VZCZCXRO2314
RR RUEHBZ RUEHGI
DE RUEHFR #0643/01 1321558
ZNR UUUUU ZZH
R 121558Z MAY 09
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 6215
INFO RUEATRS/DEPARTMENT OF TREASURY WASHDC
RUEKJCS/SECDEF WASHINGTON DC
RUEHAB/AMEMBASSY ABIDJAN 1416
RUEHGB/AMEMBASSY BAGHDAD 0308
RUEHRL/AMEMBASSY BERLIN 7022
RUEHSW/AMEMBASSY BERN 2257
RUEHBS/AMEMBASSY BRUSSELS 7018
RUEHCP/AMEMBASSY COPENHAGEN 1711
RUEHLO/AMEMBASSY LONDON 7161
RUEHMD/AMEMBASSY MADRID 3010
RUEHMO/AMEMBASSY MOSCOW 6380
RUEHNY/AMEMBASSY OSLO 1762
RUEHQT/AMEMBASSY QUITO 0576
RUEHRO/AMEMBASSY ROME 9124
RUEHSM/AMEMBASSY STOCKHOLM 1777
RUEHTC/AMEMBASSY THE HAGUE 3157
RUEHKO/AMEMBASSY TOKYO 2986
RUEHBS/USEU BRUSSELS 2593
RUEHLU/AMEMBASSY LUANDA 1096
RUEHGI/AMEMBASSY BANGUI 0413
RUEHRY/AMEMBASSY CONAKRY 0232
RUEHBZ/AMEMBASSY BRAZZAVILLE 0320
RUEHAM/AMEMBASSY AMMAN 1333
RUEHMV/AMEMBASSY MONROVIA 7522
RUEHTH/AMEMBASSY ATHENS 0898
RUEHKI/AMEMBASSY KINSHASA 1823
RUEHLC/AMEMBASSY LIBREVILLE 1559
RUEHPU/AMEMBASSY PORT AU PRINCE 1012
RUEHPC/AMEMBASSY LOME 1281
RUEHBU/AMEMBASSY BUENOS AIRES 1723
RUEHKH/AMEMBASSY KHARTOUM 0474
RUEHWR/AMEMBASSY WARSAW 0984
RUEHBR/AMEMBASSY BRASILIA 2227
RUEHCH/AMEMBASSY CHISINAU 0536
RUEHJB/AMEMBASSY BUJUMBURA 0261
RUEHBJ/AMEMBASSY BEIJING 1983
RUEHUL/AMEMBASSY SEOUL 1713
RUEHAK/AMEMBASSY ANKARA 1110
RUEHTV/AMEMBASSY TEL AVIV 0170
RUEHSA/AMEMBASSY PRETORIA 1802
RUEHKU/AMEMBASSY KUWAIT 0359
RUEHAD/AMEMBASSY ABU DHABI 0392
RUEHPL/AMEMBASSY PORT LOUIS 1133
RUEHPS/USOFFICE PRISTINA
RUEHIL/AMEMBASSY ISLAMABAD 0925
RUEHDJ/AMEMBASSY DJIBOUTI 0077
RUEHBH/AMEMBASSY NASSAU 0197
RUEHDK/AMEMBASSY DAKAR 1655
RUEHWN/AMEMBASSY BRIDGETOWN 0376
RUEHLM/AMEMBASSY COLOMBO 0373
RUEHUB/USINT HAVANA 0205
RUEHBUL/AMEMBASSY KABUL 0788
RUEHUM/AMEMBASSY ULAANBAATAR 0055

UNCLAS SECTION 01 OF 16 PARIS 000643 
 
 
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 - APRIL 2009 TOUR D'HORIZON AND DISCUSSIONS ON 
METHODOLOGICAL ISSUES 
 
THIS MESSAGE REPLACES PARIS 0629 TEXT WHICH WAS SENT IN ERROR 
 
¶1. (SBU) Summary: During the April Paris Club meeting, the IMF 
reported Afghanistan's PRGF was back on track.  Some creditors 
expressed a willingness to extend Afghanistan's debt treatment, but 
Russia noted some 'technical problems.'  The World Bank and the Fund 
had approved Cote d'Ivoire's decision point under the Heavily 
Indebted Poor Country (HIPC) initiative; negotiations with the Club 
are expected in May.  The Fund and Democratic Republic of Congo 
(DRC) authorities reported being close to an agreement on a new PRGF 
program, with the proposed $9 billion loan from China the major 
outstanding issue.  The IMF does not expect the DRC to complete the 
HIPC initiative before 2010.  Grenada had not provided the 
information needed to resolve the comparability of treatment issue. 
Moldova was seeking a successor program to the PRGF program that 
expires in May, and may need additional treatment from the Club. 
 
¶2. (SBU) In the discussion of Mongolia, despite assurances given by 
the Fund in advance of the April 1 program approval, Russia and 
Finland indicated that they were not making progress on resolving 
outstanding arrears problems.  The IMF did not envision a Club 
treatment for Sri Lanka, although the authorities and the Fund 
appeared close to agreement on a program.  An Article IV mission had 
returned from Zimbabwe and found the economic situation to have 
 
PARIS 00000643  002 OF 016 
 
 
worsened dramatically, with GDP less than half its 2000 level, and 
poverty and unemployment at "catastrophic" levels.  Preliminary data 
indicate a very heavy debt burden, with large arrears.  The Club 
also discussed methodological issues, including debt sustainability, 
seniority, the upcoming June meeting with the private sector, and 
proposed changes to the Club's website and logo.  Negotiations, 
pathbreaking in some ways, gave Seychelles a treatment under the 
Evian Approach. End Summary. 
 
----------- 
Afghanistan 
----------- 
 
¶3. (SBU) IMF staff reported that the February IMF review had been 
postponed to April 22.  (Note:  the IMF Executive Board approved the 
review and PRGF program extension as expected.)  Afghanistan had 
implemented the prior actions the Fund had sought, and revenue 
collections had risen since January.  Prudent fiscal policy in 
FY08-09 led to disinflation, although a drought had cut growth and 
caused commodity prices to rise.  Agricultural output was expected 
to recover in the new fiscal year, with 9 percent growth projected. 
Major risks from the security situation, especially during the 
August elections remained, however. 
 
 
PARIS 00000643  003 OF 016 
 
 
¶4. (SBU) The GIROA requested an extension and re-phasing of its 
program under the Poverty Reduction Growth Facility (PRGF), with a 
sixth review in the fall and a new seventh review in March 2010. 
Completion Point could come before the end of 2009, possibly at the 
same time as the sixth review.  The World Bank reported Afghanistan 
was making strong efforts to reach Completion Point, including 
trying to complete by late summer a report on the Afghan National 
Development Strategy that serves as its Poverty Reduction Strategy 
Paper (PRSP). 
 
¶5. (SBU) The U.S. drew attention to the fact that Afghanistan's 
Paris Club treatment had expired at the end of March, but expressed 
a willingness to extend the treatment, and make it retroactive to 
April 1, 2009.   The IMF indicated that it expected the authorities 
to make the request soon.  Germany agreed with the U.S. proposal, 
but Russia (the only other creditor) stated that it had a "small 
technical problem" relating to an interbank technical agreement, and 
that it could not commit at this time.  The Co-Chairman asked the 
Russian delegation to discuss the problem with the Secretariat and 
hoped it would not be an obstacle. 
 
---------------------------------- 
Democratic Republic of Congo (DRC) 
---------------------------------- 
 
PARIS 00000643  004 OF 016 
 
 
 
¶6. (SBU) The IMF reported that an Article IV mission had just 
returned from Kinshasa.  Its main findings were that the economic 
situation had deteriorated due to the external environment, with GDP 
growth expected to be only 2.5 percent in 2009, down from 6 percent 
in 2008.  The fiscal situation had deteriorated, with revenues 
having fallen with commodity prices, and expenditures rising as the 
government attempted to protect key programs, such as inputs for 
health and education, from inflation.  As for DRC efforts to 
renegotiate the proposed China loan, there appeared to be two 
factions pulling in different directions, leading to mixed signals. 
The feasibility study was now expected by late April.  The DRC would 
need a couple of months for discussions with the Chinese. 
 
¶7. (SBU) It was unlikely that a PRGF program would be in place in 
time for a review in 2009, so HIPC Completion Point would be very 
unlikely before 2010.  The World Bank reported that there was a 
great deal of pressure to maintain real wages and living standards, 
and that the central government might be unable to make scheduled 
transfers to the regions. 
 
------------- 
Cote d'Ivoire 
------------- 
 
PARIS 00000643  005 OF 016 
 
 
 
¶8. (U) The Fund and Bank approved Cote d'Ivoire HIPC Decision Point 
on March 27 and 31, respectively.  Negotiations with the Club are 
expected on May 14. 
 
¶9. (SBU) The Fund reported that external public and publicly 
guaranteed debt totaled $14.3 billion at end-2007, of which 
approximately half was owed to Club members, 28 percent to 
multilaterals and 22 percent to commercial creditors.  Cote d'Ivoire 
could expect to receive about $3 billion (net present value) of 
total debt relief through the HIPC initiative; the Paris and London 
Clubs had already provided about 55 percent of this amount.  The 
African Development Bank (AfDB) and the World Bank's International 
Development Association (IDA) had provided HIPC treatment through 
their arrears clearances, plans were in place with other 
multilaterals, and discussions ongoing with the London Club. 
 
¶10. (SBU) The Secretariat also reported on Cote d'Ivoire's meetings 
with the private sector in mid-March.  The authorities had proposed 
cancellation of 90 percent of the $900 million in arrears, with the 
remainder to be paid with funds from IDA's Debt Reduction Facility. 
Private sector creditors had thought the proposal ambitious; some 
felt they should not have to cancel more debt, given that they had 
already provided substantial relief. 
 
PARIS 00000643  006 OF 016 
 
 
 
------- 
Grenada 
------- 
 
¶11. (SBU) The Secretariat reported that it had still not been able 
to get a clear response from Grenada's authorities as to whether the 
loans from Kuwait had been to the central government or to 
parastatals.  The UK reported that its notes from Grenada's PC 
negotiations indicated that the Club had agreed that the Kuwaiti 
debts did not need to be treated, but were not clear about loans 
from Trinidad and Tobago.  The Secretariat will continue to pursue 
and provide an update in May. 
 
¶12. (SBU) The IMF reported that the economic situation had 
deteriorated significantly, with GDP expected to fall in 2009 due to 
declines in tourism (expected to fall by 3 percentage points of GDP) 
and remittances (-10 percent).   The import bill would be lower due 
to moderated food and fuel prices, but the offset would be only 
partial.  As a result the country faced a financing gap of $11 
million in 2009.  It had requested that its PRGF be augmented by $6 
million, leaving a gap of $5 million, which extension of Club 
treatment could help fill.  The Bank indicated that the country was 
also seeking more support from the IBRD. 
 
PARIS 00000643  007 OF 016 
 
 
 
--------------- 
Kyrgyz Republic 
--------------- 
 
¶13. (SBU) The IMF reported strong performance over the previous few 
years, but the outlook had worsened due to food and fuel price 
shocks in 2008, and more recent shocks to trade, remittances and 
financial flows resulting from the global crisis.  The Fund had 
approved a high access Exogenous Shock Facility (ESF) program in 
December after earthquakes and water shortages.  End-2008 conditions 
were met, and budget support from Russia would more than cover gaps. 
 
 
¶14. (SBU) The country's debt indicators had improved dramatically, 
with public debt (most of which is external) having fallen below 50 
percent of GDP, from 100 percent in 2004.  The authorities had not 
raised the possibility of seeking HIPC debt relief since they had 
been told that they could not receive treatment under the 
Multilateral Debt Relief Initiative (MDRI) without HIPC, and it was 
uncertain whether the country still met the indebtedness 
benchmarks. 
 
¶15. (SBU) The Co-Chairman asked Russia to brief on its bilateral 
 
PARIS 00000643  008 OF 016 
 
 
agreement.  Russia indicated that it had signed a $193 million 
agreement in March, of which $20-21 million was in debt-for-equity 
swaps (state-owned assets, SOE machinery, real estate), while the 
rest would be written off.   The Secretariat opined that the Russian 
agreement fell within scope of the March 2005 Paris Club Agreed 
Minute with the Kyrgyz Republic, which permits debt swaps up to 20 
percent of the amount of each creditor's total claims. 
 
------- 
Moldova 
------- 
 
¶16. (SBU) The IMF reported that Moldova had been hit hard by the 
crisis, leading to a collapse of its export markets, foreign direct 
investment (FDI) and remittance flows.  Bank lending had essentially 
stopped, and financial institutions were under stress.  The central 
bank had lost one third of its reserves defending the Leu, while 
spending - especially on wages and pensions - had risen in 
anticipation of elections, leading to a projected fiscal deficit of 
9 percent of GDP in 2009. 
 
¶17. (SBU) Moldova requested a successor PRGF program to its current 
one, which expires in May.  Discussions were at an early stage and 
further Club treatment may be necessary.  The Secretariat launched a 
 
PARIS 00000643  009 OF 016 
 
 
data call.  The IMF will provide an update in May. 
 
-------- 
Mongolia 
-------- 
 
¶18. (SBU) The Club last discussed Mongolia in January; on April 1 
the Fund Board had approved an 18 month Stand-By Arrangement (SBA) 
for $229 million, with $76 million available immediately.  The 
program, the Fund reported, was designed to restore government 
finances, allow the exchange rate to adjust, increase confidence in 
the banking system, and protect the poor.  The IMF's debt 
sustainability analysis indicated that Mongolia was at low risk of 
debt distress; its problem was illiquidity.  A recent donors' 
conference raised pledges of $160 million in budget support for 
2009-10 from Japan, Australia and the Multilateral Development Banks 
(MDBs).  The World Bank added that it expected the remaining deficit 
to be covered as other donors defined their plans over the next few 
months.  An interim strategy paper will go to the Bank's Board in 
late May.  The country is not expected to come to the Club for debt 
treatment. 
 
¶19. (SBU) The IMF noted that it cannot lend into arrears, without at 
least a payment plan or process.  Fund staff had obtained 
 
PARIS 00000643  010 OF 016 
 
 
information from Mongolia, and the Russian and Nordic Executive 
Directors had permitted the program to proceed.  While the Fund did 
not consider disputed amounts to be arrears, for program purposes, 
there would need to be a process for resolution, which could be set 
up in the fall. 
 
---------- 
Seychelles 
---------- 
 
¶20. (SBU) April 15 negotiations with the Seychelles concluded with 
an Agreed Minute signed in the early morning hours of April 16. 
Seychelles -- an upper middle-income country, but very heavily 
indebted and with explosive debt dynamics -- was an unusual case for 
the Club.  Seychelles' request, received just days before the 
meeting, was very ambitious:  a 55 percent nominal stock reduction 
in three phases.  Seychelles wanted a first 35 percent reduction 
retroactive to December 2008, with the remaining reductions in equal 
phases effective in December 2009 and in March 2010, respectively. 
Remaining balances were to be paid over 24 years, with an 8-year 
grace period. 
 
¶21. (SBU) Major points of contention were (1) the amount and 
distribution of reduction, (2) the timing of tranches; and (3) 
 
PARIS 00000643  011 OF 016 
 
 
exclusion of a German loan.  As a goodwill gesture, the Seychelles 
offered to make a $1 million payment to Paris Club creditors before 
June 30; the Secretariat will propose how to allocate this sum. 
Additional details of the negotiations will be sent septel. 
 
--------- 
Sri Lanka 
--------- 
 
¶22. (SBU) The IMF reported that discussions on a SBA were 
proceeding.  Final agreement had not yet been reached during the 
end-March mission, but the program would focus on reducing the 
fiscal deficit and strengthening the external and banking sectors. 
The Fund did not expect the country to seek a Paris Club treatment. 
 
 
¶23. (SBU) Gross reserves had fallen further, to less than $1 
billion, less than one months of imports (down from $1.5 billion 
reported to the Club in March).  The World Bank reported that the 
central bank had halted interventions, slowing the loss of reserves. 
 Remittances had fallen by 8 percent.  Sri Lanka sought 
continuation, not reorientation, of its current World Bank program 
focused on infrastructure, transportation, health, and other 
sectors. 
 
PARIS 00000643  012 OF 016 
 
 
 
¶24. (SBU) In response to a question about the country's debt 
sustainability, the IMF recalled that the last Debt Sustainability 
Analysis (DSA) a year ago had classified the country as "high risk" 
but was never published.   Last year's "high risk" had reflected 
unsustainable policies and financing gaps that the government closed 
with nonconcessional borrowing.  Even though the external situation 
had worsened, the SBA would be based on sustainable policies, so the 
next DSA would "show a different picture."  The Secretariat would 
complete its data call shortly. 
 
-------- 
Zimbabwe 
-------- 
 
¶25. (SBU) The IMF reported that an Article IV mission in March had 
found that the economic situation had worsened dramatically in 2008, 
with GDP falling 14 percent, on top of a cumulative 40 percent 
decline from 2000 to 2007.  Poverty and unemployment were at 
"catastrophic" levels.  Seventy percent of the population needs food 
aid; cholera had claimed over 4,000 lives.  Inflation had peaked at 
an estimated 500,000,000,000 percent (500 billion percent), although 
since the adoption of hard currency early in 2009 the Zimbabwean 
dollar had virtually disappeared.   Reserves were about $6 million. 
 
PARIS 00000643  013 OF 016 
 
 
 
¶26. (SBU) Zimbabwe required major efforts and donor support.  The 
authorities were refraining from quasi-fiscal activity, having 
adopted a system of cash financing.  They were allowing the 
processing of payments in foreign currency, liberalizing prices and 
exchange controls, and imposing budget constraints on parastatals. 
The external debt burden was unsustainable, with a DSA (based on 
incomplete data) indicating a debt level of $6 billion, 190 percent 
of GDP. 
 
¶27. (SBU) There was discussion of the way forward.  Italy sought a 
roadmap, while noting there would be many steps before any Paris 
Club treatment, and suggested a clear look beyond the scoping 
mission at matters like a trust fund and development assistance. 
The UK inquired about how debt would be treated, were Zimbabwe to 
obtain an IMF program.  The IMF said there would be an Article IV 
discussion, but that the IMF would need to see credible GOZ actions 
and signals of donor support before going beyond providing policy 
advice.  The IMF also noted that Zimbabwe was not considered in the 
HIPC ringfence exercise because it was not IDA-only at end-2004. 
The Fund did not have the data to determine whether Zimbabwe would 
have met the end-2004 HIPC thresholds that were required to qualify 
for HIPC.  The Co-Chairman proposed that the Secretariat prepare a 
working paper on scenarios, in response to Italy's questions. 
 
PARIS 00000643  014 OF 016 
 
 
 
¶28. (SBU) The U.S. delegation shared with counterparts from key 
countries that had participated in the March 20 Washington meeting 
some of the core outcomes of that discussion. 
 
---------------------- 
Methodological Issues: 
Debt Sustainability 
---------------------- 
 
¶29. (SBU) The IMF presented a review of its recent Board paper on 
concessionality, and its proposals for more flexible implementation 
of the Debt Sustainability Framework (DSF).  One issue that arose 
was the difference in language in references to the DSF in the 
recent G20 meetings, and particularly between the Working Group IV 
language and that attached to the leaders' statement.  The IMF was 
unsure whether it was being tasked to do something other than the 
flexibility exercise already underway, and that it would seek 
guidance on this issue, most likely from the International Monetary 
Financial Committee (IMFC).  The IMF Executive Board will address 
this matter. 
 
---------------------- 
Methodological Issues: 
 
PARIS 00000643  015 OF 016 
 
 
Private Sector Meeting 
---------------------- 
 
¶30. (SBU) There was some discussion about the Club's annual meeting 
with representatives of the private sector, now expected in June. 
The Secretariat indicated that it wanted the meeting to be somewhat 
innovative, with a more academic and public component added to the 
closed door discussion.   The Secretariat suggested that this 
component address how the financial crisis had unfolded and its 
impact on emerging and poor countries.  The private session would 
cover specific country cases (Argentina, Ecuador, Seychelles and 
four HIPCs - Cote d'Ivoire, Congo-Brazzaville, DRC and Liberia) as 
well as efforts to improve coordination between the Club and private 
and non-member official creditors. 
 
-------------------------------- 
Methodological Issues: Seniority 
-------------------------------- 
 
¶31. (SBU) On the day of the Tour, the Secretariat provided a working 
paper on seniority.  Because delegations had not had the opportunity 
to review it, there was little discussion.  The particular question 
at hand was whether loans made as part of an upper credit tranche 
IMF program in the current crisis should be considered senior to 
 
PARIS 00000643  016 OF 016 
 
 
other Club loans.  Some creditors raised concern about steps that 
could diminish the IMF and World Bank's preferred creditor status, 
asked about whether such loans would be included in Paris Club 
negotiations, and inquired about handling of loans from non-Paris 
Club creditors, e.g. the People's Republic of China (PRC). 
 
¶32. (SBU) For additional information on any country in particular, 
please contact David Freudenwald or Nicholle Manz in EEB/IFD/OMA.