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RR RUEHBZ RUEHGI
DE RUEHFR #0715/01 1481450
ZNR UUUUU ZZH
R 281450Z MAY 09
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 6340
INFO RUEATRS/DEPARTMENT OF TREASURY WASHDC
RUEKJCS/SECDEF WASHINGTON DC
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RUEHBUL/AMEMBASSY KABUL 0809
RUEHUM/AMEMBASSY ULAANBAATAR 0071

UNCLAS SECTION 01 OF 19 PARIS 000715 
 
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 - MAY 2009 TOUR D'HORIZON AND DISCUSSIONS ON 
METHODOLOGICAL ISSUES 
 
¶1. (SBU) Summary:  During the May 13 Paris Club meeting, creditors 
were willing to extend Afghanistan's debt treatment, but Russia 
blocked the move.  Paris Club members expressed concerns about 
Brazil's proposed loan to Argentina's state-owned airline Aerolineas 
Argentinas, but agreed to seek more information before taking 
action.  The Central African Republic (CAR) appeared on track to 
complete the Heavily Indebted Poor Countries (HIPC) Initiative in 
June.  Delegations as well as IMF and World Bank representatives 
were highly skeptical that the Republic of Congo's (Brazzaville) 
$800 million settlement with litigating creditors ("vulture funds") 
can be deemed comparable to HIPC treatment.  Creditors reluctantly 
agreed to extend Grenada's 2006 treatment to reschedule payments due 
in 2009.  The IMF and World Bank appear determined to bring Haiti to 
"Completion Point" soon by seeking a waiver of the public 
procurement law trigger, which requires not only passage of the law 
but implementation for six months.  The Paris Club entered into 
force the second phase of Liberia's 2008 interim treatment. 
 
¶2. (SBU) The IMF reported that Moldova is expected to seek Paris 
Club treatment together with an 18-month loan program.  France and 
Italy, the two holdouts that had not participated in Peru's 2007 
prepayment arrangement, agreed to accept prepayment now on the same 
terms.  While some creditors supported the Secretariat's draft paper 
on creating a class of senior debt for bilateral loans linked to IMF 
programs, there was also considerable skepticism.  On May 14-15, the 
 
PARIS 00000715  002 OF 019 
 
 
Paris Club negotiated with Cote d'Ivoire an interim debt treatment 
following the country's entry into the HIPC Initiative process. 
Under the new Agreed Minutes, $845 million will be cancelled over 
the next three years.  End Summary. 
 
----------- 
Afghanistan 
----------- 
 
¶3. (SBU) The IMF reported its Executive Board's April 22 approval of 
the fifth review and Poverty Reduction and Growth Facility (PRGF) 
program extension to March 2010.  Afghanistan had asked the Paris 
Club to provide a similar routine extension of its debt relief 
treatment to match this period.  Russia, which in April had reported 
a "small technical problem" vis-a-vis Afghanistan, refused, 
initially questioning whether the Afghan authorities had even made a 
formal request.  When the Secretariat replied that the April 26 
formal request had been circulated, Russia complained that 
Afghanistan had not provided a report recently on its progress in 
obtaining comparable debt relief from non-Paris Club creditors.  The 
U.S. asked whether provision of such a report would be sufficient; 
the Russian delegate said that he did not have a mandate to support 
extension.  He said Afghanistan's performance on its PRGF program 
had been weak and cited the "conditionality principle."  Paris Club 
Co-Chairman Coeure responded forcefully that the IMF Executive 
 
PARIS 00000715  003 OF 019 
 
 
Board, not the Paris Club, is the venue for discussing PRGF program 
performance, and the IMF Executive Board had deemed Afghanistan's 
performance satisfactory and approved the recent review.  Coeure 
agreed to seek an update from Afghanistan on comparability of 
treatment so that the Club can agree in June to extend the interim 
treatment.  The Fund and Bank reported that Completion Point under 
the HIPC Initiative could be reached by the end of 2009. 
 
--------- 
Argentina 
--------- 
 
¶4. (SBU) The U.S. had asked the Secretariat to place Argentina on 
the agenda to discuss a proposed Brazilian loan to the state-owned 
Aerolineas Argentinas or its subsidiary, Austral.  During the 
discussion, at which the Brazilian delegate was not present, the 
Netherlands' representative, who also chairs the OECD Export Credit 
Group, reported that the OECD had already dealt with the proposed 
loan and that it was important to separate OECD issues from Paris 
Club ones.  She also indicated that there was some uncertainty about 
the situation, including whether the loan had been agreed before the 
airline had been nationalized and whether the airline could still be 
treated as a private entity.  She also argued that there was a 
precedent for excluding commercial aircraft from Paris Club 
treatment, noting a loan to Indonesia's Garuda. 
 
PARIS 00000715  004 OF 019 
 
 
 
¶5. (SBU) All agreed that the Paris Club had legitimate concerns, 
since members had an informal agreement not to lend to Argentina. 
Sweden pointed out, however, that the understanding was not binding, 
and few of the national agencies represented at Paris Club meetings 
could constrain their country's respective export credit agencies. 
Germany commented that the Club's "gentlemen's agreement" was not 
binding, but expressed interest in implications for the Paris Club's 
outreach policy.  The U.S. relayed Brazil's statements from the 
April 21 OECD discussion that, since Brazil was not a member of the 
Paris Club, it was not bound by Paris Club agreements.  Furthermore, 
Brazil had argued that Argentina was current in payments to Brazil. 
The U.S. also noted that creditors that wish to cooperate with the 
Paris Club, including participating in methodological discussions, 
should support the Paris Club's positions and principles.  The 
Secretariat intends to ask Brazil for further details on the 
proposed loan and report back, so that creditors can consider 
further steps. 
 
¶6. (SBU) The Secretariat also reported that there was "less and 
less" news on President Fernandez de Kirchner's pledge to pay 
Argentina's $8 billion owed to Paris Club creditors, noting that any 
weakening of creditor solidarity would worsen the situation.  The 
IMF reported that international reserves remained robust at $46 
billion in spite of an expected real GDP contraction of 1.5 percent 
 
PARIS 00000715  005 OF 019 
 
 
in 2009 and declining fiscal revenues and exports.  However, 
Argentina did have a large external borrowing requirement -- 15 
percent of GDP in 2009 -- and its sovereign risk premium, already at 
1,500 basis points, could rise further. 
 
----------------------------- 
Central African Republic (CAR) 
----------------------------- 
 
¶7. (SBU) The IMF reported that the CAR continued to make 
satisfactory progress on its PRGF program, and the Bank reported 
that the country had fulfilled all conditions for Completion Point 
under the HIPC Initiative.  The IMF Executive Board is scheduled to 
approve Completion Point on June 24, with similar action expected at 
the World Bank shortly thereafter.  The IMF reported it was still 
working to obtain financing assurances for the Completion Point debt 
relief from at least one more of CAR's remaining external creditors: 
 Argentina, Taiwan, and China.  The Paris Club expects to hold 
negotiations with CAR in July or September to provide Completion 
Point debt relief. 
 
------------------------------ 
Republic of Congo (Brazzaville) 
------------------------------ 
 
 
PARIS 00000715  006 OF 019 
 
 
¶8. (SBU) To fulfill a requirement in the December 2008 Agreed 
Minutes, Congo had reported to the Club that it had paid $800 
million in full settlement of claims with its litigating creditors, 
including so-called "vulture funds."  The large amount was a 
surprise to the Paris Club and to the IMF.  Congo had reported that 
the total $2.5 billion extinguished under the settlement, a much 
larger amount of debt than previously reported, included penalties, 
fees and late interest.  Such a transaction implied a 65 percent 
discount; however, the IMF and Bank representatives, as well as 
creditors, were skeptical.  After initially refusing on the grounds 
of a confidentiality clause in the settlement, the authorities later 
agreed to provide additional information to the Secretariat by the 
end of May. 
 
¶9. (SBU) The IMF reported that the global financial crisis had had 
little impact on Congo in 2008 but was starting to negatively affect 
GDP growth and the fiscal deficit.  Congo's performance under the 
PRGF program had been broadly satisfactory.  The IMF noted, however, 
that Congo must implement a new petroleum pricing regime and improve 
commercialization of the oil industry before the first program 
review could occur.  Congo had completed or was close to fulfilling 
six of eight conditions required for HIPC Completion Point, which 
could be approved before the end of 2009. 
 
------------- 
 
PARIS 00000715  007 OF 019 
 
 
Cote d'Ivoire 
------------- 
 
¶10. (SBU) Following the IMF and World Bank's March 2009 approval of 
Cote d'Ivoire's PRGF program and HIPC Decision Point, Paris Club 
creditors negotiated new "Agreed Minutes" with Cote d'Ivoire on May 
14 and 15.  When fully implemented over three years, the 
multilateral debt treatment will cancel $845 million and reduce Cote 
d'Ivoire's debt service to Paris Club creditors by 92 percent.  The 
negotiations with Cote d'Ivoire were unusually contentious because 
the country had a large stock of private sector debt that had been 
restructured in 1998, as well as a substantial amount of more 
recently contracted, so-called "post-cutoff" debt.  Despite Cote 
d'Ivoire's unusually high capacity to pay, creditors had to 
reschedule some of this post-cutoff debt, which the debtor country 
would normally have been expected to pay on schedule. 
 
¶11. (SBU) The May 15 Agreed Minutes provided standard so-called 
"Cologne terms" on pre-cutoff debts, although the U.S. will follow 
its HIPC policy and forgive 100 percent of arrears and amounts 
coming due - about $262 million over three years.  Post-cutoff 
debts, short-term debts, and almost all interest payments will be 
deferred but not reduced.  Negotiations also centered on the 
country's capacity to pay in 2009.  Based on the IMF and 
Secretariat's analyses, the Paris Club had initially proposed that 
 
PARIS 00000715  008 OF 019 
 
 
Cote d'Ivoire pay 3.85 percent of post-cutoff arrears in 2009, as 
well as certain interest installments.  The IMF analysis (and PRGF 
program) assumed that the country would be able to borrow $600 
million on the West African Economic and Monetary Union (WAEMU) 
markets this year; the authorities argued that this was unlikely, 
thus reducing their ability to pay in 2009.  Creditors were 
generally sympathetic to this argument and agreed to much lower 
payments (1.2 percent) in 2009 and March 2010. 
 
¶12. (SBU) Cote d'Ivoire also committed to seek comparable treatment 
from its non-Paris Club creditors and, through a side letter to the 
U.S. delegation, to pay on schedule the single U.S. loan contracted 
after the June 20, 1999 Cologne G-8 summit.  The Paris Club 
ultimately agreed to this latter arrangement because of the cutoff 
date specified in the U.S. HIPC legislation and the fact that the 
U.S. forgives 100 percent of amounts coming due on loans made prior 
to the Cologne Summit.  However, a number of creditors questioned 
whether the U.S. was fulfilling its Cologne Summit commitment.  The 
Ivoirian authorities also indicated that they would not make 
payments to private creditors in 2009 and reaffirmed that they will 
seek funding from the World Bank's Debt Reduction Facility to clear 
arrears on the country's private sector Brady bonds. 
 
-------- 
Djibouti 
 
PARIS 00000715  009 OF 019 
 
 
-------- 
 
¶13. (SBU) Some Paris Club creditors continued to report problems in 
completing bilateral agreements to implement Djibouti's October 2008 
Paris Club debt treatment.  Belgium said it signed a bilateral in 
February, while Germany and Italy reported that they had made good 
progress and were close to signing.  In a letter to France, Djibouti 
disputed certain commercial debts.  Seeking a treatment more 
favorable than the terms of the Agreed Minutes, Djibouti indicated 
that it would not sign unless Spain agreed. 
 
------- 
Grenada 
------- 
 
¶14. (SBU) The discussion again focused on comparable treatment, and 
in particular whether the Club should grant a one-year extension of 
Grenada's May 2006 Agreed Minutes even though Grenada had not sought 
comparable treatment on a loan from Kuwait.  After months of seeking 
details, the Secretariat confirmed that the loan in question had 
been made to the central government.  Therefore, the Agreed Minutes' 
clear exclusion of a Dutch loan to the Port Authority could not be 
interpreted as justifying exclusion of the Kuwaiti loan.  After 
discussing the issue in five meetings, the IMF indicated for the 
first time that its notes did reflect such an agreement to exclude 
 
PARIS 00000715  010 OF 019 
 
 
the Kuwaiti loan.  Paris Club creditors expressed frustration with 
the lack of detailed records, reluctantly granted the requested 
extension, and called for proper records to avoid such problems in 
the future. 
 
------ 
Guinea 
------ 
 
¶15. (SBU) The IMF was monitoring discussions on the political 
situation, and in particular the international community's position. 
 The Fund wanted to protect the gains that Guinea had made, since 
the country had nearly completed the HIPC Initiative just before the 
coup.  The Fund was looking at prospects for restoring economic 
assistance and relief, and was discussing reengagement with members. 
 A joint Fund/Bank mission had visited Conakry in late March, and 
had found the situation to be "precarious."  The Bank reported that 
it had stopped disbursements and was also considering its course of 
action and talking to regional entities, including ECOWAS.  Guinea 
had met six of ten conditions necessary to reach HIPC Completion 
Point and was working to meet the others; preparations were underway 
for a new progress report on the PRSP. 
 
¶16. (SBU) Guinea reported $5 million in arrears to Belgium, France 
and the European Investment Bank.  A second phase of Guinea's 
 
PARIS 00000715  011 OF 019 
 
 
interim treatment, which would have covered calendar year 2009, was 
conditioned on the PRGF program's third review.  Since the review 
has not even been planned yet, the Secretariat intends to write to 
Guinea to convey that the phase had not entered into force and that 
the country was therefore required to make payments on the original 
schedules.  A number of countries, including the U.S., reported 
having received letters asking for deferrals of payments to 2011. 
Creditors agreed that countries should not reply individually; the 
Paris Club's letter will serve as the response to Guinea's requests. 
 
 
----- 
Haiti 
----- 
 
¶17. (SBU) The IMF reported on the outcome of the April 14 donors' 
conference, and noted that a mission was in Haiti to assess 
performance on Completion Point triggers.  The country "seemed to 
be" on track and could reach Completion Point around mid-2009.  The 
Bank's detailed readout included the June 30 Executive Board date 
and echoed the Fund's information on performance but neglected to 
mention the status of the requirement that Haiti adopt and implement 
a public procurement law for six months prior to Completion Point. 
When the U.S. asked about it, the Bank representative indicated that 
he had no information; the following day he reported that Bank staff 
 
PARIS 00000715  012 OF 019 
 
 
was indeed planning to seek a waiver of that performance 
requirement. 
 
------- 
Liberia 
------- 
 
¶18. (SBU) Following the IMF Executive Board's May 7 approval of the 
second review of Liberia's PRGF program, the Paris Club agreed to 
enter into force the second stage of the country's interim 
treatment.  The Fund reported that the global slump was affecting 
Liberia through lower demand and commodity prices.   The authorities 
had little space for counter-cyclical fiscal or monetary policy 
because of the country's high levels of debt and dollarization, 
respectively.  Nevertheless, Liberia's performance under the PRGF 
program was satisfactory. 
 
¶19. (SBU) Liberia had made excellent progress in reducing its debt 
stock.  Liberia completed its World Bank and USG-supported 
commercial debt buyback operation with 97.5 percent participation. 
Liberia has also signed debt restructuring agreements with all 
creditors except for four non-Paris Club bilateral creditors. 
Although external debt had fallen below $2 billion, Liberia remained 
in debt distress.  Once Liberia completes the HIPC Initiative, its 
debt levels will fall well below HIPC thresholds as long as it 
 
PARIS 00000715  013 OF 019 
 
 
maintains robust growth and controls new borrowing.  The Fund 
reported Liberia had made significant progress toward fulfilling the 
HIPC performance requirements, with public sector reform the single 
difficult issue remaining.  The authorities hoped to reach 
Completion Point by the end of 2009. 
 
------- 
Moldova 
------- 
 
¶20. (SBU) The IMF reported that Moldova had requested an 18-month 
Stand-By Arrangement (SBA), given the country's unsustainable 
financial situation.  The new loan program's timing was uncertain, 
however, since there could be delays in putting the new government 
into place.  The IMF planned to send another mission to Chisinau in 
late May or early June to continue discussions and expected Moldova 
to seek Paris Club debt relief to help finance the SBA.  Although 
the financing gap would be large, debt rescheduling, rather than 
debt cancellation, was more likely.  Moldova's four largest Paris 
Club creditors include Russia, the U.S., Germany and Japan.  Russia, 
the largest creditor, asked about comparability of treatment, 
perhaps a signal of plans to raise difficulties. 
 
---- 
Peru 
 
PARIS 00000715  014 OF 019 
 
 
---- 
 
¶21. (SBU) Peru had invited France and Italy, the two creditors that 
had not participated in the 2007 prepayment operation, to 
participate now on the same terms, despite the August 2007 deadline. 
 Both indicated that they would.  (Note:  In May 2007, the Paris 
Club concluded an agreement that allowed Peru to prepay at face 
value up to $2.5 billion in previously rescheduled non-concessional 
debt falling due between 2007-2015.)  The IMF reported that Peru's 
recent record of exceptional performance -- thirteen years of 
uninterrupted growth, peaking at 10 percent in 2008 -- had begun to 
slow in the last quarter of 2008.  Financial indicators were stable, 
since banks held no asset-backed securities, had limited reliance on 
external funding, and faced little rollover risk. 
 
---------- 
Seychelles 
---------- 
 
¶22. (SBU) During the Paris Club's April negotiations with 
Seychelles, the country had agreed to make a $1 million goodwill 
payment immediately.  The Secretariat presented a working paper with 
three options on how the payments could be allocated.  The U.S. is 
not a creditor. 
 
 
PARIS 00000715  015 OF 019 
 
 
-------- 
Zimbabwe 
-------- 
 
¶23. (SBU) The Secretariat produced a working paper laying out 
possible steps to normalization of relations with creditors, either 
through HIPC or non-HIPC channels.  As in previous discussions on 
this subject, creditors recalled that Zimbabwe was not included as a 
potential HIPC-eligible country during the 2006 ring-fencing process 
and that the lack of end-2004 data prevented an assessment of 
whether Zimbabwe would have met HIPC's numerical income and debt 
benchmarks.  The IMF pointed out that preparing a HIPC debt 
sustainability analysis, even for informational purposes, could be 
seen as a signal of the international community's willingness to 
move to change its rules and include Zimbabwe in the HIPC 
Initiative.  All agreed that such issues should be discussed at the 
IMF and World Bank; any Paris Club involvement would come at a much 
later stage. 
 
¶24. (SBU) During the IMF Executive Board's May 4 discussion, 
directors had welcomed the emergency recovery program, but noted 
many downside risks.  The Board had lifted some restrictions on 
technical assistance.  The Bank also stressed the need for technical 
assistance and praised the government's realistic budget and strict 
discipline in matching monthly income and expenditures.  The Bank 
 
PARIS 00000715  016 OF 019 
 
 
reported that donors believed a multi-donor trust fund was the best 
vehicle for moving forward, and said it would seek Board approval 
for such a fund in May. 
 
--------------------------------------------- -- 
Methodological Issue: 
Seniority of Crisis-Related Bilateral Financing 
--------------------------------------------- -- 
 
¶25. (SBU) There was a lengthy but inconclusive discussion of the 
Secretariat's revised proposal to grant senior status to bilateral 
loans made in conjunction with IMF upper credit tranche programs. 
Some countries, most notably Japan, were generally supportive. 
Japan suggested as broad a scope as possible (i.e. extending the 
provision to World Bank-led operations) to accommodate Asian 
countries like Indonesia that are averse to seeking Fund programs. 
There was no support for this idea.  Many others, including 
Co-Chairman Coeure, criticized the suggestion, noting the tension 
between this idea and the G-20's recent reaffirmation of the IMF's 
central role.  Delegations also discussed, inter alia, how the 
proposal impacted the IFI's preferred creditor status, whether the 
proposal should apply retroactively to loans made in the last few 
months, what criteria should be used, and what effect the idea would 
have on current creditors, and on bond spreads. 
 
 
PARIS 00000715  017 OF 019 
 
 
¶26. (SBU) Germany was the most skeptical about the idea; the U.S. 
suggested that many of the subsidiary questions could be addressed 
through carefully considering the purpose of the loans -- whether 
they were meant to complement the IMF when it was bound by lending 
limits, or whether it was more broadly intended to respond to the 
crisis.  The U.S. delegation, along with several others, made very 
clear that it did not yet have a position on the proposal.  In any 
case, the Secretariat will revise the paper again.  Germany stressed 
the need to alert senior officials engaged in G-8 and G-20 
channels. 
 
---------------------------- 
Methodological Issue: 
Treatment of Loan Guarantees 
---------------------------- 
 
¶27. (SBU) The Secretariat had surveyed members on whether they 
provide Paris Club treatment on loan guarantees that have not been 
triggered by defaults.  Although not all responses had been 
received, it was clear that different creditors used different 
methods.  While some creditors report all guarantees and subject 
them to restructuring, others report non-triggered guarantees only 
when specifically requested in the data call.  Creditors generally 
agreed that the approach should be uniform.  The Secretariat will 
prepare a working paper.  There could be significant implications of 
 
PARIS 00000715  018 OF 019 
 
 
forcing performing loans into default. 
 
------------------------------ 
Methodological Issue: 
June 2009 Meeting with 
Private and Outreach Creditors 
------------------------------ 
 
¶28. (SBU) The Paris Club's annual meeting with private and outreach 
creditors will take place on June 25.  The agenda, as agreed with 
the Institute for International Finance (IIF), will focus on 
implementation of the IIF's Principles for Stable Capital Flows and 
Fair Debt Restructuring in Emerging Markets (including specifically 
Ecuador and likely Argentina), sovereign debt reconciliation, 
so-called "vulture funds" and litigation related to sovereign debt, 
and the Paris Club's recent activities (including Seychelles, Cote 
d'Ivoire and the Republic of Congo). 
 
¶29. (SBU) The meeting will be followed by a broader conference on 
the crisis and its implications for emerging and developing 
countries, which Economy Minister Lagarde will open and close.  The 
Secretariat explained that this meeting aims to show that the Paris 
Club is actively engaged in addressing the global financial crisis. 
 
¶30. (U) For additional information on any country in particular, 
 
PARIS 00000715  019 OF 019 
 
 
please contact David Freudenwald or Nicholle Manz in EEB/IFD/OMA. 
 
PEKALA