PARIS CLUB -- DECEMBER 2004 TOUR D'HORIZON

UNCLAS SECTION 01 OF 20 PARIS 000167

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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 -- DECEMBER 2004 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 December 14, 2004 Paris Club session. The
Paris Club's President, Jean-Pierre Jouyet, chaired the
session. Staff represented the Secretariat since
Secretary General (SecGen) Emmanuel Moulin suffered an

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unexpected medical emergency. Representatives of non-
Paris Club members Brazil, Israel and Korea attended
discussions on those countries to which they are
creditors. Congo Brazzaville negotiation reported
septel. The next session of the Paris Club is scheduled
for the week of January 10, 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

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REPRESENTATIVES, NOR WITH NON-PARIS CLUB PARTICIPANTS.


3. (SBU) Discussed in this session:

Angola -- IMF Update (Brazil)
Argentina -- Perspectives for upcoming negotiation
(Israel)
China -- creditor status
Congo (Brazzaville) -- upcoming negotiation (Brazil)
Djibouti -- IMF update
Dominican Republic -- IMF Update, comparability of
treatment issues, review of arrears
Haiti -- IMF update
Honduras -- IMF update
Iraq -- IMF update, EDR tables
Kenya - IMF update
Kyrgyzstan - debt sustainability analysis (Turkey)
Nigeria - 2005 debt repayment schedule (Brazil)
Peru - - buyback, Secretariat report (Brazil)
Poland -- prepayments (Brazil)
Russia -- buyback proposal
Sierra Leone - agreement extension
Sudan -- IMF update


4. (U) ACTION/FOLLOW-UP/UPCOMING ITEMS

Congo (Brazzaville) -- debt relief negotiation --
December 2004 session

Methodology -- Possible publication of rules concerning
buybacks and prepayments

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ANGOLA
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5. (SBU) The Secretariat said that it had not yet been
able to talk with the Angolan Minister of Finance (as
agreed upon at the November session),and will try again
in January. The IMF reported that after the staff visit
to Angola in November, although some progress had been
made, data issues remain. The GoA is unable or unwilling
to share information about its offshore oil accounts.
These are not reported as part of their reserves, but the
IMF suspects the total roughly equals existing reserves.
If the GoA shares the information, then the IMF would
visit in January 2005, which could lead to Article IV
discussions at the Board in February. The GoA also held
bilateral discussions with Hungary and Bulgaria, which
appear to have involved debt-rescheduling negotiations,
not merely data reconciliation. The World Bank reported
on a memorandum of understanding with the UNDP, and
commented that a precondition for a donors' conference
would be the signing (not implementation) of a Staff
Monitored Program (SMP) with the IMF, and finalization of
a poverty reduction strategy paper (PRSP). The objective
of such a conference would not be to collect pledges, but
to get Angola to get used to multi-year programming. The
GoA needs to have a longer-term vision. The Bank will
continue for the next 18 months an interim support
strategy. Last week it concluded in Paris negotiation
about a loan of USD 200 million, with a board date for
approval of Feb 11.


6. (SBU) The Spanish delegate thanked the IMF for its
update, and offered to help the Secretariat contact
Angolan officials.


7. (SBU) The Chair noted the continuing desire to engage
the Angolans, welcomed the Spanish offer of assistance,
and promised to report results at the next meeting.

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ARGENTINA
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8. (SBU) The Chair reported on his informal visit to the
Argentine authorities (in his capacity as Ambassador, not
as Paris Club President),in which the Argentineans urged
creditors to be more flexible and creative. The IMF
confirmed, however, that the GoA does not want another
IMF program; it just wants to repay the IMF as soon as
possible and be done with it. This creates the tactical
problem that the GoA may seek to approach the Paris Club
without an IMF program. It is up to the creditor
countries to decide how to handle that possible scenario,
but working in tandem has generally been the best
approach in the past. As for the private sector, the
debt exchange has been pushed forward from last month to
February 25, 2005. The GoA expects a high rate of
participation. Structural reforms are stalled.


9. (SBU) The World Bank rep said the Board approved a
loan on December 7 of USD 200 million for provincial
services to reactivate the economy. The Board did so
only with great reluctance, because of its concerns about
debt levels and structural reforms. The rest of the Bank
programs are on hold. The rate of net lending flows in
2005 probably will be just under a half billion USD to
Argentina; with an IMF program the net flow would be
slightly positive to the Bank.


10. (SBU) The UK rep argued that although conditionality
is important, an IMF program is just a means to an end
and perhaps the Paris Club should consider other means,
citing Nigeria as an example. In the case of Argentina,
however, no conditionality would exist absent an IMF
program; therefore, UK opposed any restructuring outside
of a Fund program. Germany answered that in the absence
of progress on the IMF program, the Paris Club should
send a strong letter requesting repayment, complaining
that GOA's two years of increasing arrears amounted to an
'indirect rescheduling' of its Paris Club debt. The
USDEL agreed to send a letter. Italy agreed to send a
letter, but arguing that the time is not right, suggested
that perhaps January would be better. Japan said it
would join any consensus. The Netherlands noted that it
had been pushing for a letter since August, and fully
supports sending one because it doubts that the private
sector deal will ever materialize.


11. (SBU) The Chair proposed that the Secretariat would
circulate a draft letter, reminding the GoA about its
repayment obligations and that if it wants a debt deal it
needs an IMF program. The Chair plans to send the letter
in January.

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CHINA
--------------

12. (SBU) Spain asked for China's inclusion on the
agenda, in order for the Club to consider the issue of
China's relationship with the Paris Club and a possible
future membership. Countries agreed that a first step
would be for the Secretariat to gather publicly available
individual country data on China's role as a creditor.
Japan raised the issue of China's Export Bank's loans to
Angola as an example. Germany pointed out that China is
a WTO but not OECD member, the opposite of Russia, and
said China is a major case and its membership in the Club
will definitely be a political matter for the Club. The
Germany rep said that China had approached the Club very
informally in 1999 on its principles and procedures. The
Chinese had in the last few days approached Germany via
their Embassy to ask about Germany's opinion of a Chinese
membership in the Club (UK and Russia later indicated
they also had been asked the same question fairly
recently). He asked the IMF for information on China's
claims, because to be a Paris Club member a country must
have "substantial" claims. The UK noted that China is a
very active creditor in Africa and Latin America. The
USDEL suggested-and the Chair agreed--that China might be
invited to the Paris Club informational meeting (see
"Iraq" below) discussion to be set up for non-Paris Club
creditors of Iraq.


13. (SBU) The IMF said that the Chinese had not raised
Paris Club membership during the Fund's most recent
mission (which left December 7). The Chinese are a very
active creditor, having forgiven $1.3 billion of all debt
to 31 African HIPC and low-income countries. He said the
IMF could include a questionnaire on China's creditor
information during its Article IV consultations in April
2005, and pointed out a number of public sources the
Secretariat could use in gathering data on China's

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creditor role. The World Bank also offered to help the
Secretariat gather data on developing country claims.

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The Bank pointed out that notwithstanding its growing
creditor role, China remains the Bank's largest borrower
at $21 billion (half in IBRD exposure, although the IBRD
share is declining over time due to early repayments in
2002, 2003, and 2004). China is still an active
borrower, at about $1.2 billion a year.


14. (SBU) The Chair said it would report to members the
results of its informal findings on China's creditor
role, so that members could then consider next steps.

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CONGO (BRAZZAVILLE)
--------------

15. (SBU) The IMF said the Board approved on December 6
a three-year PRGF for USD 84 million that is in line with
the priorities (decrease poverty, increase oil
transparency) identified in the GoC's PRSP. 2002 arrears
totaled CFA 258 billion to the Paris Club, while the PRGF
assumes a payment of CFA 106 billion in the first year.
The IMF research department just revised downward
projected oil prices, which brings the IMF assumptions
very close to where they were in August with WEO
projections. The World Bank noted that the Board
approved a USD 30 million economic recovery credit last
week; generally the Bank is pleased with the GoC progress
in repaying arrears.


16. (SBU) The Secretariat distributed the Congolese debt
reduction proposal, and commented on two technical
details - additional conditions for rescheduling post-
ccod debt treated in the 1996 agreed minute, and a 5-year
reprofiling of post-ccod debt. Russia said it is not
comfortable with the request for a 5-year reprofiling.
Denmark requested the agreed minute include a de minimus
clause, which Japan supported. The French suggested a
clawback clause. The UK expressed uncertainty about a
clawback. Germany supported the Russian position, and
suggested payment be made in one year. The USDEL
questioned whether a clawback clause would be worth the
effort, since most debtors refuse them and since they are
complex, but noted flexibility within the range between 1
to 5 years for a reprofiling.


17. (SBU) The Chair confirmed the Paris Club would open
the negotiation with the GoC on December 15.

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DJIBOUTI
--------------

18. (SBU) The Chair reminded creditors that only the
first phase of Djibouti's most recent Agreed Minute was
ever implemented (from October 1999 to end-August 2000).
The IMF said that Djibouti's performance under its SMP
started in April 2004 was `quite weak,' with only limited
progress on structural reforms. The authorities had
hoped the SMP would lay the basis for a PRGF, but agreed
to ask for an extension of the SMP in order to create a
longer track record (a minimum of two quarters of
successful implementation) for the PRGF. During the IMF
November mission, the Minister of Finance had lectured
the Fund on raising the issue of Djibouti's arrears with
certain Paris Club creditors. The IMF should not be
involved; instead, creditors should be discussing their
disputes regarding arrears directly with the government.
Furthermore, the Minister said, those countries (Italy,
Spain) were continuing to give grants to Djibouti,
implying that they would not be doing so if they had a
`real' problem with the Government. Italy and Spain
countered that the Government had refused to deal with it
in good faith, and in Italy's case, the issue was not a
dispute over the debt but rather a dispute over the debt
treatment given by the Paris Club: the Minister had told
them it was "unfair" that Djibouti was not a HIPC
country. The World Bank representative said progress on
its overall Country Assistance Strategy was satisfactory,
with its portfolio strengthened and improved; a new CAS
will come before the Bank board in January 2005.


19. (SBU) The Chair indicated that he would send a firm
letter to the Government reaffirming Paris Club
solidarity.

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DOMINICAN REPUBLIC
--------------

20. (SBU) The Technical Secretary of the Finance
Ministry of the GODR met with the Secretariat the week
before the December session to explain the DR's
comparability of treatment (CoT) strategy, showing them a
copy of a letter sent only to DR creditors (Club members
did not see a copy of the letter). The latest CoT
attempt relies on a bond swap, the results of which will
be known in the coming months. This means the DR will
miss the end-December 2004 deadline set in the April 2004
AM. The DR asked the Secretariat for more time; while
the 2004 AM has a suspension clause, members did not
believe it was a good idea to exercise it after the
Secretariat posed the question.

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21. (SBU) The new two-year IMF SBA program for 2005/06 is
being presented this week, the IMF rep indicated. The
Fund said that it would ask members for financing
assurances at the January session instead of at the
December session. Italy said it has post-ccod arrears on
ODA debt of $2.3 million; it also expressed concern about
the CoT situation. The USDEL approved of the performance
tripwires established in the upcoming SBA, and on the
question of post-ccod arrears, acknowledged it was a
serious problem but did not support annulling the 2004
AM, instead suggesting that the Club offer financing
assurances for just one year. This would meet the
members' concerns over CoT, permit the IMF program to go
forward, and motivate the DR to work towards CoT.
Germany and Spain supported the US idea on one-year
assurances, and the IMF confirmed that the two-year
program could go forward with assurances for just the
first year (the DR would need to return to the Club for
negotiations before the second year). Germany added that
the DR should clear post-ccod and interest arrears before
the next round of negotiations and that creditors should
continue to ask for a new DSA. The IMF said the DR could
return to the Club in March, and by that time the results
of the bond offer should be clear.


22. (SBU) The Chair closed the DR session by saying it
would circulate before Christmas a draft letter, which
would insist on CoT compliance and remind the DR of
outstanding arrears. He said the Club could do one year
financing assurances, and between January and March
members could consider any pre-conditions for
negotiations.

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HAITI
--------------

23. (SBU) The IMF is seeking management approval for an
Emergency Post-Conflict Assistance (EPCA) arrangement.
There could be a meeting in January after which things
would move quickly. SMP performance is satisfactory, but
some structural commitments are delayed. The stock of
arrears to bilateral creditors is USD 28.5 million to
France, Italy and Spain, with the bulk of it owed to
France. In designing the EPCA facility, the IMF had
assumed that Haiti would remain current on payments to
those countries that are providing substantial financial
support over the EPCA period, e.g., the USG and Canada,
which are together providing USD 250 million, far in
excess of the USD 2 million of scheduled debt service to
those two donors. The IMF is asking creditors if they
are willing to go along with a debt service payment
moratorium, or provide aid to cover payments due, as a
positive signal to Haiti until the time that a new
program is available. The World Bank reported on a USD
12 million budget recovery credit, and a USD 73 million
package to be presented to the Board on January 6. The
Bank strategy is to provide IDA intervention in the short
term to restore institutional credibility. The USD 73
million is about half the IDA financing pledged by the
Bank, but is contingent on Haiti clearing USD 52 million
in IDA arrears.


24. (SBU) Italy inquired about the French position, and
although it does not have the resources of the US/Canada,
it wants to help and so in principle can agree to a
payment moratorium. Spain pointed out that the Paris
Club normally keeps a clear separation between financing
aid and debt servicing. New money is no alternative to
debt treatment. It expressed surprise about being asked
for aid today, but will get an answer within a week.

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HONDURAS
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25. (SBU) The Secretariat put Honduras on the December
agenda, to see whether after the IMF report the Club
would wish to invite Honduras for Completion Point (CP)
in spring 2005. The IMF rep said Honduras was broadly on
track with its PRGF according to a review done in
November, and was doing a good job in meeting its HIPC
trigger conditions. A team was in Honduras working on a
DSA for HIPC completion point; a Board meeting is planned
for March 2005, with a possible CP for end-March 2005.
He envisaged no need for topping up. The World Bank
concurred with the IMF, and said its Board has scheduled
to discuss Honduras' HIPC CP during the second half of
March 2005. The Secretariat said given the March CP, it
would sometime early next year start collecting the data
call.

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IRAQ
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26. (SBU) The Chair stated that two issues remain from
the last negotiation: the calculation of how to achieve
the 60 percent reduction in the second tranche, and
comparability of treatment. The IIG has begun talks with
non-Paris Club creditors, but there appears to be a need
for an educational campaign. In that vein, the Chair has
received a letter from the Kuwait Fund asking for details
of the debt deal. The Chair asked for reaction to the
idea of the Secretariat organizing an informational
meeting in Paris.


27. (SBU) The IMF reported that a mission had just left
Amman on Saturday after meeting with IIG officials to
assess the 2005 Iraq budget. Policy discussions will be
held December 18. Information is still only slowly
trickling in, so the IMF is unable to judge EPCA
performance. The 2005 budget appears to be in line with
the EPCA, but questions have arisen about the concrete
measures on domestic petrol subsidies and domestic debt
management. The IMF understands that the IIG has begun
contacting non-Paris Club creditors among the Gulf States
and some eastern European countries. The World Bank rep
said donor funds of 225 million for 2004 have almost
completely been allocated.


28. (SBU) Russia asked a technical question about the
calculation of the appropriate market rate after 23
years, contained in the Secretariat working paper. The
USDEL noted that the USG has the same question as Russia
and, while noting the 1994 working paper that serves as a
precedent, questioned whether this was a sound
methodology. On comparability of treatment, the USDEL
welcomed the willingness of the Secretariat to engage in
a pedagogical exercise. The USDEL mentioned that it
plans to meet with the IIG in December, and hopefully
sign its bilateral agreement (note: the bilateral debt
treatment was signed December 17 in Washington). The
Netherlands requested that the working paper use a
December 31, 2004 date for budgetary purposes, as it has
already budgeted for debt relief this year. The
Secretariat, noting that it had not yet widely

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distributed the 1994 working paper addressing the
appropriate market rate, defended the methodology, to
which the Russian del proffered his support and said he
would not be able to accept any changes to the working
paper. The USDEL noted its need to consult in DC.

29. (SBU) The Chair said it would provide information to
the Kuwait Fund as requested, and would proceed to
organize its informational meeting.

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KENYA
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30. The Secretariat indicated a successful IMF Board
review would allow for implementation of the second phase
(Jan 2005-Dec 31, 2005) of the latest agreement. The IMF
representative said the first review is scheduled for
December 20; the staff report will recommend an
augmentation of the PRGF by 50 million SDR, due in part
to increased food imports. The Kenyans were broadly on
track with their program. The World Bank said the
government was making only slow progress on reforms, with
financial sector reforms `relatively' slow.
Privatization was also progressing slowly, although the
government is working on a paper setting out its
privatization policies. The Chairman said the government
was on the right track on governance. The USDEL asked
about the relative importance of the five waivers being
requested for the upcoming first review; the IMF said
they were not particularly significant, characterizing
them as `technical and small.' More importantly,
authorities were taking offsetting actions. The IMF
wanted more, but said Kenya has continued to be affected
by contentious deliberations on constitutional reform.
Members approved sending a letter to the GOK on the
entering into force of the second phase.

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KYRGYZ REPUBLIC
--------------

31. (SBU) The Chair said he had received a letter from
the GOK requesting an extension , to align the Paris
Club's Houston terms treatment ending December 2004 with
the end of the IMF program in April 2005. The Chair
indicated he proposed to answer positively, unless he
heard otherwise from creditors. The IMF rep told
creditors that a staff mission is currently in Bishkek,
where the team is evaluating a PRSP. The IMF did provide
an extension on November 19 to enable completion of the
last review. April was a target extension date with a
built-in cushion, staff could go to the Board in
February. In the absence of a February Paris Club
session, the IMF might seek financing assurances in
January. It would appreciate feedback on a new DSA; in
its view flow treatments would not suffice, the GoK
needing a stock treatment to stabilize debt ratios. The
World Bank rep discussed its leadership role in
governance and the energy sector. The Bank is happy with
the progress on restructuring the energy sector, but not
satisfied with the slow pace of government reform. The
Board is likely to approve three new projects totaling
USD 38.5 million, of which 45 percent are grants.


32. (SBU) Russia said it would need to consult in Moscow
regarding the extension request. In any event, no
substantial payments are due over the next few months, so
an extension really might not be necessary. On the DSA,
Russia said concessional treatment should be tailored to
debtor needs; Naples terms may be too generous. Japan
expressed no problem joining a consensus, and noted that
the 2002 agreed minute includes a goodwill clause on the
stock of previously rescheduled debt, so a concession
could be based on that clause. Denmark is OK with an
extension, and of course could follow the goodwill
clause. Germany agreed with Denmark, and inquired when
will the new DSA be available. The IMF acknowledged the
need for a new DSA, but commented that it will not change
much from the last one.


33. (SBU) The Chair urged Russia to provide a reply
quickly, to which Russia suggested that the Secretariat
prepare a working paper. (Note: USG holds no Krygyz
debt.)

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NIGERIA

34. (SBU) According to the IMF, staff completed a visit
on November 15 to look at the 2005 budget framework,
which overlapped with a World Bank visit. Article IV
consultations are scheduled for late February, and the
IMF would do a new DSA for a Board meeting in April or
May. The World Bank rep said Nigeria is on track with
its legislative reforms; the Bank is thinking of
increasing aid to USD 700 million.


35. (SBU) The Secretariat expects Nigeria will have an
increased capacity to pay its debt in 2005. IMF states
that the DSA shows reserves for Nigeria climbing to USD
22 billion by the end of the DSA period; this assumes
Paris Club is paid $1 billion in 2005. Nigeria has seen
a steady decrease in its debt to GDP ratio, and IMF
states that the debt is sustainable. The Secretariat can
approach the GoN on an informal basis to urge them to
regularize the situation and become current. On the 2005
payment allocation, Denmark's proposal is one option but
the Secretariat would not like to reopen the debate.


36. (SBU) Concerning lifting of the debt swap moratorium
and sharing of 2005 payments: there seemed to be general
consensus with lifting of the moratorium once all 2004
payments have been received, although some creditors
wanted to press for higher payments in 2005, perhaps
requiring that Nigeria not run any new arrears. On the
allocation methodology for 2005, there was disagreement,
with some supporting staying with the 2004 methodology
and some supporting the German/Danish proposal.


37. (SBU) Creditors (except for Spain, and Brazil which
still has not settled its dispute with Nigeria) confirmed
receipt of the final 2004 payment. Russia said it had
studied the Danish proposal, and while it is flexible it
prefers to leave the allocation as is. On the question
of contact, Russia supports sending a letter that ties
lifting the moratorium on debt swaps to increased 2005
payments. Germany agreed with the letter, and mentioned
that in a bilateral meeting with the Finance Minister in
January, it would press for increased payment. Germany
distributed its own table with proposed 2005 allocations,
and suggested that the issue should only be discussed
within the Paris Club, not with Nigeria. Denmark agreed
on a letter with a link to increased payments, and
reported that a Nigerian delegation recently had asked
about lifting the ban on new export credits. Denmark
said no, not with arrears and no IMF program. As for the
2005 allocation, its proposal is still on the table.
Spain objected to the draft letter, but said as soon as
it gets its payment it could support lifting the debt
swap ban. Brazil noted its dispute has not yet been
settled with Nigeria about the size of its debt, and so
it has not gotten paid. Belgium indicated a preference
to link the moratorium end to increased payments. It
prefers to continue the 2004 allocation, but suggested
that a better solution would be for Nigeria to increase
its payments to amounts scheduled so it runs no arrears.
The UK agreed to lift the moratorium (once Spain is paid)
and while admitting that leveling up is important,
prefers not to reopen the issue. The Netherlands signed
an ODA agreement on December 13 with the Nigerian FinMin.
Responding to the Dutch request for increased payments,
the Nigerian Finance Minister had said it is a political
decision and a tough sell (which the Dutch interpret as
not entirely excluding the possibility). The Finance
Minister had asked about a new agreement and the Dutch
replied that Nigeria still would need a new DSA. If
Nigeria increases payments, the Netherlands can lift the
debt swaps embargo. They really should clear all
arrears, if not in one year then at least all maturities
next year. On the allocation, the Netherlands cannot
accept the 2004 schedule, but can accept the Danish
proposal (and maybe the German table after taking a
look). Japan agreed 2005 payments should be higher. A
link to the moratorium is not necessary, but could be
acceptable, but in any event the draft letter is
acceptable. Italy agreed to the letter, and is
sympathetic to the Danish/German proposal. Switzerland
agreed with the draft letter, although it prefers greater
specificity regarding the amount of increase payments,
and strengthening the link. The USDEL agreed to greater
specificity, and agreed that if Nigeria were to meet all
its maturities in 2005, the Paris Club could avoid the
allocation problem. Finland supports the letter.


38. (SBU) The Chair took note of the consensus on
sending a letter, and the lack of consensus on allocation
of 2005 payments. On the latter point, he suggested a
technical meeting in January to address the issue.
Secretariat also reminded delegations of the Ngozi lunch

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with heads of delegations at the January session.

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PERU
--------------

39. (SBU) The Chair reported that Peru has no intention
to return to the Paris Club, but since it has a peak in
its repayment schedule, it would like to partially
buyback some of its short term debt to smooth out those
peaks. The IMF said it had approved on June 9 a
precautionary standby arrangement. On November 19 the
Board completed its review, and a second review will
occur in mid-February 2005. Peru is just using the IMF
arrangement to bolster investor confidence to carry it
through its elections. It has reduced its public debt
ratios from 48 percent of GDP in 2003 to 40 percent in

2004. Debt humps will occur in 2008 through 2012. The
Finance Minister wants conduct market operations to
perform this buyback. The buyback would save costs on
debt, improve duration and reduce the overall stock of
debt. The IMF supports the buyback proposal. The World
Bank said it is granting USD 950 million in new lending;
it welcomes the buyback proposal.


40. (SBU) The Secretariat noted the proposal would indeed
decrease debt peaks. The buyback discount rate would
equal the exchange rate for long term debt, meaning
payments at slightly higher than par. The Secretariat
supports the Peruvian request.


41. (SBU) The USDEL said it could go along with the
Secretariat proposal, and promised to study the request.

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Germany said it is positively inclined to the proposal,
it can go along with a market rate set multilaterally,
and an exchange of letters would be sufficient to effect
the operation. Spain said it supports the proposal in
principle, and is OK with the methodology. Japan said it
would like more time to study the details. Italy is in
principle interested, and is OK with the methodology - it
is an opportunity to chart new ground.


42. The Chair said he would have the Secretariat prepare
a letter reporting agreement in principle but requesting
more details. The issue will be taken up in January.
Creditors should have preliminary views by then.

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POLAND
--------------

43. (SBU) The IMF and the World Bank reiterated support
for Poland's prepayment offer. The Secretariat
circulated a working paper on how to calculate the
discount rate for those countries that chose debt-
servicing reduction (DSR),noting that debt for nature
swaps would have to be interrupted to achieve the 50
percent NPV reduction accorded in the 1991 Agreed Minute.
Many countries expressed interest in the prepayment
offer, with a slight majority indicating their intention
to pursue the DSR option.


44. (SBU) Germany said it has chosen debt reduction so
is not concerned with the DSR options. Belgium agreed
with the working paper methodology, and reiterated its
opposition to being pressured to participate. The
Netherlands said it will participate and had already told
the Poles; it chose debt reduction so the options are of
no concern. Japan said it might have been willing to
participate, but it chose DSR so it will not participate.
Italy chose DSR, agrees with the methodology, and has not
yet decided whether it will participate. Sweden chose DR
and is interested. Canada said one of its agencies, the
largest creditor, is not interested, but the GOC and EDC
are interested (DR option). Denmark chose DSR, is
checking the math and seeking authorization; a discount
of 11-12 percent might be acceptable. The USDEL is quite
attracted to the offer; it chose DR and indicated it
still had some internal issues relating to potential
budgetary impacts of prepayment. . Finland chose DR
option, and is interested. Austria chose DSR, is still
checking formulas but probably is mostly not interested.
Switzerland selected DSR, is ok with methodology, but
hasn't decided yet whether to participate. UK has chosen
the DR option, and is interested. Norway chose the DSR
option, and is still thinking. Spain is not likely to
participate. France chose the DSR option, and agrees
with methodology but is still thinking over its
participation.


45. (SBU) Although many countries indicated interest, a
number still needed to think about whether they would
participate or not. The Secretariat asked that creditors
come back to the Secretariat by the end of the year with
their formal positions so that the Secretariat could
inform Poland of Paris Club interest.

--------------
RUSSIA
--------------

46. (SBU) The Chair reviewed the Russian offer, and
before going around the table for reactions, noted the
USDEL was the lone holdout on whether to set the discount
bilaterally or multilaterally. The IMF reported that it
is still a bit too early to say the Russian government
has reached a final decision on the Finance Ministry's
prepayment offer. Based on 2005 budget assumptions,
approximately USD 10 billion would be available. A
bullet buyback would require borrowing from central bank
reserves. The Fund wishes to avoid relaxation of Russian
fiscal policy, and in fact would prefer further fiscal
tightening to bolster monetary policy goals. In short,
the IMF welcomes the prepayment. The World Bank concurs.


47. (SBU) Germany is pleased its comments to the working
paper were incorporated, and is prepared to negotiate the
Russian offer. It prefers to leave securitization open
as a consequence of failure (note: Germany securitized
some of its Russian Paris Club debt in June 2004, to
Russia's consternation). The discount rate should be set
multilaterally and be market based, as per the working
paper and not per the Russian request. Austria urged
agreement on methodology, voluntary participation, and
freedom to securitize. Italy agreed to the working paper
and a multilateral approach. Netherlands favors the
multilateral approach, might consider combining discount
with Aries bonds, but insists on cash. Australia has not
yet decided, but if there is a three-year prepayment with
the first year involving cash and subsequent years
involving bonds, it would only participate in the first
year. Sweden agrees with the working paper, and will
provide written comments to the working paper. Japan
agrees with the working paper and that the freedom to opt
out should be included. Canada is not interested in
participating but does support a multilateral approach.
Belgium, Denmark, and Spain agree with the working paper
and stress voluntary participation, as does the UK.
Finland said it is interested in the Russian proposal and
supports the multilateral approach. The USDEL
acknowledged that it had argued for a strictly bilateral
approach, to preserve voluntary participation, but would
join the consensus for a multilateral approach, on the
condition that Russia first clears all arrears to all
Paris Club creditors. The USDEL also noted the existence
of USG contract prepayment clauses that allow prepayment
without penalty.


48. (SBU) The Chair took note of the consensus on the
working paper, with emphasis on voluntary participation.
He will therefore indicate that consensus to the Russians
and will inform the Russians that the Paris Club will
meet with them in January. Germany proposed that as
Russia is a Paris Club member, a classical negotiation
format is unnecessary; the Secretariat could work with
them bilaterally in advance of the next session. Germany
also posed a question to the IMF regarding the timing of
Russian prepayment to the IMF. The IMF said it
understood Russia proposed to prepay the Paris Club
creditors first, and then pay the IMF whatever is left
over.

--------------
SIERRA LEONE
--------------

49. (SBU) The Secretariat prepared a draft letter
granting Sierra Leone an extension so that its Paris Club
treatment would coincide with the recently-extended IMF
program. The IMF reported that Sierra Leone had its
fifth review on November 12, when its PRGF was extended
by three months to June 2005. Progress was broadly
satisfactory. The government completed its PRSP this
month. With a one-year implementation period, HIPC
completion point (CP) could be considered end-2005 at the
earliest. The Chairman said that if Sierra Leone fails
to reach CP, the Club would send another letter.

--------------
SUDAN
--------------

50. The Chairman opened the discussion by asking what
conditions the Paris Club would have for dealing with
Sudan. The IMF said a March 2005 Board date was set for
Article IV discussions, and that a 2005 SMP was
envisaged, using a Rights-Accumulated Policy approach.
Any timetable will depend on the peace process and a
resolution of the Darfur problem. The IMF said funding
for IMF arrears clearance for Sudan needs to be
identified. It also confirmed that financing assurances
would be needed for a RAP. Zambia had received a Naples
treatment under a RAP in 1992, which could be used as a
precedent for Sudan. Norway said Darfur and peace
agreement were requirements, and asked when non-Paris
Club creditors would be advised of the need for financing
assurances.


51. (SBU) The USDEL also affirmed that no formal
discussion of arrears clearance should take place before
Darfur was resolved. Responding to a question from
Denmark, the IMF said the RAP could last 1-3 years. He
also said IMF HIPC financing could take time (one idea
has been IMF gold sales). Answering the UK question
about getting non-Paris Club creditors involved, the IMF
said under the IMF's lending into arrears policy, the IMF
considers that financing assurances from Paris Club
creditors extend to non-Paris Club creditors. However,
that Board decision dates to 1983, a time when Paris Club
creditors were the largest group of creditors; however,
now Sudan has large non-Paris Club creditors, so it would
be desirable for Sudan to seek comparable treatment.
Either the PC itself could consider contacting major non-
PC creditors on Sudan's behalf (precedents exist),or the
IMF could consult via ED's, per Iraq model. The Chairman
said Secretariat could contact; the German rep said the
Club should avoid sending a signal to the outside world;
the US agreed, reiterating that Darfur would need to be
resolved before outside creditors were engaged.
Minimize considered.

LEACH