PARIS CLUB - SEPTEMBER 2005 TOUR D'HORIZON

UNCLAS SECTION 01 OF 08 PARIS 006373

SIPDIS

SENSITIVE

STATE FOR EB/IFD/OMA
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 - SEPTEMBER 2005 TOUR D'HORIZON


SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET DISTRIBUTION

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SUMMARY
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1. (SBU) At the September 2005 Paris Club meeting, creditors
agreed that Iraq's recently announced debt restructuring offer to
its private creditors was broadly comparable to the deal it
received in the Paris Club last year. Some creditors (Italy,
Japan, Italy) suggested that Iraq may not be negotiating in good
faith with its private creditors, but the IMF said it was
premature to judge whether the Fund's lending-into-arrears policy
had been violated, and the Paris Club Secretariat reminded
creditors that the issue is not for the Paris Club to decide.
The IMF gave a cautious assessment of Iraq's prospects for
signing a Stand-By Arrangement by the end of the year, stating
that it hoped to commence negotiations in the fourth quarter.
Negotiations with Nigeria on a final settlement with the Paris
Club are expected to take place in October, if a Policy Support
Instrument for Nigeria is approved by that time. Creditors
agreed to "freeze the flows" as of September 15, so that any
missed payments falling due at the end of the month do not add to
arrears. In addition, the Secretariat confirmed that Nigeria is
prepared make an additional cash payment toward its 2005 debt
service. Other countries on the agenda included Angola,
Argentina, Burundi, the Dominican Republic, the Democratic
Republic of the Congo, Gambia, Indonesia, Malawi, Peru, Russia,
Sao Tome and Principe, Serbia and Montenegro, Sierra Leone, and
Sri Lanka. END SUMMARY.

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ANGOLA
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2. (SBU) The IMF reported that the authorities were no longer
interested an SMP, but were now eyeing a PSI as a means to a
Paris Club treatment. The Secretariat took stock of whether any
creditors had cut bilateral deals with Angola to recover some of
their claims, and whether any creditors were contemplating new
financing. Although no creditor reported cutting a bilateral
deal (not counting Germany in 2003 and Russia in 1996),Sweden
acknowledged that it recently extended USD 17.5 million in short-
term financing, and Italy said it was under tremendous pressure
from its export credit agency to resume lending. Creditors
agreed that, for the time being, they should refrain from cutting
any deals in order to maximize pressure on Angola to reengage
with IMF - even though this strategy has been unsuccessful to
date. The UK was the most vocal is questioning the wisdom of
lending to a country in debt distress.

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ARGENTINA
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3. (SBU) Italy once again was the sole creditor to block a
proposal by the Secretariat to send a letter to Finance Minister
Lavagna urging Argentina to clear its arrears with the Paris
Club. Italy reiterated its argument that a letter to the
authorities would signal that there is no hope for repairing
relations with the IMF, and that the Club accepts the results of
the bond exchange. In response, the Secretariat circulated a
revised letter urging Argentina to clear arrears and conclude a
program with the Fund. Italy has yet to comment.

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BURUNDI
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4. (SBU) Creditors agreed to provide Burundi a debt treatment on
Cologne terms following decision point in July. The agreement
will be finalized by mail. (The US is not a creditor.)

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Dominican Republic
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5. (SBU) Creditors agreed that the DR had satisfied the
comparability of treatment requirement, clearing the way for
negotiations with the Paris Club next month on a 2005
rescheduling. The IMF reported that the authorities completed a
restructuring of commercial bank loans in July and are working to
restructure debt to private suppliers. Canada reported USD 1.5
million in post-cutoff-date arrears resulting from a missed
payment in August.

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DEMOCRATIC REPUBLIC OF THE CONGO
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6. (SBU) Creditors agreed to extend the consolidation period of
the current Paris Club arrangement through March 2006, in line
with the extension of the DRC's Poverty Reduction Growth Facility
(PRGF). The current arrangement provides for interim debt relief
on Cologne terms. The US announced that we are now in a position
to provide interim relief, and that we will continue to seek
budget authority to join the consensus on an eventual HIPC
completion point treatment. The Secretariat noted that, under
the current Paris Club arrangement, some moratorium interest
payments are scheduled to fall due in March 2006. Creditors will
decide how to deal with these payments as the date approaches,
based on the DRC's capacity to pay.

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GAMBIA
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7. (SBU) The Secretariat will inform the Gambian authorities
that the second and third phases of the 2003 Paris Club agreement
granting interim debt relief on Cologne terms will not enter into
force because the country's PRGF is off track. (The US is not a
creditor.)

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INDONESIA
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8. (SBU) Creditors reported on the status of their bilateral
agreements implementing the tsunami debt deferral. The US,
Australia, France, and Norway have concluded their bilateral
agreements. Several other agreements are nearing completion.
Some creditors (Austria, Canada, France, Italy, Korea, Norway,
Switzerland) reported that they are charging no or low interest
on deferred amounts.

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IRAQ
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9. (SBU) The IMF gave a cautiously worded assessment of Iraq's
prospects for signing an SBA, stating that staff hope to commence
negotiations on an SBA in the fourth quarter. When asked
pointedly by Sweden whether Iraq was currently off track, the IMF
responded that the Executive Board did not declare the EPCA to be
off track, but did identify a number of issues that need to be
resolved before SBA negotiations can commence.


10. (SBU) Some creditors (Italy, Japan, France) suggested that
Iraq may not be negotiating in good faith with its private
creditors. The IMF said it had encouraged the Iraqi authorities
to negotiate in good faith, as required under the Fund's lending-
into-arrears, but that it was premature to pass judgment, since
negotiations on an SBA had yet to begin. The Secretariat
conveyed concerns raised by some private creditors about the
negotiating process, but pointed out that lending into arrears
was not an issue for the Paris Club to decide. The US emphasized
that Iraq and its advisors had held numerous meetings with many
creditors, and that the vast majority of claimants appeared to be
satisfied.


11. (SBU) Creditors agreed to extend the deadline for concluding
Paris Club bilateral agreements to the end of the year. (To
date, only the US and Canada have concluded their bilateral
agreements.) On the issue of comparability of treatment,
creditors agreed with the Secretariat's preliminary assessment
that Iraq's offer to its private creditors was comparable to the
treatment it received in the Paris Club.

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MALAWI
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12. (SBU) Creditors agreed to extend the consolidation period of
the current Paris Club arrangement from December 2004 to
September 1, 2006, following approval of Malawi's new PRGF last
month. The current arrangement provides for interim debt relief
on Cologne terms. Malawi is projected to reach completion point
in mid-2006 at the earliest. (The US is not a creditor.)

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NIGERIA
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13. Paris Club negotiations are tentatively scheduled for the
week of October 17, assuming a PSI is in place by that time. The
Secretariat urged creditors to complete their data reconciliation

SIPDIS
process with Nigeria as soon as possible so that the Secretariat
can calculate precisely how much Nigeria owes each creditor once
the deal is struck. (The implication that the aggregate figures
could shift pending further data reconciliation is somewhat
worrisome.) Encouragingly, creditors did not object to the
Secretariat's proposal to freeze the flows as of September 15, so

SIPDIS
that any missed payments at the end of the month do not add to
arrears. The Secretariat confirmed that Nigeria is prepared to
honor, on a pro-rated basis, its commitment to pay USD 1 billion
in debt service in 2005 (above and beyond the USD 12.4 billion
cash outlay envisioned under the upcoming deal). If creditors
agree to freeze the flows as of September 15, Nigeria would owe
creditors an additional USD 450 million in debt service on top of
the USD 300 million paid earlier this year. In other matters,
creditors agreed with the Secretariat's assessment that Nigeria
has already satisfied the comparability of treatment requirement
through previous restructurings of its private debt. On the
issue of how to score the proposed debt treatment in terms of ODA
assistance delivered, the Secretariat informed creditors that the
Development Assistance Committee viewed the buyback portion of
the deal as a commercial operation, meaning the discount involved
should not count as ODA.

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PERU
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14. (SBU) The Secretariat summarized the results of Peru's
recently concluded prepayment operation. Peru prepaid a total of
USD 1.6 billion to 12 Paris Club creditors, reducing non-ODA
principal maturities falling due in 2006-2009 from USD 1.77
billion to USD 197 million. The US and Belgium were the only two
Paris Club creditors with exposure to Peru not to have
participated in the prepayment operation. (The US welcomed
Peru's prepayment offer but did not sign the Agreed Minute for
legal and budgetary reasons.)

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RUSSIA
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15. (SBU) The Secretariat summarized the results of Russia's
recently concluded prepayment operation. Russia prepaid a total
of USD 15 billion to 16 Paris Club creditors (including the
United States),reducing its overall Paris Club debt from USD
37.2 billion to USD 22.2 billion. Creditors agreed that Russia
had respected the terms of the agreement, thus triggering the
agreement's non-securitization provision, which prohibits
creditors from securitizing their remaining Russian claims until
at least December 31, 2006. Russia said that it had yet to make
a decision about any future prepayment operations, but indicated
that it has sufficient resources to prepay the balance of its
Paris Club debt.

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SAO TOME AND PRINCIPE
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16. (SBU) Following approval of STP's new PRGF last month,
creditors agreed to provide STP with a retroactive Cologne
treatment, effective from May 2001 to December 2007. The
agreement will be finalized by mail. In return, STP will be
responsible for making an upfront payment of about USD 1.5
million covering interest arrears and late interest. (The US is
not a creditor.)

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SERBIA AND MONTENEGRO
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17. (SBU) The USDEL announced that it had obtained domestic
legal authority to support the Paris Club's decision in June to
extend S&M's current arrangement (which provides for the
capitalization of 60% of interest payments) until the end of the
year. The Secretariat will send a letter to the S&M authorities
notifying them of the extension and urging them to implement
reforms necessary to complete the final review under the
country's IMF program.

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SIERRA LEONE
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18. (SBU) Sierra Leone reached decision point in March 2002 and
received interim debt relief from the Paris Club on Cologne
terms. Interim relief expired in June 2005, when Sierra Leone
completed the sixth and final review of its PRGF. Although the
authorities hope to have a new PRGF in place next January, the
Paris Club cannot formally extend the consolidation period of the
current arrangement in the absence of an IMF program.
Nevertheless, creditors agreed to bill Sierra Leone as if Cologne
terms still applied. (In the case of the US, we will no longer
be able to go beyond Cologne terms and forgive 100% of pre-
Cologne Summit flows falling due after decision point.)

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SRI LANKA
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19. (SBU) Creditors reported on the status of their bilateral
agreements implementing the tsunami debt deferral. Norway and
France have concluded their bilateral agreements. A few other
creditors have made good progress. (The US expects to finalize
its bilateral later this month.) Norway, Canada, France, and
Korea reported that they are charging no or low interest on
deferred amounts. In response to Sri Lanka's request for a two-
year extension of the debt deferral, creditors agreed that any
extension could only take place within the normal Paris Club
framework, meaning Sri Lanka would first have to have an IMF
program in place.

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METHODOLOGICAL DISCUSSION: DE VENECIA SWAP INITIATIVE
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20. (SBU) Creditors dismissed Philippine Congressman de
Venecia's proposal calling on the Paris Club to conduct debt-for-
equity swaps with middle-income countries to help them achieve
the Millennium Development Goals. Several creditors
characterized the proposal as a "non starter" and stressed that
the Club - through the Evian approach - already had the tools to
deal with middle-income countries in debt distress. In a related
issue, a few creditors (led by Norway, and supported by the UK,
Italy, and Russia) thought the Club should consider removing the
ceiling on non-ODA debt-for-development swaps. Other creditors
(Sweden, Netherlands, Australia) disagreed, arguing that the club
was not a development institution. The Secretariat agreed to
produce a working paper on the subject.

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METHODOLOGICAL DISCUSSION: BREAKAGE COSTS
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21. (SBU) Although most creditors agreed with the Secretariat's
recommendation that debtor countries should not be forced to pay
so-called "breakage costs" in future prepayment operations, and
that creditors and debtors should not negotiate bilateral
settlements, two creditors (Netherlands, Australia) requested
more time to study the matter. The Secretariat agreed to revisit
this issue in the future.

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METHODOLOGICAL DISCUSSION: EXTENSION OF HIPC
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22. The Secretariat encouraged the IMF to work closely with
Paris Club creditors to ensure that the data it was using to
evaluate potential new HIPC countries was accurate. Japan
suggested that the IMF and World Bank may not be taking into
account the full extent of Japan's debt cancellation for certain
low-income countries.

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Methodological Discussion: IDA-administered Loans
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23. (SBU) EU creditors agreed that they will not require any
payments after November 1 on EU loans administered by IDA and
extended to HIPC countries having reached completion point.
These loans were previously thought to be multilateral loans but
were recently reclassified as bilateral loans subject to Paris
Club treatments.

MINIMIZE CONSIDERED.
STAPLETON#