POLAND DEFERS DECISION ON IRAQI DEBT TO NEXT

C O N F I D E N T I A L SECTION 01 OF 02 WARSAW 003277

SIPDIS

STATE FOR EUR/NCE MICHAEL SESSUMS
STATE FOR NEW/I-ECON LAIRD TREIBER
PARIS FOR OTTO VAN MAERSSEN
TREASURY FOR OASIA MATTHEW GAERTNER AND ERIC MEYER
FRANKFURT FOR TREASURY JIM WALLAR
USDOC FOR 4232/ITA/MAC/EUR/JBURGESS

E.O. 12958: DECL: 12/31/2015
TAGS: EFIN PREL PL IZ
SUBJECT: POLAND DEFERS DECISION ON IRAQI DEBT TO NEXT
GOVERNMENT

REF: WARSAW 3010

Classified By: Economic Counselor Richard Rorvig, reasons 1.4 (b) and (
d)


1. (U) This cable contains an action request - see para 4.

--------------
Summary
--------------


2. (C) Polish Finance Ministry Under Secretary Wieslaw
Szczuka told us September 1 that, despite press reports, the
Polish Government still has taken no decision regarding a
write-off of Iraqi debt. At present, the Poles and Iraqis
are trying to reach agreement on the actual amount of debt
and accumulated interest. The Ministry figures Iraq owes
Poland about $800 million, which would make it Warsaw's
largest debtor. Given the short time remaining to Poland's
September 25 parliamentary elections, Sczuka expects the
current Polish Government to leave the problem to its
successor. The Finance Ministry has heard rumors that the
U.S. remains the only Paris Club member that has actually
concluded a follow-on bilateral agreement with Iraq to
implement actual debt forgiveness. Szczuka reiterated the
Finance Ministry's long-standing position that it would be
much easier politically for Poland's Government to forgive
Iraq's debt if Baghdad (or the U.S.) could offer sweeteners
such as debt-equity swaps, construction contracts, or oil
deliveries to soften the pain.

--------------
No Agreement yet on Numbers
--------------


3. (C) Finance Ministry Under Secretary Wieslaw Szczuka
told us September 1 that press reports that Prime Minister
Belka reached a debt write-off deal with Iraq during his
recent visit to Baghdad were incorrect. Iraq's debt to
Poland was discussed, but no resolution was reached. Poland
and Iraq are still trying to agree on the exact size of the
debt principal and accumulated interest. Until that issue is
resolved, the process can't proceed much further. The
Finance Ministry estimates Baghdad's debt to be approximately
$800 million, making it Warsaw's largest debtor. By
contrast, Sudan owes Poland only about $80 million. Polish
Finance Minister Miroslaw Gronicki hopes to meet his Iraqi
counterpart on the margins of the upcoming IMF and World Bank
meetings in Washington DC to further explore this subject.


4. (C) Szczuka stated that one option for resolving the
issue would be to follow the Paris Club model. However, the
Government of Poland has heard that only the U.S. has
followed up on the overall Paris Club Agreement by
negotiating a bilateral accord with Iraq to implement actual
reductions. Szczuka asked if the U.S. could provide
information as to whether other Paris Club members have
actually followed through on their commitments. (Post would
appreciate any information the Department can provide in this
regard.)


5. (C) According to Szczuka, the Government of Poland has
an existing agreement with Iraq which says that the Middle
East country's debt would be repaid with future oil
shipments. He stated that it would be very difficult to
explain to the Polish public that, in addition to the large
expenses related to Poland's troop deployment to Iraq, the
country will have to make further financial concessions. In
this regard, a sweetener, such as equity participation in
Iraqi companies, oil deliveries, or further contracts for
Polish companies would be extremely helpful to the Polish
government politically. Szczuka suggested that the U.S.
could also offer to provide such a carrot.


6. (C) With oil prices currently hovering above $70 a barrel
and Iraq estimated to hold nearly 10% of global reserves,
Poland's Finance Ministry hopes yet to salvage something from
Baghdad's debt. The hope is underpinned by an expectation
that at some point the situation in Iraq will stabilize
enough to permit a significant expansion of petroleum oil
exports, and hence in Iraq's ability to service its remaining
foreign debts. In this regard, Poland views Iraq as a very
different case from Syria, with which it recently agreed on a
debt write off under the presumption that Damascus' debts
(for military equipment delivered in communist times) were,
in any case, uncollectible. The Finance Ministry figures
that the unreimbursed costs of Poland's troop deployments to
Iraq have been running at roughly $100 million per year,
which it considers to be a relatively large burden for a
middle-income country like Poland. It fears that the Polish
public will be critical of further Iraq-related financial
costs such as a debt write-off, unless the GOP can find some
offsetting sweeteners that make the pill easier to swallow.

--------------
Comment
--------------


7. (C) Given the proximity of the September 25 parliamentary
elections and the first and second rounds of the Presidential
elections on October 9 and 23, respectively, it is unlikely
that the present Belka Government will be able to resolve
this issue during its remaining time in office. Most
observers agree that a successor government is not likely to
be in place in Warsaw until late October at the earliest. It
will take even longer to fill all of the key sub-Ministerial
positions relating to technical debt and budget issues. Thus
it may not be until January 2006 that we can resume the Iraqi
debt discussion with officials who feel knowledgeable and
secure enough to take a decision.
Ashe