PARIS CLUB - MAY 2006 TOUR D'HORIZON AND DEBT NEGOTIATIONS

UNCLAS PARIS 003247

SIPDIS

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SIPDIS

STATE FOR EB/IFD/OMA
TREASURY FOR DO/IDD AND OUSED/IMF
SECDEF FOR USDP/DSAA
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E.O. 12958: N/A
TAGS: EFIN ECON EAID XM XA XH XB XF FR
SUBJECT: PARIS CLUB - MAY 2006 TOUR D'HORIZON AND DEBT NEGOTIATIONS


SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET DISTRIBUTION

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SUMMARY
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1. (U) At the May 10-12 meeting of the Paris Club, Afghanistan's
three creditors, Russia, Germany and the United States, took the
first step toward fulfilling their pledges to cancel 100% of
Afghanistan's debt by providing assurances of debt relief during the
period of Afghanistan's new IMF program, which is expected to be
approved in early June. Creditors rescheduled the debt of Moldova
and Grenada on non-concessional terms, and formally accepted
Algeria's offer to prepay at face value its previously rescheduled
Paris Club debt. The U.S. will partially participate in the
prepayment by accepting $665 million owed by Algeria to Eximbank.
Creditors welcomed Angola's offer to pay the Club $2.7 billion over
the next two years (out of $4.5 billion owed),but rejected Angola's
request to negotiate the balance ($1.8 billion) on a bilateral
basis. Paris Club Chairman Musca will continue to press the Angolan
authorities to seek a multilateral solution to normalizing relations
with Paris Club creditors. Other countries on the agenda included
Argentina, Brazil, Cameroon, DRC, Iraq, Kyrgyz Republic, Nigeria,
Russia, Serbia Montenegro, and Sierra Leone. END SUMMARY.


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Afghanistan
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2. (SBU) Germany, Russia, and US provided financing assurances for
Afghanistan's Poverty Reduction and Growth Facility (PRGF) with the
IMF. Russia said $8.4 billion of the $9.4 billion in debt owed by
Afghanistan was reconciled two years ago, and that meetings are
scheduled in Kabul in coming weeks to reconcile the remaining $1
billion. The US pointed out that full reconciliation was not
necessary at this stage, but would have to take place before
Afghanistan received a Naples treatment on its debt. The IMF added
that full reconciliation was necessary for Afghanistan to be
declared eligible for the Heavily Indebted Poor Countries (HIPC)
initiative. In response to a question from Germany, the Secretariat
said it was not opposed in principle to capitalizing interest
payments during the period of the PRGF (this would be done so that
Afghanistan will not have to make any payments during that time),
but that any decision should be based on Afghanistan's capacity to

pay. The Secretariat will launch a data call in preparation for
Afghanistan's Naples treatment, likely to occur in July.

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Algeria
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3. (SBU) Creditors signed an agreement formally accepting Algeria's
offer to prepay at face value its previously rescheduled Paris Club
debt, which totals $7.7 billion. The prepayment transactions will
take place between May 31, 2006 and November 30, 2006, at a date
determined bilaterally between Algeria and participating creditors.
Nearly all creditors committed to participate either in full or in
part, notwithstanding some arrears. Russia, having recently
concluded a separate debt restructuring agreement with Algeria, was
an observer to the agreement. The US reiterated that only debt owed
to EXIM (around $665 million) can be prepaid at face value. Germany
pressed for a buyback option, but France insisted that creditors had
already agreed in principle last month to prepayment at face value.

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Angola
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4. (SBU) Paris Club Chairman Musca reported on his April meeting
with Angolan Minister of Finance de Morais. In response to the
Club's proposal that Angola resume debt service in excess of
maturities falling due, Angola offered to pay $2.7 billion over the
next 12 to 24 months, an amount intended to cover outstanding
principal ($0.4 billion) and arrears ($2.3 billion) but not late
interest ($1.8 billion). As a condition for this payment, Angola
would reserve the right to negotiate with creditors bilaterally on
the $1.8 billion residual, presumably in the expectation of securing
favorable restructuring terms. Creditors agreed that this part of
Angola's counteroffer was unacceptable, but authorized Musca to
continue contacts with the Angolan authorities on a multilateral
approach to arrears clearance. Musca will also indicate that
creditors would consider a more favorable debt treatment if Angola
concludes an IMF program, and that a resumption of payments by
Angola could lead some creditors to reopen credit lines. Musca is
scheduled to meet with the Finance Minister at the end of May.

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Argentina
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5. (SBU) Creditors reacted to reports that Argentina may be

interested in addressing its Paris Club debt in the second half of

2006. Germany, Italy, the Netherlands, and the UK stressed that the
Club needed to act in unison and encourage the authorities to pursue
a multilateral solution. Germany urged the Secretariat to contact
the authorities immediately. In response, the Secretariat said it
had already requested a meeting with Argentina on the margins of the
IMF-World Bank spring meetings, only to be turned down. In the end,
creditors agreed that the ball was in Argentina's court.

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Brazil
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6. (U) Although Brazil has concluded its Paris Club prepayment
operation, arrears remain to Canada, Germany, Italy, and the
Netherlands. The Secretariat sent a letter to the authorities
urging them to clear these arrears by June 30, 2006. There was no
discussion of a reported Brazilian request to become a full member
of the Club.

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Cameroon
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7. (U) The Secretariat confirmed that Cameroon will come to the
Paris Club next month to negotiate the terms of its HIPC completion
point treatment.

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Democratic Republic of the Congo
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8. (SBU) The DRC is no longer on a PRGF or other type of IMF
program that would qualify it for HIPC interim debt relief.
Germany, supported by Belgium, proposed that creditors nonetheless
extend HIPC interim relief on the basis of a Staff Monitored Program
(SMP) that the IMF is discussing with the DRC. The US explained
that it had a legal obligation to resume billing now that the DRC no
longer has a PRGF in place. The Secretariat said extending interim
relief on the basis of an SMP would set a bad precedent. However,
in light of the DRC's limited payment capacity, the Secretariat
suggested that creditors who are able to do so not send bills for
the next interest payment.

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Grenada
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9. (U) Creditors (Belgium, France, Russia, the UK and the US))
agreed to reschedule Grenada's 2006-2008 debt service, in support of
the country's PRGF. Medium and long-term debt was rescheduled over
12 years, with a 5-year grace period (so-called classic terms),
while Belgium and the UK's short-term debt will be repaid over the
period 2009-2013.

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Iraq
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10. (U) Australia announced that it would sign its bilateral with
Iraq on May 11. Russia, on the other hand, reported no progress
since last month's discussion. Although Russia and Iraq have agreed
on the text of a bilateral, the data reconciliation process remains
incomplete. Russia said it was nevertheless hopeful that an
agreement could be reached within the next two months.

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Kyrgyz Republic
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11. (U) The IMF said the Kyrgyz Republic has begun the HIPC
process. Staff is working on a preliminary HIPC document, which is
likely to be presented to the IMF Executive Board this summer.
Decision Point could be reached in late 2006 or early 2007. There
were no comments from creditors. The IMF noted that Haiti is
another country that may soon enter the HIPC process.

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Moldova
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12. (SBU) Creditors (Germany, Italy, Japan, Russia, and the US)
agreed to reschedule Moldova's debt on so-called Houston terms, in
support of the country's PRGF. Development assistance debt was
rescheduled over 20 years, with a 10-year principal grace period,
while commercial debt was rescheduled over 15 years, with a 5-year
grace period. Moldova agreed to pay 70% of its Paris Club arrears
over the next three years, with the balance rescheduled on Houston
terms together with maturities falling due between May 1, 2006 and
December 31, 2008. Russia took the hardest line during the
negotiations, initially arguing for a rescheduling over a shorter
time horizon and with a shorter grace period.

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Nigeria
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13. (U) All creditors except Austria, Brazil, and Denmark have
received their final payment from Nigeria. Brazil and Denmark
reported that their bilateral agreements had yet to enter into
force. Austria said it expected to close its deal with Nigeria
early next year.

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Russia
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14. (SBU) Russia will come to the club in June to negotiate the
terms of its offer to prepay all of its remaining Paris Club debt at
face value. A majority of creditors signaled their intention to
participate, although several creditors holding a substantial
portion of Russia's Paris Club debt indicated they would only
participate if the prepayment included an option to buy back the
debt at more than face value. In particular, Germany said its
securitized Aries debt could not be prepaid at face value. Russia
advised the U.S. delegation privately that it would not pay more
than face value.

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Serbia Montenegro
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15. (SBU) The IMF and Secretariat briefed creditors on the
potential implications of an independent Kosovo, noting that if
Kosovo were allocated a significant portion of Serbia's debt, it
would not likely be in a position to service it, and therefore some
type debt relief would probably be necessary. The US and Russia
said it was important to monitor the debt allocation process to
ensure that it was fair and to avoid creating perverse incentives
for Serbia to unload debt on Kosovo. The World Bank cautioned that
it would be very difficult to restructure World Bank debt.

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Sierra Leone
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16. (U) The IMF said approval of the Sierra Leone's new PRGF could
lead to HIPC completion point by the end of the year. The
Secretariat said it would draft a letter to the authorities

SIPDIS
announcing the extension of interim HIPC relief.

STAPLETON#