HONDURAS: $125 MILLION DEBT TO U.S. CANCELLED

UNCLAS TEGUCIGALPA 002182

SIPDIS

STATE FOR WHA/CEN, WHA/EPSC, EB/IFD

E.O. 12958: N/A
TAGS: EFIN KTIA ECON HO
SUBJECT: HONDURAS: $125 MILLION DEBT TO U.S. CANCELLED

REF: Tegucigalpa 174978


1. SUMMARY: On October 7, the U.S. and Honduras signed a
debt reduction agreement cancelling 100 percent ($125m) in
loans owed to USG organizations as of March 1, 2005. This
effectively eliminated the U.S. share of $1.47 billion owed
by the GOH to the Paris Club. Similar bi-lateral agreements
need to be negotiated by the GOH with the other Paris Club
members. Debt forgiveness agreement discussions are on-
going with the World Bank, IMF, and the International
Development Bank (IDB). END OF SUMMARY.


2. Per reftel, Honduras and the U.S. signed a debt reduction
agreement on October 7 that cancels approximately $125
million in debt owed by Honduras to four USG organizations
(USDA, EXIM, DOD, and USAID). Honduran Finance Minister
William Chong Wong and Charge were the official signatories,
while President Ricardo Maduro and Central Bank President
Maria Elena Mondragon signed as witnesses of honor.


3. The deal absolves all debt owed before March 1, 2005, to
the following U.S. institutions: Department of Defense
($48.0 million),USAID ($65.7 million),Department of
Agriculture ($9.7 million),and the Export - Import Bank
($1.2 million). This represents the fifth time the USG has
forgiven debt owed by Honduras, totaling $689 million since

1991. Private debt owed to non-public interests in the U.S.
was unaffected.


4. The debt forgiveness was based on a recommendation from
the Paris Club, an informal group of industrialized
countries with extensive loans to third world countries. The
Club members (Canada, Denmark, France, Germany, Italy,
Japan, the Netherlands, Spain, Switzerland and the U.S.)
jointly agreed on May 1, 2005 to reduce the debt once
Honduras had reached a significant milestone (Completion
Point) in the World Bank and IMF sponsored Highly Indebted
Poor Countries (HIPC) Initiative. The milestone
demonstrated that Honduras had achieved strong structural
reforms and had a strategy to use these reforms to generate
economic growth and reduce poverty. As of March 1, 2005,
$1.47 billion was owed to Paris Club members by Honduras.
The U.S. accord is the third bilateral debt forgiveness
agreement concluded under this Paris Club agreement; accords
with Spain (USD $138 million) and Canada (USD $9.5 million)
were signed in April of this year. Like the U.S. accord, a
bi-lateral deal must be negotiated with each remaining Club
member to cancel their respective debts.


5. Achieving the HIPC Completion Point has also allowed
Honduras to move forward on negotiating debt forgiveness on
debts owed to the World Bank, the International Monetary
Fund (IMF),and the International Development Bank (IDB).
The World Bank cancelled $67 million in commercial debt owed
to its International Development Association (IDA) group in
May, and will consider reducing or cancelling all of IDA's
credits to Honduras, approximately $1.2 billion, in 2006.
The IMF has committed to eliminating USD $30.3 million of
Honduran debt, leaving approximately $110 million for future
negotiation. Finally, the International Development Bank
cancelled $192 million in loans in April, but discussions
continue on whether action can be taken on the balance of
$1.2 billion. Publicly and privately the GOH has called for
such forgiveness or rescheduling, and has been quick to
point out that the African Development Bank, IDB's
equivalent in Africa, has rescheduled or cancelled debt owed
by African countries that have reached the HIPC Completion
Point.

Williard