PARIS CLUB - SEPTEMBER 2006 TOUR D'HORIZON

UNCLAS PARIS 006323

SIPDIS

SENSITIVE
SIPDIS

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
BELGRADE PLEASE PASS TO PODGORICA

E.O. 12958: N/A
TAGS: EFIN ECON EAID XM XA XH XB XF FR
SUBJECT: PARIS CLUB - SEPTEMBER 2006 TOUR D'HORIZON


SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET DISTRIBUTION

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SUMMARY
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1. (SBU) At the September 13 meeting of the Paris Club, Xavier
Musca, the Chairman of the Paris Club, reported that Angolan Finance
Minister de Morais had told him the previous week that Angola is
still considering a precautionary Stand-By Arrangement with the IMF,
with the understanding that this would unlock debt relief from the
Paris Club. The Minister said Angola would resume discussions with
the IMF on the margins of the September 17-20 annual meetings of the
IMF and World Bank in Singapore. He also said that Angola is
prepared to start servicing its Paris Club debt and make a
good-faith payment toward its arrears of over 4 billion dollars.
Some creditors were skeptical about Angola's intentions and pressed
for more aggressive action to try to recover arrears. Haiti may
reach Decision Point under the Highly Indebted Poor Countries (HIPC)
Initiative in October and come to the Paris Club for interim debt
relief in November. Malawi reached HIPC Completion Point in August
and is tentatively scheduled to come to the Paris Club for
negotiations in October. The USDEL said helping Lebanon is a high
priority, and that, although Paris Club debt represented only a
small part of its total debt, it is open to creative ideas of how
the Paris Club might contribute to the reconstruction effort. Other
countries on the agenda were Algeria, Argentina, Belize, Brazil,
Cambodia, Iraq, Kenya, Nicaragua, Pakistan, Russia, Sao Tome,
Serbia, Montenegro, and Seychelles. END SUMMARY.

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ALGERIA
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2. (SBU) The secretariat will distribute an updated table
summarizing the results of Algeria's prepayment operation. The
USDEL chose not to announce that, in response to a letter from
President Bouteflika to President Bush, the USG is taking a second
look at whether it can accept prepayment of approximately 600
million dollars in debt owed to USDA.

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ANGOLA
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3. (SBU) Angola appears to be moving closer to obtaining an IMF
program and normalizing relations with the Paris Club, but some
creditors are losing patience. Finance Minister de Morais told
Paris Club Chairman Musca last week that he had received a green
light from President dos Santos to resume negotiations with the IMF
on the margins of the annual meetings in Singapore. In addition, de
Morais said Angola was prepared to start servicing its Paris Club
debt and make a symbolic good-faith payment toward arrears (in an
amount unspecified). De Morais promised to send a letter to the
Paris Club confirming these intentions. The IMF reported that a
mission had visited Luanda in July to explain the modalities of a
possible precautionary SBA, but that progress had not been as rapid
as originally envisioned.


4. (SBU) Several creditors, led by Spain, pointed out that the
Paris Club has been down this road before, only to be disappointed.
They argued that if Angola is no closer to concluding an IMF program
come October, the club should revert to a previously agreed strategy
of pressing Angola to clear arrears in as short a timeframe as
possible. Other creditors (US, UK, Germany, Belgium) cautioned
against setting artificial deadlines and urged creditors to use
discretion. In the end, creditors agreed to await the outcome of
the Singapore meetings before deciding on a course of action. Musca
will meet with the Angolan authorities in Singapore and underscore
creditors' growing impatience. The secretariat will initiate a data
call to get a better picture of payments falling due and draft a
working paper on how to divide up any arrears payments received from
Angola.

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ARGENTINA
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5. (SBU) Economy Minister Miceli and Finance Secretary MacLaughlin
told the UK's ambassador in Buenos Aires that Argentina plans to
make a proposal to the Paris Club by the end of the year. Other
creditors had no further news to report since the last meeting.
Several creditors have scheduled bilateral meetings with Argentina
on the margins of the IMF-World Bank meetings in Singapore and
intend to raise the debt issue.

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BELIZE
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6. (U) The US reported, and the IMF confirmed, that, although
Belize announced in August that it intends to rearrange its debt
with the private sector, it does not intend to restructure its
official bilateral debt. The UK said it was already forgiving
Belize's debt service payments as they came due under the
Commonwealth Debt Initiative. The only other Paris Club creditors
are the United States (12 million dollars in claims) and Japan (5
million dollars). Of Belize's 1 billion dollars in public debt,
over half is owed to commercial creditors.

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BRAZIL
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7. (U) The secretariat took stock of Brazil's prepayment operation.
Germany and Italy said arrears still had not been cleared. The
secretariat will meet with the Brazilian authorities in Singapore

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and encourage them to settle these disputes. All other participating
creditors have received their prepayment.

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CAMBODIA
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8. (U) Russia and Cambodia still have not resolved their bilateral
debt dispute, which continues to hold up approval of Cambodia's new
Poverty Reduction and Growth Facility (PRGF) with the IMF. (The US
resolved its own bilateral dispute with Cambodia earlier this year
and has signaled its support for the PRGF.) A Cambodian delegation
visited Russia in August to try to resolve the dispute, but no
agreement was reached. Russia proposed several options for treating
post-cutoff debt (the main point of contention),but the Cambodian
delegation said it would need to discuss these options back in Phnom
Penh. The US said it was in the process of concluding its bilateral
agreement implementing the 1995 Paris Club agreed minute and
reaffirmed its willingness to provide financing assurances for
Cambodia's new PRGF. Italy reported small arrears (1.3 million
euros).

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HAITI
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9. (U) The IMF said Haiti's request for a PRGF will come before the
executive board in late October, together with decision point. The
US said supporting economic development in Haiti is a high priority
for the international community and that, if Haiti achieves Decision
Point in October, the US would look forward to meeting with it in
the Paris Club as early as November to negotiate a Cologne
Treatment. (This would provide cancellation of 90 percent or more
of the debt service coming due during the PRGF period.) The
secretariat acknowledged that proceeding directly to a Cologne

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treatment, as opposed to starting with a Naples treatment, (which
provides less debt relief) was atypical, though not unprecedented.
The IMF will ask for financing assurances for the PRGF from the
Paris Club at the October meeting.

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IRAQ
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10. (U) Russia said the text of its bilateral agreement with Iraq
has been completed, but the agreement itself has not yet been
signed. A signing session was originally planned for late August
but was subsequently postponed pending high-level formal approval.
Russia remains the only Paris Club creditor that has yet to conclude
a bilateral agreement with Iraq implementing the 2004 Paris Club
agreed minute.

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KENYA
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11. (U) The IMF said there was considerable uncertainty as to
whether the second review of Kenya's PRGF will be completed before
the program expires in November, due to limited progress on
governance reforms. If, in fact, the program expires without
completion of the second review, the third phase of Kenya's current
Paris Club agreement (which provides for the rescheduling of 2006
maturities) will not enter into force. The IMF noted that no
financing gaps are anticipated in 2006 and 2007, even in the absence
of a Paris Club rescheduling. The secretariat will draft a letter
to the Kenyan authorities alerting them to the current state of
events.

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LEBANON
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12. (SBU) The IMF said the ratio of government debt to GDP stood at
175 percent, but only a small fraction of the debt was owed to
official creditors. Italy said the reconstruction of Lebanon could
not be done on grants alone and suggested that new lending (both ODA
and non-ODA) needed to be considered, notwithstanding the precarious
debt dynamics. The USDEL said helping Lebanon is a high priority,
but cautioned against adding to Lebanon's debt burden.
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MALAWI
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13. (U) The IMF reported that Malawi reached its completion point
on August 3 and qualified for HIPC and Multilateral Debt Relief
Initiative (MDRI) relief, which will likely exceed 3 billion
dollars. Malawi is tentatively scheduled to come to the Paris Club
for negotiations next month. (The US does not have any claims.)

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NICARAGUA
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14. (U) The secretariat met with officials from the Libyan embassy
in Paris to explain the HIPC process and the Paris Club's principle
of comparable treatment. (Nicaragua is seeking 91 percent
cancellation, consistent with its January 2004 HIPC completion point
treatment in the Paris Club, whereas Libya is offering to cancel 67
percent of its claims and is threatening litigation to recover the
balance.) The Libyan officials said they would report back to their
authorities in Tripoli. The secretariat will reinforce its message
by sending a letter directly to the authorities. Separately,
several creditors (Austria, Denmark, France, Japan, Netherlands,
Norway, Sweden, US) reported that they had been asked by Nicaragua
to help the World Bank's International Development Association (IDA)
finance a buyback of Nicaragua's commercial debt on HIPC-comparable
terms.

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PAKISTAN
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15. (U) Norway announced that it will do a 20 million dollar
debt-for-development swap with Pakistan, in close cooperation with
the Asian Development Bank. Under the terms of the swap, commercial
debt will be converted into grants and channeled to the Pakistan
Earthquake Fund to support reconstruction.

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RUSSIA
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16. (U) All creditors have received their prepayment from Russia.

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SAO TOME
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17. (U) The IMF said HIPC completion point could be reached by
early 2007. Germany, France, Russia, and Spain reported technical
arrears but agreed to allow the second phase of the current Paris
Club agreement to enter into force. The secretariat will send a
letter to the authorities urging them to clear all arrears and
conclude outstanding bilateral agreements with Spain, France, and
Russia. (The US does not have any claims.)

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SERBIA AND MONTENEGRO
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18. (U) The secretariat proposed sending a letter to the finance
ministers of Serbia and Montenegro acknowledging the partition of
Serbia's external debt and calling on each country to conclude new
bilateral agreements with its Paris Club creditors. Creditors
agreed with the thrust of this approach, but asked the secretariat
to hold off on sending the letter until they have had a chance to
review the partition agreement and verify the figures. Several
creditors, including the US, reported discrepancies between their
own debt figures and data provided by the Serbian central bank in
August. Separately, the secretariat suggested that no response was
necessary to Serbia's recent letter inviting Paris Club creditors to
engage in debt swaps.

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SEYCHELLES
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19. (U) The secretariat will send a letter to the newly elected
Seychellois authorities calling on them to normalize relations with
the Paris Club. (The US is not a creditor.)

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Methodology
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20. (U) Creditors agreed to a new approach proposed by the
secretariat to address discrepancies between IMF-WB data and data

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submitted by Paris Club creditors in the context of HIPC. In the
past, these discrepancies have led to significant revisions in the
HIPC common reduction factor. Under the new approach, the
secretariat will ask creditors to reconcile their data with the

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debtor country two months prior to decision point and two months
prior to completion point. On each occasion, the data will be
passed to the IMF for inclusion in the DSA. The secretariat
confirmed that the HIPC sunset clause will not affect the Paris
Club's methodology for providing debt relief to HIPC countries. In
response to a question from Russia, the IMF said Afghanistan could
be declared HIPC eligible in early 2007, pending completion of a
Debt Sustainability Analysis.

STAPLETON#