PARIS CLUB - JANUARY 2005 TOUR D'HORIZON

UNCLAS SECTION 01 OF 13 PARIS 001052

SIPDIS

SENSITIVE

STATE FOR EB/IFD
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 - JANUARY 2005 TOUR D'HORIZON


SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET DISTRIBUTION

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SUMMARY
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1. (U) Following are summaries of country discussions during
the January 12-13, 2005 Paris Club session. The Paris Club's
President, Jean-Pierre Jouyet, chaired the session. Secretary
General (SecGen) Emmanuel Moulin represented the Secretariat.
Representatives of non-Paris Club members Brazil, Israel and
Korea attended discussions on those countries to which they
are creditors. The next session of the Paris Club is
scheduled for the week of March 7, 2005.


2. (U) NOTE: INDIVIDUAL CREDITOR POSITIONS REPORTED IN THIS
MESSAGE SHOULD BE TREATED AS "PARIS CLUB CONFIDENTIAL" AND
NOT/NOT DISCUSSED WITH DEBTOR COUNTRY REPRESENTATIVES, NOR
WITH NON-PARIS CLUB PARTICIPANTS.


3. (SBU) Discussed in this session:

Algeria -- Implementation of bilateral agreements
Angola -- IMF Update (Brazil)
Argentina -- Perspectives for upcoming negotiation
(Israel)
Chad - IMF update, extension of the current agreement
Dominican Republic -- IMF Update, comparability of
treatment issues, financing assurances
Haiti -- IMF update
Honduras -- IMF update
Iraq -- EDR tables
Kyrgyz Republic - IMF update, financing assurances
(Turkey)
Nigeria -- 2005 debt repayment schedule (Brazil)
Peru -- buyback, Secretariat report (Brazil)
Poland -- prepayments (Brazil)
Russia -- buyback proposal
Rwanda -- IMF update
Serbia and Montenegro - - IMF update
Vietnam -- update
Zambia -- IMF update


4. (U) ACTION/FOLLOW-UP/UPCOMING ITEMS
Methodology -- Possible publication of rules concerning
buybacks and prepayments

March negotiation -- Kyrgyz Republic, pending Russian
financing assurances; Peru buyback


April negotiation --potential Honduras, Zambia and Rwanda HIPC
treatments, potential DR debt rescheduling

TBD negotiation -- Russia buyback

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ALGERIA
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5. (SBU) The IMF rep said the Board was considering that same
day the results from the 2004 Article IV consultations. On
December 21 staff presented its report, with a debt
sustainability analysis in it.


6. (SBU) Russia said its debt is still unsettled after two
years of talks. The Algerians do not want to accept the 1995
Agreed Minute nor the terms of Russia's agreement on joining
the Paris Club. Russia still hopes to settle the debt
pursuant to Paris Club rules, and plans another round of talks
in the first quarter of 2005. The Paris Club should not
accept any buybacks because Russia has not gotten a single
payment from Algeria in seven years, and should remind Algeria
to pay up per Paris Club rules. The UK said it has 1.9
million in arrears on short-term debt, Algeria is not
responding, and so it would like to be mentioned in any letter
too. Italy said it also has a dispute about old claims, but
would prefer to be mentioned separately from the Russians.
Spain said it also has arrears, and will confirm later the
amount. Responding to an inquiry from the Netherlands, the
Secretariat explained that the 1997 Memorandum of

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Understanding admitting Russia to the Paris Club, provided it
would grant an upfront discount of 35 percent to its eligible
debtors, up to 65 percent for those countries to which Russia
was the biggest military supplier. Algeria contends Russia
was its biggest military supplier, but never provided any
proof. The Secretariat proposed that Algeria send its data to
the Secretariat for verification.


7. (SBU) The President noted the consensus to have the
Secretariat draft separate letters reminding Algeria to clear

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its arrears and proposing settlement of the Russian claims
with verification through the Secretariat.

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ANGOLA
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8. (SBU) The IMF reported that staff plan to visit on January
19; this trip is pending IMF receipt of GOA financial
documents on SONANGOL and details about external debt
negotiations with bilateral creditors. Economic performance
has improved; on the debt side, Portuguese banks opened a
credit line for USD 100 million on November 19, and the GoA is
talking to Bulgaria about its USD 68.8 million debt and with
Hungary on its USD 5.7 million debt (as of June 2004). The
World Bank rep said the Bank hopes to present a strategy on
February 17, conditioned on an IMF agreement and conclusion of
a Poverty Reduction Strategy Paper (PRSP).


9. (SBU) The Secretariat said it had contacted the GoA Finance
Minister late last year, and had said the Secretariat would be
available to explain Paris Club rules and expectations. The
Finance Minister had welcomed the call, and arranged for a
delegation to visit Paris on January 17.


10. (SBU) Spain expressed its thanks for the Secretariat's
actions.

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ARGENTINA
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11. (SBU) The IMF indicated it had seen press reports that the
GoA is considering not continuing with an IMF program after
its private bond exchange is completed, but has had no
official word. The President of the Paris Club proposed
delaying action on a letter to the GoA until the close of the
GOA's bond exchange.


12. (SBU) Germany said since it had been the one to originally
propose sending a letter, it wants to make the point that
Argentina has made no payments for three years thus turning it
into a de facto deferral. It is necessary to demand payment.
It is not very happy to delay a letter for another 6 to 8
weeks. Argentina does not want another IMF program. It wants
to pay the remaining balance of its obligations to the Fund
and then end its relationship with the IMF. Without a
program, the Paris Club does not reschedule debt, and so it
would not be possible to invite the GoA for a negotiation.


13. (SBU) Noting the acquiescence among creditors, the
President said he would have the Secretariat circulate a draft
letter in a few weeks. The IMF added that the Argentine debt
offering is expected to close on February 25; absent any
official notification to the contrary, the Fund does expect
the GOA to request a resumption of IMF support due to the
large amount coming due to the IMF in 2005.

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CHAD
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14. (SBU) The Chair reminded creditors that Chad reached its
HIPC decision point in May 2001 but went off track of its
PRGF; Cologne terms are possible if it gets back on track.
The IMF reported that talks began in August for a PRGF. The
GoC has taken a range of measures. In November 2004,
agreement was reached for a 3-year program at 45 percent of
quota. Executive Board discussion is scheduled February 7.
Staff indicated the GoC has completed all prior actions
including clearance of arrears on non-rescheduable debt. The
GoC also made progress on HIPC triggers, and has said it will
do everything possible to get to HIPC completion point in

2005. Its economic performance is much better thanks to high
oil income. It will be stabilizing by 2023 at a debt to
export ratio around 85 percent. The Secretariat closed the
discussion with the observation that good economic performance
does not alter HIPC triggers.

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DOMINICAN REPUBLIC
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15. (SBU) The IMF reported that late last month, Fund
management approved a memorandum of economic policy. The GoDR
requested a 28-month Standby Arrangement at 85 percent of
quota, canceling the current standby. Assuming the Paris Club
agrees to financing assurances, staff will prepare a memo for
Board consideration on January 31. The GODR reports it
completed all 16 required prior actions listed in the staff
report. A rescheduling is required due to deficits on the
fiscal side with debt servicing obligations, not problems with
the balance of payments. It needs a USD 800 million package,
sourced from bond restructuring, private sector debt
restructuring, IDB funds, a concessional deal from Venezuela,
banks, and the Paris Club. The GoDR claimed to have made
payments to eliminate its stock of arrears. It is
implementing its bond restructuring. It did a road show to
meet with commercial banks, which reacted amenably. It is
preparing a prospectus for bondholders for an exchange offer
to be presented over the next few weeks. The World Bank rep
stated that the Bank had approved an adjustment loan in 2004,
and it is engaged in talks now on a new country assistance
strategy that would go to the Board in May or June 2005.


16. (SBU) The Secretariat reviewed the timetable, and urged
the Paris Club to avoid last year's scenario, where
comparability of treatment (CoT) proved elusive. The
Secretariat urged financing assurances be conditioned on CoT,

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and/or it could envision financing assurances granted only for
the first year to see what might be the results.


17. (SBU) The USDEL noted that the GoDR still had a very
small amount of arrears that had not been cleared; endorsed
conditioning financing assurances on CoT and putting them on a
one-year leash; and inquired whether the financing gap may be
somewhat smaller due to likely additional private financing
that the GODR had secured.


18. (SBU) Spain reported the GoDR had arrears last year of USD
16 million, now the amount is only one million. It is wise to
link financing assurances to CoT plus clearance of arrears
plus a one-year limit.


19. (SBU) The UK reported all arrears cleared, and all its
claims are post-ccod so it would be participating in the
upcoming negotiation only as an observer.


20. (SBU) Canada reported USD 200,000 arrears, and agrees with
Spain on the proposals regarding financing assurances.


21. (SBU) Norway has a problem with the DR, since it has a
loan in technical default for a dam project. Negotiations
continue, with hopes for conclusion in February, but if the
dispute is not settled Norway will have considerable claims in
default: USD 35 million. It agrees with Spain on financing
assurances, and does not want to invite the GoDR to
negotiations if arrears exist.


22. (SBU) Japan has USD 6 million in arrears; supports the
three conditions on financing assurances.


23. (SBU) Italy has 2.3 million arrears about to be paid,
[which the GODR says it will paid shortly]. Its claims are
only post-ccod, so it would be participating in the upcoming
negotiation only as an observer.


24. (SBU) Sweden has only post-ccod debt, and agrees with
Norway. The GOS is also a partner in the dam project with
Norway, which has not been settled yet.


25. (SBU) Germany has two small accounts in arrears, and
supports the three conditions on financing assurances.


26. (SBU) France agrees to the three conditions, and has 12
million euros in technical arrears.


27. (SBU) Responding to the inquiry about the size of the
financing gap, the IMF confirmed that due to better fiscal
performance, the gap will be about USD 327 million, since the
non-financial sector public balance was 80 million stronger
than anticipated. IDB funds are 50 million higher in 2005,
somewhat offsetting a 20 million decrease resulting from a
shift in benefits to 2006 of certain benefits from the
Venezuelan deal. The commercial bank deal has not
materialized. The IMF raised practical questions, namely,
does the exchange offer need to close for CoT, and given that
the IMF does not tolerate arrears to official creditors, if
financing assurances are for 2005 only, would the Paris Club
have two negotiations?


28. (SBU) The Secretariat aligned itself with the USDEL
remarks, saying creditors need a better idea of the 2006
financing gap. A March invitation would be premature; April
might be better to give creditors a chance to learn the
evolution of the exchange offer.
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HAITI
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29. (SBU) The IMF said an EPCA was prepared on January 10, in
part based on Paris Club forbearance. If security permits, a
mission will return the week of January 17 to assist with
institution building and lay the groundwork for a program.


30. (SBU) In the absence of the World Bank rep, the
Secretariat reported for the World Bank that all arrears were

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cleared on January 6, thanks to a Citibank loan. Immediately
thereafter the World Bank approved assistance of USD 61
million for reconstruction and USD 12 million for natural
resource management, 51 percent in grant form. The Secretariat
will await the EPCA. It indicated some creditors (e.g.,
France) have indicated they will not apply penalties in
recognition of the political turmoil.

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HONDURAS
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31. (SBU) The IMF reported a mission will visit in late
January to discuss a second PRGF review, HIPC triggers, and
Article IV consultations. March may be too early for a Paris
Club negotiation since the Board is not likely to discuss
Honduras until just after the Paris Club session.


32. (SBU) The Secretariat suggested it would try to schedule
Honduras for a negotiation in April.

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IRAQ
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33. (SBU) The Chair invited creditors to attend the
information session scheduled the following day for non-Paris
Club creditors.


34. (SBU) The USDEL reported it had signed its bilateral
agreement with the IIG, and had cancelled 100 percent of Iraq
debt upfront, with no further obligations. On the EDR tables,
the USDEL still has concerns about the methodology, and hopes
to circulate a paper by the next session.

35. (SBU) The Chair noted the methodology is the same as that
used for the HIPC countries, and proposed that the tables be
initialed, de-linking them from later methodological
discussions. Creditors agreed. In a parting observation, the
Chair noted that canceling all debts is on the margin of
acceptable Paris Club behavior, since normally conditionality
is observed, and creditors wait until other creditors
implement their accords.
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KYRGYZ REPUBLIC
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36. (SBU) Russia blocked financing assurances for the Kyrgyz's
follow-on PRGF and request for an extension Kyrgyz's
consolidation period (to correspond with the extension of the
current PRGF). Russia would not agree to extend the
consolidation period or financing assurances, demanding that
Kyrgyz first clear $220,000 in arrears to Russia. The
Secretariat pointed out the inconsistency of Russia's

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position: by agreeing to extend the consolidation period,
Russia was effectively folding the arrears into the previous
rescheduling. The Russian delegate said he would check with
Moscow and get back to the Secretariat to confirm Russia's
position. In the meantime, the IMF plans to issue the staff
paper for the follow-on PRGF in late January or early February
(the paper will indicate that financing assurances are still
pending). Assuming financing assurances are in place, Kyrgyz
will be invited to the March Paris Club meeting, at which time
creditors will negotiate the terms of a stock treatment. Most
creditors seemed amenable to a significant concessional stock
treatment, but wanted the IMF to provide further analysis on
alternative debt reduction scenarios (for example, under
London and Toronto terms).

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NIGERIA
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37. (SBU) The IMF reported it will hold Article IV
consultations on March 4, and will do a new debt
sustainability analysis. After the 2005 budget is approved,
staff will visit Abuja to help the GoN design a new
macroeconomic policy framework.

38. (SBU) The Secretariat reported on its preliminary meeting
on allocating 2005 payments, and noting it wished to avoid
airing the arguments again, said it would work on a proposal
to see how increased payments under the 2004 formula might
satisfy all creditors (although the GON has not agreed to
increase payments above the $1B threshold).


39. (SBU) Determined to air its objection, Germany said it is
unwilling to return to the 2004 compromise. It is not at all
optimistic that increased payments are likely, given the vague
answer from the Nigerian Finance Minister the day before. It
can, however, go along with the Secretariat proposal. The
Netherlands and Italy took the same position as Germany.
Germany added that it would like to hear more at the next
session about how Nigeria's NEEDS program would compare to an
upper credit tranche Fund programsince conditionality is a big
deal for the Paris Club. The IMF rep commented that its rules
on enhanced surveillance have been made much more specific
since the Finance Minister departed her employment at the WB.
Further, the IMF rep stated for the record that the Fund's
agreement on enhanced surveillance for Nigeria was not an
"endorsement" of the GON's program as equivalent to the usual
upper credit tranche program, which is required for a Paris
Club treatment.


40. (SBU) The Chair noted the consensus on procedure, and
directed the Secretariat to crunch the numbers and have a
working paper ready for the next session.

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PERU
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41. (SBU) The IMF reported a mission would visit in mid
February for a second review under the current precautionary
standby arrangement. The World Bank reported that the economy
is doing well; the main risk is political.


42. (SBU) The Chair reported on the Peruvian request for a
buyback. It has offered USD 1.5 billion for previously
rescheduled debt, to reduce its debt profile, by the second
half of 2005. It proposes a March negotiation. The key is
methodology. Peru argues the right price is net present
value, but the rate includes three components: political risk,
country spread, and a liquidity premium for cash. Peru wants
to cap the buyback price at par. For the Paris Club, a
liquidity premium is debatable, and not consistent with the
appropriate market rate. Essentially, Peru wants a
rescheduling of its debt without rescheduling. The Chair
circulated a draft reply.


43. (SBU) Spain agreed there is no case for a liquidity
premium. It is not sure about a cap at face value, since
giving a choice between a buyback and prepayment leads to the
same thing as a cap. The Secretariat argued that the problem
is that a cap allows Peru to select among creditors. If a cap
is put on the price, than those creditors with higher rates
are penalized. That is why a market rate is needed, so that
the terms are the same for all, with creditors free to accept
or refuse.


44. (SBU) The Chair noted the consensus to send the letter to
Peru.

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POLAND
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45. (SBU) The IMF had nothing to add. The Secretariat noted
that the Poles made an offer, and that it had communicated to
them the methodology agreed upon in the December session. The
Poles now need to know who is participating so they can
prepare financials. So far, the Secretariat has not told them
who is participating per the Belgian request.


46. (SBU) France still has no position about participation.
Italy will not participate. Canada has two agencies that will
participate, but its Wheat Board will not. Finland will
participate. The UK intends to participate but does not yet
have authorization; it hopes to get it within a week. Sweden
will participate. The USDEL said it might participate.
Norway said it still knows nothing, requested a deadline, and
asked what to do with debt for ecology swaps. Spain does not
know yet. Denmark will have an answer in a week.


47. (SBU) Jouyet set a deadline of January 21 for creditors to
advise the Secretariat whether they are in or out of the
prepayment arrangement.

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RUSSIA
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48. (SBU) An anticipated negotiation to effect Russia's
proposal to buy back as much as USD 12 billion of debt owed to
Paris Club creditor countries did not take place as Russia
abruptly called for a postponement. The Russian head of
delegation explained that there were still big differences
between Russia and its creditors regarding the general
parameters for negotiating the buyback operation, but hoped to
be able to narrow them over the next several weeks to make a
negotiation possible.

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RWANDA
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49. (SBU) The IMF reported that a mission is working on a
fourth PRGF review (not complete),and got agreement on a
medium-term framework. Its program is on track but there are
issues about 2005 spending. There is too much non-essential
spending, e.g., a hotel project, loans to civil servants, new
aircraft purchases. If the fourth review is successfully
concluded, staff could bring Rwanda to the Board in late March
for a decision on completion point. Much of the technical
work on a debt sustainability analysis has already been
completed. Preliminary analysis indicates a significant need
for topping up.

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SERBIA AND MONTENEGRO
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50. (SBU) While the IMF has some concerns about the current
account deficit and inflation, the GoS&M have adopted a policy
package to address the concerns, which has led to substantial
fiscal tightening. Presentation of the fifth review and
Article IV consultations is scheduled for the Board in April.


51. (SBU) Russia reported Serbia has USD 1.68 million in
arrears, and asked if the Secretariat would prepare a letter
reminding Serbia to clear arrears.


52. (SBU) The Chair, noting the consensus, directed the
Secretariat to prepare a letter.

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VIETNAM
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53. (SBU) The IMF reported that the 3rd PRGF expired April

2004. No follow-up program was contemplated. The Board
discussed Article IV consultations on November 22, 2004.
Vietnam is not a HIPC-eligible country so there is no follow-
up on the debt side. Its NPV debt to export ratio is 39
percent according to 2003 data.


54. (SBU) Norway reported that on November 2, 2004, it signed
a declaration of intent to do a debt for development swap,
probably including debt forgiveness. They have invited the
International Fund for Agricultural Development to
participate. The beneficiary is a decentralized agricultural
board. The deal covers all claims, which total USD 5.7
million. All are non-ODA commercial export credits, all
development-oriented. All will be forgiven if Vietnam spends
all on development. This will be one single transaction to
fund two years of the program. Norway hopes to conclude the
transaction in February or March.


55. (SBU) Under the existing standard debt swap provision,
creditors are limited to the amount of non-concessional debt
they can be included in a debt swap operation. The
Secretariat noted that Norway had exceeded that threshold,

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however no creditors objected. The Chair thanked Norway for
the information.

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ZAMBIA
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56. (SBU) The IMF reported that there is a fairly high
probability of reaching HIPC completion point in March. A
mission to conduct the 2nd review under its PRGF is scheduled
at the end of January. The program is on track so there
should be no hold up at the Board meeting. Nevertheless,
there is one complication regarding data. Zambia has a
serious debt management problem. During an October conversion
of debt management software, large amounts of data were wiped
out and totally lost. Reconciliation is ongoing, and the IMF
hopes to have an accounting basis upon which to complete its
debt sustainability analysis. The IMF hopes the Club can help
with the reconciliation process, particularly regarding US
PL480 loans and Japan.


57. (SBU) Russia said it has considerable arrears, totaling
USD 30.7 million in post-ccod from October 2004 maturities.
In June 2004, the Club agreed to extend the 2002 Agreed Minute
to June 2005, if all arrears are paid; therefore the debtor
should be informed to clear its arrears. It also asked if
topping up would be needed; the IMF replied probably not.


58. (U) Baghdad minimize considered.
LEACH