VZCZCXRO5622
RR RUEHBZ
DE RUEHC #7595/01 3481634
ZNR UUUUU ZZH
R 141630Z DEC 09
FM SECSTATE WASHDC
TO RUEHFR/AMEMBASSY PARIS 7622
INFO RUEHBY/AMEMBASSY CANBERRA 6027
RUEHVI/AMEMBASSY VIENNA 0276
RUEHBS/AMEMBASSY BRUSSELS 5872
RUEHOT/AMEMBASSY OTTAWA 0737
RUEHCP/AMEMBASSY COPENHAGEN 1489
RUEHHE/AMEMBASSY HELSINKI 2722
RUEHRL/AMEMBASSY BERLIN 5278
RUEHDL/AMEMBASSY DUBLIN 1361
RUEHRO/AMEMBASSY ROME 3434
RUEHKO/AMEMBASSY TOKYO 1610
RUEHTC/AMEMBASSY THE HAGUE 7233
RUEHNY/AMEMBASSY OSLO 9254
RUEHMO/AMEMBASSY MOSCOW 5960
RUEHMD/AMEMBASSY MADRID 3427
RUEHSM/AMEMBASSY STOCKHOLM 8701
RUEHSW/AMEMBASSY BERN 7142
RUEHLO/AMEMBASSY LONDON 8352
RUEHWN/AMEMBASSY BRIDGETOWN 0148
RUEHAN/AMEMBASSY ANTANANARIVO 9825
RUEHBZ/AMEMBASSY BRAZZAVILLE 1768
RUEHBU/AMEMBASSY BUENOS AIRES 0269
RUEHKI/AMEMBASSY KINSHASA 0795
RUEHUB/USINT HAVANA 7511
RUEHCH/AMEMBASSY CHISINAU 1239
RUEHKV/AMEMBASSY KYIV 2832
RUEHBJ/AMEMBASSY BEIJING 2039
RUEKJCS/SECDEF WASHINGTON DC
RUEATRS/TREASURY DEPT WASHINGTON DC 0469

UNCLAS SECTION 01 OF 07 STATE 127595 
 
SENSITIVE 
SIPDIS 
TREASURY FOR DO/IDD AND OUSED/IMF 
SECDEF FOR USDP/DSCA 
EXIM PASS TO CLAIMS - MPAREDES 
USDA PASS TO CCC - WWILLER/TRYAN/JDOSTER 
USAID PASS TO CLAIMS - WFULLER 
DOD PASS TO DSCS - PBERG 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EAID XM XA XH XL CN FR
SUBJECT: Paris Club November 2009 Meeting and Negotiations with 
Comoros 
 
¶1.  (SBU) SUMMARY:  During the November 18, 2009, Paris Club "Tour 
d'Horizon," the IMF requested financing assurances for the Democratic 
Republic of Congo's (DRC) new IMF program.  Canada, troubled by the 
revocation of a mining license held by a Canadian-led consortium, 
waited until November 24 to join the consensus in favor of providing 
assurances.  The IMF and World Bank said that the Republic of Congo's 
failure to provide details on a $939 million payment to vulture funds 
did not jeopardize the IMF lending program, though the U.S. argued 
that the Paris Club should explore ways to respond to the payment, 
which was a major breach of comparability commitments.  The U.S. 
informed the IMF and World Bank that it expected full implementation 
of the performance criteria for completing the Heavily Indebted Poor 
Countries (HIPC) initiative. 
 
¶2.  (SBU) Antigua and Barbuda is negotiating an IMF lending program, 
which would involve sweeping fiscal actions and debt relief.  The 
U.S. noted that any debt treatment could only involve rescheduling 
debts, since the U.S. was not in a position to provide debt 
cancellation to Antigua.  Argentina had indicated to the Secretariat 
that it would not address Paris Club arrears until after the 
reopening of the offer to private sector holdout creditors.  The IMF 
said that the proposed lending program for Moldova did not envisage 
Paris Club debt relief.  Australia wanted to restructure some $10 
million of long-standing debt owed by Cuba.  The Paris Club was firm 
and unanimous that this would violate solidarity among creditors. 
November 19 negotiations with Comoros went smoothly.  Paris Club 
creditors provided exceptional treatment of short-term debt and 
included a clause providing for additional reduction of payments 
coming due after Comoros reaches HIPC decision point, as an 
additional incentive to begin the HIPC process. 
 
¶3.  (SBU) Creditors also discussed methodological issues concerning 
outreach to non-Paris Club creditors and held another meeting of the 
working group on treatment of loan guarantees.  End Summary. 
 
------------------- 
Antigua and Barbuda 
------------------- 
 
¶4.  (SBU) The IMF reported that the Antiguan government had publicly 
announced that it was seeking an IMF Stand-By Arrangement (SBA) 
lending program.  An IMF staff mission in December would continue 
discussions, and the Fund expected to seek financing assurances from 
Paris Club creditors at the January 2010 meeting.  The IMF Executive 
Board could be asked to approve the SBA in early February.  The 
program would aim to shift the primary deficit to surplus in 2010, 
and involve an array of tax changes, cuts in wages and transfers, 
outsourcing, and rationalization.  The package would be announced in 
the 2010 budget to be presented to Parliament later in November. 
Fiscal actions would not be sufficient, however, and a debt 
restructuring - of both domestic and international debt - would be 
required.  The country had hired advisors (which were unnamed). 
 
 
STATE 00127595  002 OF 007 
 
 
¶5.  (SBU) The Secretariat indicated that it expected only a 
rescheduling but that debt sustainability under that scenario would 
need to be assessed.  The U.S. indicated (as it had done to the Fund 
mission the previous week) that it was not in a position to go beyond 
rescheduling due to the lack of congressional authorization and 
appropriations.  Debt data reconciliation is underway. 
 
--------- 
Argentina 
--------- 
 
¶6.  (SBU) Paris Club Chairwoman Delphine d'Amarzit reported on her 
meeting with Finance Secretary Lorenzino during a G-20 meeting in St. 
Andrews, at which he had told her that Argentina would not address 
Paris Club arrears until the new offer to holdout bondholders had 
been made.  She had asked whether Argentina would seek a discount 
from the Paris Club, and Lorenzino had replied that it would not. 
She noted that the recently floated - then denied - idea of paying 
Paris Club arrears by issuing a bond contradicted what Argentina had 
said, and what Argentine law provided for, on payment using reserves. 
 
¶7.  (SBU) The IMF reported that GDP was expected to decline 2.5 
percent in 2009, then to grow 1.5 percent in 2010, with a pickup in 
export demand and agricultural production (following a drought).  The 
peso had stabilized vis-a-vis the dollar, after depreciating 15 
percent since September 2008, and in fact the central bank had been 
buying dollars to stem peso appreciation.  The current account 
surplus was strengthening due to weak imports and strong export 
demand, while capital flight by residents had slowed in the third 
quarter, with confidence growing.   As a result, gross reserves at 
the end of October were $46 billion, with net reserves estimated at 
about $30 billion. 
 
¶8.  (SBU) The offer to holdout bondholders was expected to be made in 
early-2010, with a haircut of 66 percent of principal, and repayment 
of PDI with a 7-year bond yielding market interest rates. 
Institutional creditors would be required to put in new money. 
Interest in an IMF Article IV consultation appeared to have waned, 
perhaps because of the focus on the offer to holdouts.  The Fund 
insisted that an Article IV had to be "normal" in every respect. 
 
------- 
Comoros 
------- 
 
¶9.  (SBU) Negotiations on so-called "Naples terms" treatment for 
Comoros were amicable, marked by a couple of oddities:  (1) France 
alone accounted for almost 90 percent of the total debt owed to the 
Paris Club, with Italy accounting for almost all of the rest; and (2) 
over 70 percent of the total Paris Club debt was short-term, which is 
normally not restructured under Paris Club debt relief agreements. 
Total Paris Club exposure was just under $16 million, perhaps a 
record low.  The Paris Club accounted for a very small share of 
Comoros' total debt, so the Secretariat had tried (unsuccessfully) to 
persuade Comoros' Gulf creditors, which accounted for over $40 
million, to participate in the negotiations. 
 
¶10.  (SBU) The Paris Club's offer to the Comoros contained two 
 
STATE 00127595  003 OF 007 
 
 
unusual elements:  (1) deferral of the short-term debt, and (2) a 
commitment to reduce debt service coming due by a further 50  percent 
after decision point - the latter designed to provide an incentive to 
reach decision point, which would otherwise have provided almost no 
additional benefit. 
 
---------------------------- 
Democratic Republic of Congo 
---------------------------- 
 
¶11.  (SBU) The IMF requested financing assurances for a new 3-year 
Poverty Reduction and Growth Facility (PRGF) lending program, which 
the IMF Executive Board eventually approved on December 11.  All 
creditors except Canada agreed to provide the financing assurances, 
although many raised concerns, including unpaid short-term debts 
(Russia and Brazil), the fiscal effects of Chinese-funded investments 
and particularly their maintenance costs (Japan), and monetary policy 
and the general comfort level with the program (Netherlands). 
 
¶12.  (SBU) Canada's concerns revolved around the DRC authorities' 
decision to revoke the license of a mine controlled by a Canadian 
company, and in which the World Bank's International Finance 
Corporation (IFC) had an investment.  Canada insisted that its 
motives were not commercial in nature, but driven by concerns about 
the investment environment. 
 
¶13.  (SBU) Paris Club Chairwoman D'Amarzit was particularly critical 
of the Canadian position, arguing that the investment climate was an 
issue for the IMF and World Bank, not for the Paris Club; that the 
Paris Club should not be used for leverage in the way Canada was 
attempting; and that DRC had made all of the concessions that had 
been demanded by the international community. 
 
¶14.  (SBU) The Fund argued that it could not wait long for the Paris 
Club's financing assurances, since the PRGF program included 
end-December targets, and a delay beyond December would create a 
requirement to renegotiate the program.  Finally, Paris Club 
creditors agreed to give Canada "a few days" to provide assurances. 
Canada provided its assurances on November 24, and the Paris Club's 
collective assurances were communicated to the IMF on November 25. 
 
¶15.  (SBU) The PRGF program will target average annual growth of 6.5 
percent, single-digit inflation, and international reserves rising to 
12 weeks of non-aid imports by 2012.  The lending program will aim to 
mobilize domestic revenues, improve financial management, 
recapitalize and reorganize the Central Bank, and to improve public 
enterprises, the financial sector and the regulatory environment. 
 
¶16.  (SBU) The IMF confirmed that Sino-Congolese loan package carried 
a fixed rate of 4.4 percent, yielding a grant element of 42 percent 
(or 46 percent if the signing bonus was included).  The second 
infrastructure tranche had been cancelled, and the mining portion 
carried no state guarantee.  The joint IMF/World Bank debt 
sustainability analysis concluded that the Sino-Congolese deal would 
increase the DRC's debt burden in the medium term but would not have 
a major impact on debt sustainability over the long term. 
 
¶17.  (SBU) HIPC completion point could come as soon as mid-2010, at 
 
STATE 00127595  004 OF 007 
 
 
the time of the first PRGF review.  The Netherlands again raised the 
idea of initially rescheduling, rather than cancelling, DRC's 
arrears.  There was general sympathy for the idea of not cancelling 
arrears until the DRC reaches HIPC completion point.  The U.S. 
delegation stated that it was considering this proposal. 
 
------------------------------- 
Republic of Congo (Brazzaville) 
------------------------------- 
 
¶18.  (SBU) The IMF reported that the Republic of Congo (ROC) had 
declined to provide additional information on the recent $939 million 
payment to vulture funds, citing confidentiality clauses in the 
settlement.  The IMF believed the information was not critical to the 
country's macroeconomic outcomes and that the payments did not 
threaten the PRGF program.  The Fund judged that the initial 
miscalculation of the discount was not misreporting under the PRGF 
program or under the HIPC initiative.  The ROC had met all 
quantitative criteria, along with all but one of the June benchmarks 
(a strategic study of the oil sector, expected to be completed in 
2010).  The IMF Executive Board later approved the PRGF review on 
November 30. 
 
¶19.  (SBU) A number of conditions for completing the HIPC initiative 
(so-called "completion point triggers") had already been met.  A 
joint Fund/Bank mission to Brazzaville planned for early December had 
been postponed to allow more time for implementation of unmet 
triggers - including on oil commercialization and the procurement 
code.  If these are met, the IMF and World Bank boards could approve 
completion point as early as January 2010.  The World Bank echoed the 
IMF's assessment, noting that the delays were mostly on the oil 
commercialization trigger, though the Bank too envisaged a January 
completion point.  The U.S. delegation stated, both in plenary and to 
Fund and Bank representatives on the margins, that the U.S. would 
expect to see stringent implementation of the triggers before the ROC 
advances to completion point. 
¶20.  (SBU) Paris Club creditors also agreed to send a letter to the 
Institute for International Finance (IIF) complaining about the 
vulture payment, and to reply to the ROC's October 15 letter to the 
Secretariat.   The reply will point out the ROC's violation of its 
commitment to obtain comparable treatment from all creditors, 
highlight the ROC's failure to take advantage of the international 
assistance that was available concerning negotiations with vulture 
funds, and emphasize the Paris Club's desire to receive more 
information before launching new negotiations to provide completion 
point debt cancellation. 
 
¶21.  (SBU) The U.S. delegation stressed that while more information 
would be helpful, the Paris Club already had enough to know that the 
payment represented a serious departure from comparable treatment and 
that Paris Club members should consider what actions might be taken 
in response.  The U.S. delegation stated that it was considering 
withholding the voluntary additional debt cancellation, beyond the 
minimum required under the HIPC treatment, that the U.S. normally 
provides to HIPCs that reach completion point. 
 
---- 
Cuba 
 
STATE 00127595  005 OF 007 
 
 
---- 
 
¶22.  (SBU) Australia had placed Cuba on the agenda, indicating that 
it was seeking to reengage with the country and as part of that 
effort wanted to renegotiate about EUR 6-7 million in debt, all of 
which was in arrears.  While Australia preferred to join a 
multilateral effort, it had a "realistic" view, was considering "all 
options," and sought the Paris Club's input.  Australia was not 
attempting to collect payment, however, and would not seek to be paid 
when other Paris Club members were not being paid. 
 
¶23.  (SBU) The Secretariat replied that the Paris Club (and the 
"Group of Creditors of Cuba," which excludes the U.S.) had agreed to 
a multilateral approach and on maintaining creditor solidarity. 
Paris Club Secretary General Cheremetinski reminded members that 
there had been an attempt to make contact with Cuba after 2008 
storms, but that the Cuban authorities had not replied.  However, the 
Paris Club/Group had agreed that there could be bilateral agreements 
on short-term loans, which the Australian ones were not. 
 
¶24.  (SBU) Other creditors unanimously argued that Australia should 
not proceed, with the UK warning that an Australian deal could put 
pressure on other creditors also to cancel debt.  The U.S. delegation 
made clear that its policy had not changed, and that there had been 
no change in Cuban behavior to warrant a change in the multilateral 
consensus.  Any future debt relief should come, as for all countries, 
with a firm commitment to economic reform, and with membership in the 
Fund and an appropriate program.  The Secretariat concluded that "the 
message from creditors is clear."  The Secretariat also indicated it 
might attempt again to make contact with the Cuban authorities. 
 
------- 
Moldova 
------- 
 
¶25.  (SBU) The IMF reported that the government and Fund staff had 
reached preliminary agreement on a lending program, which the IMF 
Executive Board could be asked to approve in January.  The program 
did not envisage Paris Club debt relief, since financing from other 
sources would be adequate.  The World Bank reported that it planned 
to provide some $40 million in budget support. 
 
------- 
Ukraine 
------- 
 
¶26.  (SBU) The IMF reported that the Stand-By Arrangement (SBA), 
including total disbursements of $10.9 billion, had helped stabilize 
Ukraine's economy.  The recession seemed to have bottomed out in the 
first quarter, though GDP was still expected to fall 14 percent in 
2009 before rising 3 percent in 2010.  The IMF had delayed the 
planned SBA program review, however, due to the political situation. 
Following an October IMF staff mission, the Fund concluded that the 
governing coalition had effectively collapsed, and that there was no 
broad ownership of the program ahead of upcoming presidential 
elections.  Whereas the SBA program targeted a budget deficit 
equivalent to 3 percent of GDP, the parliament approved a budget that 
creates a deficit equivalent to 8 percent of GDP.  Additionally, the 
 
STATE 00127595  006 OF 007 
 
 
President had declined to veto a wage and pensions bill one of the 
governing coalition partners had put forward which would increase 
spending by an additional 2.5-6.0 percent of GDP.  The World Bank 
indicated that it could provide no further policy-based lending in 
the current environment. 
 
------------------------------------ 
Methodological Issue: 
Outreach to non-Paris Club Creditors 
------------------------------------ 
 
¶27.  (SBU) The Secretariat presented initial ideas for a new strategy 
to secure comparable treatment, particularly for HIPCs, from 
non-Paris Club creditors.  Based on incomplete data from the IMF and 
World Bank's September 2009 HIPC implementation report, the 
Secretariat concluded that some non-Paris Club members were creditors 
of as many as eighteen (Kuwait) or twenty (China) HIPCs.  Most 
non-Paris Club creditors did not provide debt relief comparable to 
HIPC terms.  The Secretariat's proposed strategy divided the 
creditors into four groups:  (1) Gulf states, (2) EU members, (3) 
emerging or middle-income economies (India, China, Venezuela, Libya, 
Taiwan), and (4) "difficult" countries (Iran, Angola, Honduras).  The 
strategy suggested a joint diplomatic initiative to the Gulf 
countries, proceeding through EU channels to contact EU-member 
creditors, and ad hoc diplomatic efforts to engage emerging or 
middle-income economies. 
 
¶28.  (SBU) The U.S. suggested that it would be wise to discuss in 
advance with Embassies and others the likely reaction from Gulf 
governments and other creditors to any joint diplomatic approaches, 
and recommended working with IMF Executive Directors, who should 
understand HIPC and comparable treatment issues.  While others 
supported these suggestions, the Paris Club took no decisions. 
 
--------------------------- 
Methodological Issue: 
Working Group on Guarantees 
--------------------------- 
 
¶29.  (SBU) The dynamics of the working group on treatment of loan 
guarantees meeting were different than in previous months.  Four 
creditors - Italy (which had sent its export credit agency's (SACE) 
legal advisor for the meeting), the U.S., Russia, and Canada - spoke 
strongly against automatic inclusion of non-indemnified guarantees, 
while only the UK spoke strongly in favor.   The Secretariat/France 
was left in the middle. 
 
¶30.  (SBU) Italy and Germany even argued against automatically 
including in data calls guaranteed loans that were being serviced on 
schedule; nevertheless, it was again agreed that creditors would 
attempt to include them to the extent possible.  Denmark argued that 
such data was already provided to the OECD; the Secretariat agreed to 
investigate this. 
 
¶31.  (SBU) Italy argued that until claims are indemnified they do not 
belong to the government, and therefore cannot be treated, which the 
Secretariat noted could in itself provide an incentive to default. 
The U.S. responded that while this might be theoretically true, there 
 
STATE 00127595  007 OF 007 
 
 
was no evidence of this incentive in practice - and indeed, no 
evidence that the non-indemnified claims were a practical problem at 
all. 
 
¶32.  (SBU) The UK noted that the standard language of Agreed Minutes 
implied the inclusion of all guarantees, whether indemnified or not, 
in Paris Club treatment.  The Secretariat observed that even if 
non-indemnified claims were excluded from a treatment, the debtor was 
obligated to seek comparable treatment on such claims - which argued 
for including them in the Paris Club treatment in the first place. 
Germany, despite its concerns over inclusion in data calls, opined 
that legally-constrained creditors should not be allowed to free ride 
on those without such constraints. 
 
¶33.  (SBU) Participants agreed to the following steps: 
 
-- Paris Club members that do not have problems restructuring 
non-indemnified loan guarantees will check whether the restructuring 
of such debts is official policy, and whether the guarantor asks the 
commercial lender for authorization to restructure the debt (as the 
UK's export credit agency does). 
 
-- Paris Club members that do not restructure such contingent 
liabilities would determine the extent of subsequent default on 
guaranteed loans that were performing at the time of the Paris Club 
treatment, how members reacted to such defaults if any occurred, and 
whether members could ask the commercial lenders to allow treatment. 
 
-- All Paris Club members would examine the debt treatments provided 
to Indonesia (May 2005) and Pakistan (December 2001) to determine how 
such non-indemnified commercial loans were dealt with in actual 
cases. 
 
¶34.  (U) For additional information on any of the countries or issues 
mentioned above, please contact EEB/IFD/OMA David Freudenwald at 
freudenwalddj@state.gov or Nicholle Manz at manznm@state.gov. 
 
 
CLINTON 
CLINTON