on the PRGF program and Completion Point 
 
PARIS 00000284  005 OF 016 
 
 
triggers.  Cote d'Ivoire had also recently requested $60 million 
from IDA's Debt Reduction Facility (DRF) to clear $827 million in 
commercial debt arrears.  The amount requested appeared not to match 
the need and the Bank was not sure whether the DRF could or should 
address just arrears, rather than the total commercial debt 
(estimated at $2.3 billion. 
 
--- 
DRC 
--- 
 
¶9. (SBU) The IMF reported that DRC had been subjected to major 
shocks - the international financial crisis, the collapse of metals 
prices, especially those of copper and cobalt, and the escalating 
conflict in the eastern part of the country.  As a result, revenues 
were less than expected and security expenditures higher, causing a 
deterioration in the fiscal position.  Inflation had risen, and the 
GDP growth estimate for 2008 lowered from 10% to 8%.  Given these 
issues, performance under the SMP had been broadly satisfactory, 
with end-September quantitative targets mostly met and good 
performance on structural benchmarks. 
 
¶10. (SBU) A December Fund mission had reached preliminary agreement 
on 2009 policies, which would include zero borrowing from the 
central bank, a fiscal deficit below 2.6% of GDP, and tight monetary 
 
PARIS 00000284  006 OF 016 
 
 
policy to reduce inflation to 12% by year-end (from 24% at 
end-2008), all in the context of growth estimated at 4.5% of GDP. 
Nevertheless, there was severe pressure from the deteriorated terms 
of trade - gross reserves were down to less than $100 million (one 
week of imports) and a $600m gap was projected for 2009, leading the 
Fund to examine a rapid access ESF program for 25% of quota ($200m). 
 While the World Bank and others would also help fill the balance of 
payments gap, the Fund expected further growth in bilateral arrears. 
 
 
¶11. (SBU) The IMF also reported good progress on resolving 
misreporting issues dating from 2005 spending, with an audit to be 
completed in February to confirm the government's remedial measures. 
 If resolved, the issue would be brought to the Board along with the 
ESF program, perhaps in late February or early March.  A PRGF 
program would not come before mid-2009, meaning that Completion 
Point would likely come no earlier than 2010. 
 
¶12. (SBU) The IMF reported the DRC and China had apparently agreed 
to drop the second infrastructure tranche (of $3 billion), and had 
initiated discussions on sovereign guarantees and concessionality, 
but no further details were available.  The Letter of Intent for the 
ESF would commit DRC not to proceed with the loan unless it was 
compatible with sustainability.  The World Bank representative had 
similar information, adding that Bank President Robert Zoellick had 
 
PARIS 00000284  007 OF 016 
 
 
raised the matter during a visit to China.  Construction of Phase I 
of infrastructure has apparently begun.  The Bank was also planning 
fast-track assistance under emergency procedures, with a late 
January/early February Board meeting planned for a $100 million 
program.  The Secretariat reported that a PRC firm had taken over a 
South African company's work on the mining feasibility study, which 
was due by end-March.  The Paris Club chair noted need for early 
international support for countries like the DRC, where officials' 
weak technical capacity made them ill-equipped to negotiate 
contracts with China. 
 
------- 
Ecuador 
------- 
 
¶13. (SBU) The discussion focused on Ecuador's recent bond default 
and the November 2008 public debt audit commission's report that 
purported to justify it.  The Secretariat observed that the 
Ecuadorian authorities had distanced themselves from the report's 
conclusions on the Club and mentioned the discussions relating to 
Ecuador's $50 million IDB loan.  The World Bank reported some delay 
in payment, but Ecuador has generally paid on time.  The Bank is 
reviewing disbursements and grants carefully; by June one operation 
and four trust funds will remain.  In a winding down strategy, the 
Bank approved the last operation in December 2007, but is watching 
 
PARIS 00000284  008 OF 016 
 
 
the macro impact of oil and other factors. 
 
------- 
Grenada 
------- 
 
¶14. (SBU) Grenada had requested an extension of its treatment to 
correspond with its Fund program, and at the December meeting the 
Club agreed to a U.S. suggestion that Grenada be asked to provide an 
update on comparable treatment before making a decision.  Grenada 
responded to the request, indicating that it was seeking comparable 
treatment from Taiwan, but that it had not approached Algeria and 
that it did not wish to request comparable treatment from Kuwait or 
Trinidad and Tobago, as they were both disbursing new loans - a 
clear violation of Grenada's obligations to the Club.  (Grenada also 
indicated that Libya had informally agreed to debt forgiveness, but 
that this had not been formalized; Libya was not billing, however, 
and Grenada was not paying.)  The U.S. argued that this information 
did not support an extension.  The UK asked about implications of 
not granting an extension.  The Secretariat stressed the language in 
the Agreed Minute which required Grenada to pursue comparability of 
treatment from its other creditors.  IMF said implications were 
limited and Grenada could manage if the Club denied the extension. 
 
 
 
PARIS 00000284  009 OF 016 
 
 
------ 
Guinea 
------ 
 
¶15. (SBU) In December, the IMF representative had reported that 
Guinea was on track for Completion Point in early 2009, with 
negotiations in March.  All that had changed as a result of the 
military coup following the death of President Conte.  The new 
ruling body blocked some mining operations, launched audits of 
ministries, lowered prices and promoted military personnel, 
presumably raising the wage bill.  The AU and ECOWAS condemned the 
coup and suspended GOG participation.  No data had been provided 
since the coup.  The Fund was unable to engage until members 
recognized the new regime, so delays on the PRGF and Completion 
Point were inevitable. 
 
----- 
Haiti 
----- 
 
¶16. (SBU) The IMF reported that there had been riots over food and 
fuel prices, forcing the Prime Minister to resign.  The four storms 
that hit Haiti in August and September had imposed losses estimated 
at 15% of GDP, and the U.S. and Canadian slowdowns were reducing 
exports and remittance flows.  As a result, the current account 
 
PARIS 00000284  010 OF 016 
 
 
deficit was higher than expected, 2.6% of GDP, although inflation 
had receded from 20% in September to 14% in November. Performance 
had actually been "broadly satisfactory," although for 2009 there 
was a pressing need to respond to the humanitarian crisis and to 
repair infrastructure damaged by the storms. Inflation was expected 
to be below 10% due to lower global food and fuel prices, but the 
balance of payments would be worsened by the loss of crops (60% of 
harvest destroyed) and by the need for higher fuel imports to supply 
new power plants. 
 
¶17. (SBU) The fourth review of Haiti's program would likely take 
place during the first half of February, with the fifth review and 
Completion Point in mid-2009.  There would also be a donors' 
conference towards the end of March 2009.  The Bank reported that 
progress on triggers was satisfactory, and had helped IDA increase 
interim debt relief. 
 
---- 
Iraq 
---- 
 
¶18. (SBU) The Secretariat reported that the final tranche of Iraq's 
treatment took effect on December 17, as agreed, and that the Club 
would issue a press release.   The Fund noted the very successful 
completion of Iraq's SBA, and reported that a mission in mid-March 
 
PARIS 00000284  011 OF 016 
 
 
would discuss a follow-on program.  The Bank indicated that an 
interim strategy note foresaw assistance of some $500 million, all 
from IBRD, since there had been current account and fiscal 
deterioration as a result of the fall in oil prices.  Creditors 
received Iraq's letter apologizing for problems with the first round 
of payments, which had been due on January 2. 
 
-------- 
Mongolia 
-------- 
 
¶19. (SBU) The IMF reported that Mongolia had performed well over the 
past few years, with growth averaging 9% per annum and per capita 
income doubling, driven by gold and copper mining.  The country had 
been running significant fiscal surpluses, and its debt had fallen 
from 51% of GDP at end-2004 to 24% at end-2007.  The boom had come 
to an abrupt end with the price of copper plunging 68% since July. 
There was pressure on the exchange rate, and a loss of confidence 
that had led to a bank run.  The fiscal situation was worsening, 
with revenues from minerals having fallen by fully 3% of GDP in 
2008, and expected to fall a further 6% of GDP in 2009.  The balance 
of payments shifted from a surplus of 2.7% of GDP in 2007 to a 
projected 9% deficit in 2009.  The country lost 40% of its reserves 
to just two and a half months of import cover.  A mission was in 
Ulaanbaatar to discuss a possible SBA in the next three weeks, but 
 
PARIS 00000284  012 OF 016 
 
 
revenue sources were hard to find.  The Bank, participating in the 
Fund mission and reprioritizing its support, believed that an 
additional $75 million in concessional resources was needed, of 
which the Bank could provide perhaps $10-15 million.  Additional 
support would be needed from other donors. 
 
------ 
Serbia 
------ 
 
¶20. (SBU) The Netherlands noted that Serbia's SBA was being 
discussed at the IMF the following day, and complained that the IMF 
paper had reported that "negotiations on settling remaining official 
external arrears are ongoing" and that "restructuring agreements 
were concluded with Paris and London Club creditors in 2001 and 
2004, respectively, and are being implemented."  Neither of these 
statements was true, according to the Netherlands, and the Serbs 
were acting in bad faith.  A tour de table revealed that a number of 
countries had not yet signed agreements with Serbia, although there 
were differences as to whether there were serious obstacles.  The 
Secretariat said it would draft a letter to send to the Serbian 
authorities. 
 
---------- 
Seychelles 
 
PARIS 00000284  013 OF 016 
 
 
---------- 
 
¶21. (SBU) The IMF reported that the country's program was being 
implemented "with determination," and that all December 2008 
quantitative indicators appeared to have been met.  The 2009 budget 
was in line with the program, although structural measures were 
still being implemented.  The slowdown had been worse than expected 
because of weak tourism, although inflation had increased from a 32% 
annual rate in October to 60% in November as a result of the 
depreciation, goods and services tax changes, and increases in 
managed prices.  The first review mission would head to Seychelles 
in the first half of February, with discussion of the results 
possibly in late March. The Bank reiterated its draft two-year 
interim strategy to provide budget support of $9 million in both 
2009 and 2010. 
 
¶22. (SBU) The Secretariat argued for stringent conditions, 
suggesting that the agreement cover three years and that it 
therefore be conditioned on a follow-up Fund program.  The 
Secretariat argued against upfront reduction, suggesting that the 
Club choose between reduction towards the end of the agreement or a 
three-phase agreement with entry into force conditioned in part on 
the progress made with private creditors.  Some creditors, including 
the U.S. delegation, were concerned about making decisions without 
adequate data and without a Debt Sustainability Analysis (DSA). 
 
PARIS 00000284  014 OF 016 
 
 
Germany went a step further, arguing that there was no clear need 
for a reduction, since IMF documents referred in some places to 
"reduction" and in others to "restructuring."  The UK agreed that 
conditionality would be crucial, but suggested the Seychelles could 
object to a requirement for a follow-up program because of elections 
in 2011.  After lengthy discussion, including a U.S. request that 
the IMF prepare several scenarios for the Club to consider, the Club 
provided four possible schedules to the Fund and requested DSAs for 
each.  These range from a two-year treatment with reduction at the 
first review and at the end of each year, to a four-year treatment 
with reduction at the ends of years 2, 3 and 4.  Negotiations are 
scheduled for March. 
 
--------- 
Sri Lanka 
--------- 
 
¶23. (SBU) The IMF representative reported little change in Sri 
Lanka's situation since December's pessimistic briefing, except that 
reserves had declined by a further $300 million.  The Bank indicated 
that some of its $318 million in planned assistance for FY09 could 
slip to FY10.  The Netherlands raised an arcane issue about the 
country's DSA - apparently authorities had not consented to 
publication of the most recent DSA, which had concluded that the 
country was at "high risk" of debt distress.   As a result, the 
 
PARIS 00000284  015 OF 016 
 
 
Fund's website still listed the country at "moderate risk," based on 
the previous DSA. 
 
----------------------------------- 
Methodological Discussion: Outreach 
----------------------------------- 
 
¶24. (SBU) There was a lengthy discussion of outreach to non-Paris 
Club creditors following a working paper and letter circulated by 
the Secretariat.  Germany began with a strong view that the Club 
should carefully examine the claim structure and behavior of 
creditors before proceeding.  The Secretariat replied that it had 
two aims - improving data flow and increasing the provision of 
comparable treatment.  It particularly asked members for their views 
on allowing three "category 1" creditors - Brazil, Israel and Korea 
- to participate fully in tours d'horizon, including methodology 
discussions. 
 
¶25. (SBU) Most creditors agreed that the Club should remain 
flexible, considering steps and invitations on a case-by-case basis. 
 All creditors agreed that asking creditors to share data was a good 
first step, but the U.S. - supported by Belgium and Germany - 
successfully argued that it was premature to invite full 
participation in tours (in particular, the methodology discussions), 
and that the Club should first examine Brazil, Israel and Korea's 
 
PARIS 00000284  016 OF 016 
 
 
responses on data sharing and their record on providing comparable 
treatment. 
 
-------------------------- -------------------------------- 
Methodological Discussion: New Types of Debt Buyback Offers 
and Repayment Profile Adjustments to Developing Countries 
------------------------ ---------------------------------- 
 
¶26. (SBU) The Secretariat suggested new kinds of treatment that the 
Club might provide, and changes to Club methodology in estimating 
market prices used in buybacks. It also suggested the Club consider 
embedding prepayment options in reschedulings and willingness to 
help smooth payments for countries managing their debts. The 
embedding option was not well received, with many creditors arguing 
that it would add another level of complexity to negotiations; the 
idea was shelved.  There was more openness to the payment-smoothing 
proposal, although creditors generally stated that they needed more 
time to consider the idea.  The U.S. raised significant concerns 
about both embedding and smoothing, noting that they raised 
significant legal, budgetary and policy issues.  The U.S. also 
called for resolution of comparability of treatment clauses in 
voluntary buybacks and prepayments before any future buyback 
operation. 
 
PEKALA