PARIS CLUB - MARCH 2006 TOUR D'HORIZON

UNCLAS SECTION 01 OF 07 PARIS 001568 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 - MARCH 2006 TOUR D'HORIZON SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET DISTRIBUTION -------------- SUMMARY -------------- ¶1. (SBU) At the March 7 Paris Club meeting, creditors agreed on an approach for dealing with Angola's arrears to the Club, consistent with US objectives. The Secretariat will call on Angola to resume payments to Paris Club creditors in excess of scheduled debt service, such that arrears are reduced. If accepted by the authorities, this approach will ensure that Angola remains current on its debt service to the US while upholding the Paris Club's principle of no debt relief without an IMF program. Russia and Germany reiterated their intention to forgive 100% of Afghanistan's debt under the Heavily Indebted Poor Countries Initiative (HIPC),but explained that they would not be able to do so under the alternative Evian approach. The IMF said it could not include the $10 billion Russian debt in a Debt Sustainability Analysis (DSA),which would make it eligible for HIPC, until Russia and Afghanistan agreed on the amount. Russia said it was "waiting for Afghanistan" to act. China appears to have no desire to forge a more cooperative working relationship with the Paris Club at this time. A senior Chinese finance ministry official told the Secretariat that China has its own approach to debt issues SIPDIS and is not interested in subjecting itself to the disciplines of the Club. Creditors agreed to provide financing assurances for Grenada's new IMF Poverty Reduction and Growth Facility (PRGF). Other countries on the agenda included Argentina, Brazil, Burundi, Cambodia, Cameroon, Republic of Congo (Congo-B),Cuba, Democratic Republic of Congo (DRC),Georgia, Guinea, Iraq, Moldova, Nicaragua, Nigeria, and Russia. End Summary. Afghanistan -------------- ¶2. (SBU) The IMF said the authorities had requested a three- year PRGF, which would be conditional on financing assurances from Paris Club creditors. Although the debt reconciliation process has been completed, the IMF said "unverified" debts remain with Russia and other countries, which were not included in the latest HIPC calculation. The US said it was important to see the Russian claims reflected in the DSA. Germany and Russia reiterated their commitment to forgive 100% of their claims under HIPC, but not under the Evian approach. Russia added that it was waiting for Afghanistan to act, and said the process could be facilitated if Afghanistan cooperated more with the IMF and with Russia. Angola -------------- ¶3. (SBU) Creditors gave the Secretariat a mandate to approach the Angolan authorities about resolving its protracted arrears to the Club. The proposed way forward consists of three elements. First, Angola is to resume payments to Paris Club creditors in excess of scheduled debt service, such that arrears are reduced. Second, the Paris Club chairman will express the goodwill of creditors to consider a formal Paris Club agreement once Angola has concluded a Fund-supported program (either a PRGF or Policy Support Instrument (PSI)). Third, the chairman will note that a resumption of payments by Angola could lead some creditors to review their export credit policy toward Angola. Argentina -------------- ¶4. (SBU) The Secretariat presented the results of the data call launched at the request of the US. As of January 1, 2006, Argentina owed $6.3 billion to Paris Club creditors, of which $3.5 billion consisted of arrears and past due interest. Germany is the largest creditor ($2.1 billion), followed by Japan ($1.4 billion),Spain ($629 million),and Italy ($516 million). The US is the sixth largest creditor with $362 million in claims. During the period 2001 to 2005, Italy received the largest percentage (29%) of payments falling due to it, compared to 8% for the US. The UK reported that Economy Minister Miceli told the UK's ambassador in Buenos Aires that normalizing relations with the Paris Club was not a priority for Argentina at the moment. There was no discussion in the Club about possible next steps. Brazil -------------- ¶5. (U) Brazil's prepayment of 1992 previously rescheduled debt is in train. Belgium, Canada, Germany, Italy, Spain, and Sweden have been fully paid. Austria, France, Japan, the Netherlands, Switzerland, and the UK are finalizing their prepayment operations. The US has been partially paid, with more payments expected later this month. Denmark, Finland, Norway, and Russia are not participating in the prepayment. It remains to be seen whether Brazil will meet its commitment to clear arrears to Canada, France, and the Netherlands by end-March. Burundi -------------- ¶6. (U) The third and fourth reviews of the Burundi's PRGF will be combined and brought to the executive board in mid- June. The third phase of Burundi's September 2005 Cologne treatment will enter into force upon completion of this review. (The US is not a creditor.) Cambodia -------------- ¶7. (SBU) The US reported that its bilateral dispute with Cambodia was essentially resolved, and that it was prepared to provide financing assurances for a new PRGF. Russia, on the other hand, said recent negotiations in Cambodia had failed to result in an agreement on what interest rate to charge on rescheduled post-cutoff-date debt. As a result, Russia continues to withhold financing assurances. The next round of negotiations between the two countries is scheduled for May in Moscow. Cameroon -------------- ¶8. (U) The IMF and World Bank expect completion point to be reached in April. Like Congo-B, Cameroon is facing active litigation from its commercial creditors, though the share of commercial debt in Cameroon's overall external debt is not as large as the corresponding ratio in Congo-B. Given expectations of completion point in April, creditors agreed not to bother extending the current consolidation period beyond March 31. The Secretariat suggested that creditors needn't bill for payments falling due in April. China -------------- ¶9. (SBU) The Secretariat met with a senior official in the Chinese Ministry of Finance to convey the Paris Club's wish to learn more about China's external creditor status and explore the possibility of a more cooperative working relationship. Yang Shao Lin, Deputy Director General for International Affairs, responded that China is a developing country that manages its bilateral relations as it wishes. It has its own approach to debt issues and is not interested in subjecting itself to the disciplines of the Paris Club. Although Paris Club Chairman Xavier Musca may revisit this topic with his Chinese counterpart at some point in the future, the Secretariat was not optimistic that the response from the Chinese would be any different. Congo-B -------------- ¶10. (U) Creditors agreed in principle to send a letter to the Congolese authorities granting interim HIPC debt relief once decision point has been approved by the IMF and World Bank executive boards. At the request of the US, the Secretariat will hold off sending the letter until after the SIPDIS US has satisfied its internal domestic legal requirements. The IMF noted that it was not in a position to provide interim relief even if it approved decision point for Congo- B given that less than 70% of Congo's creditors had committed to provide debt relief on comparable terms. (Note: The IMF approved Decision Point on March 8, but noted in its press release that, "As the necessary financing assurances from external creditors are not in place as of the decision point, no interim relief will be provided by the IMF at this time.") Cuba -------------- ¶11. (SBU) In 2001, some Paris Club members met with Cuba in an unsuccessful attempt to discuss a possible treatment of Cuba's external debt. The U.S. had blocked a formal Paris Club negotiation on the ground that Cuba didn't have an IMF program and wasn't even a member of the IMF. Sweden requested that Cuba be placed on this month's agenda to discuss developments since 2001. Canada, Sweden, and Switzerland acknowledged that they had restructured Cuba's short-term debt on a bilateral basis, but said that arrears on medium- and long-term debt remained. Spain questioned whether concluding bilateral deals with Cuba was a breach of the sub-group's solidarity given the existence of arrears to other creditors. Germany argued that creditors have the right to restructure short-term debt on a bilateral basis since short-term debt is excluded from Paris Club agreements. Other creditors disagreed and called on the Secretariat to produce a working paper clarifying the Club's SIPDIS general policy on short-term debt. The Secretariat will also distribute the Chairman's Summary that followed the April 2001 meeting with Cuba. Democratic Republic of Congo -------------- ¶12. (U) Creditors decided not to defer a capitalized moratorium interest payment falling due on March 31, given the expected expiration of the DRC's PRGF at the end of the month and uncertainty surrounding a successor arrangement. (The US, per our HIPC policy, will forgive the payment, as it falls within the current consolidation period.) The IMF said a successor arrangement was unlikely to be in place until after the general elections in June, but indicated that completion point could still be reached by mid-2007. Once a successor arrangement is in place, creditors will decide what to do with other moratorium interest payments capitalized under the September 2002 Agreed Minute. Georgia -------------- ¶13. (U) The Secretariat will send a letter to the authorities announcing the entry into force of the third phase of the July 2004 Agreed Minute once the third review of the PRGF is approved. The review is tentatively scheduled for March 31. Grenada -------------- ¶14. (U) Creditors (France, Netherlands, Russia, UK, US) agreed to provide financing assurances for Grenada's new PRGF covering the period 2006-2008. Grenada could come to the Club for negotiations as early as April. Under the Evian approach, creditors will provide a rescheduling of maturities falling due during the period of the PRGF. (The Secretariat's working paper proposes a rescheduling on SIPDIS "Classic" terms.) If, following successful implementation of the program, creditors determine that Grenada's debt is unsustainable, they may consider providing an exit treatment. The IMF estimated a financing gap of $10 million in 2006, taking into account disbursements under the PRGF. Paris Club debt relief is expected to cover half of this amount, with the remainder to be covered by debt relief from non-Paris Club creditors, including Taiwan. Guinea -------------- ¶15. (U) The Secretariat urged creditors to respond to a data call launched at the request of the IMF. (Two creditors have yet to respond.) The IMF said a new PRGF could be in place by mid-2006, for which financing assurances would be needed from the Club. Guinea reached decision point in December 2000, but its previous PRGF went off track and expired in 2004. Iraq -------------- ¶16. (U) In response to a request from Central Bank of Iraq Governor Shabibi, the Secretariat agreed to send letters to eleven of Iraq's non-Paris Club official creditors updating them on Iraq's debt restructuring process and urging them to conclude bilateral agreements with Iraq on terms comparable to the 2004 Agreed Minute. The group of eleven consists of those countries that attended the informational session on Iraq in January 2005 and have not yet concluded a bilateral with Iraq (Bulgaria, Cyprus, Croatia, Hungary, Poland, Czech Republic, Slovenia, Turkey),plus Greece, Malaysia, and the former Yugoslavia (as identified in Shabibi's letter). Moldova -------------- ¶17. (SBU) The IMF said agreement in principle has been reached on a three-year PRGF arrangement, for which financing assurances will be requested next month. Russia said it would not provide financing assurances until Moldova settles its internal currency debt to the former Soviet Republics and recognizes all debt owed to Russia (including Transnistria debt). In addition, Russia said it first needs to see a data call, a DSA, and a working paper from the Secretariat. SIPDIS Nicaragua -------------- ¶18. (U) The Secretariat will send a letter to the authorities taking note of Nicaragua's difficulties obtaining comparable treatment from its non-Paris Club official creditors and reminding Nicaragua of its commitments under the March 2004 Agreed Minute. The letter is intended to help the authorities negotiate agreements with those non-PC creditors that have resisted providing debt reduction comparable to what Nicaragua received at completion point. The Secretariat said it was reluctant to address letters to individual non-Paris Club official creditors, citing the principle that the debtor country alone is responsible for seeking comparable treatment. On the other hand, the Secretariat noted that Libya's upcoming Article IV board discussion would be a good occasion for creditors, through their IMF executive directors in Washington, to pressure Libya to deliver debt relief in line with HIPC. Nigeria -------------- ¶19. (U) The IMF said Nigeria was making good progress under the Policy Support Instrument (PSI),with the first review tentatively scheduled for mid-April. Austria and Russia are the only creditors that have yet to conclude their bilateral agreements with Nigeria. Brazil has concluded its bilateral but has yet to be paid. All other creditors, including the US, have concluded their bilaterals and have received their first and second tranche payments. (Canada, Norway, and Sweden have no claims.) Russia -------------- ¶20. (U) The Secretariat said it had not received an official proposal from Russia regarding a new prepayment. In the meantime, Russia's financial position continues to improve. Reserves stand at $200 billion (2.5 times the government's external debt),the oil stabilization fund exceeds $51 billion (2.5 times outstanding debt to the Paris Club),and spreads on Russian Eurobonds continue to narrow. In response to a question from Austria, the Secretariat clarified that there was no link between a new prepayment operation and creditors' contributions to the World Bank's International Development Association (IDA). STAPLETON#