PARIS CLUB - JANUARY 2007 TOUR D'HORIZON AND MACEDONIA &

UNCLAS SECTION 01 OF 10 PARIS 000328

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

E.O. 12958: N/A
TAGS: EFIN ECON EAID XM XA XH XB XF FR
SUBJECT: PARIS CLUB - JANUARY 2007 TOUR D'HORIZON AND MACEDONIA &
SIERRA LEONE NEGOTIATIONS


PARIS 00000328 001.2 OF 010


SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET DISTRIBUTION

--------------
SUMMARY
--------------


1. (SBU) During the January 23-24 meeting of the Paris Club,
creditors granted Sierra Leone completion point treatment under the
enhanced HIPC initiative, cancelling 100 percent ($363 million) of
Sierra Leone's bilateral debt to the Club. The United States wrote
off $44 million in USDA concessional loans. Creditors also accepted
Macedonia's offer to prepay its previously rescheduled debt.
Macedonia plans to prepay about $36 million in Export-Import Bank
claims. The Secretariat confirmed again that Argentina has not
submitted a formal proposal to the Paris Club. Creditors remained
in agreement that Argentina should immediately use its reserves ($33
billion) to clear its Paris Club arrears ($5.5 billion),though
Germany - the largest creditor, accounting for over a quarter of the
debt - expressed a willingness to consider "innovative" solutions.
Russia announced a new policy to forgive 100 percent of debts owed
by HIPC countries that reach completion point. Other countries on
the agenda included Afghanistan, Angola, Cambodia, Cameroon, Central
African Republic, Comoros, Republic of Congo, Democratic Republic of
the Congo, Ecuador, The Gambia, Iraq, Jordan, Kenya, Lebanon,
Pakistan, Sao Tome and Principe, Serbia Montenegro, and Tonga.

--------------
AFGHANISTAN
--------------


2. (U) The U.S. reported it had signed its bilateral agreement with
Afghanistan implementing the July 2006 Paris Club agreed minute.
Germany said it had sent a draft bilateral agreement to Kabul and
was waiting for a reply. Russia said it was working on a draft with
Afghanistan's advisors and noted that, at the request of the Afghan
authorities, it had agreed to implement the debt reduction option
rather than the debt service reduction option (the agreed minute

PARIS 00000328 002 OF 010


allows for both). Under the debt reduction option, Russia will
cancel 67 percent of Afghanistan's consolidated non-ODA debt
outright, rather than reschedule the debt at a concessional interest
rate so as to achieve the same reduction in net present value (NPV)
terms. The IMF also reported that it had developed a new
methodology for estimating Afghanistan's services exports, an
important element in assessing the country's debt sustainability
before reaching HIPC Decision Point.

--------------
ANGOLA
--------------


3. (U) Following a flurry of payments in recent weeks, Angola has
cleared 97 percent of its $2.3 billion in arrears to the Paris Club,
not including late interest. Some creditors (Belgium, Denmark,
Switzerland) expressed annoyance at being underpaid while others
have been overpaid. The Secretariat pointed out that this unequal
treatment is likely a reflection of disorganization in Luanda rather
than a deliberate policy to discriminate among creditors. The U.S.
reported that Angola prepaid without notice the entire debt to USDA,
apparently overpaying the outstanding balance by some $11 million.
No other creditor reported receiving a similar overpayment. In a
telephone conversation with the Secretariat, Finance Minister de
Morais said he will ask the Paris Club to treat the $1.8 billion in
late interest once Angola has an IMF program in place. The
prospects for concluding such a program, however, remain unclear.
In the meantime, the Secretariat will send a letter to the
authorities commending them on clearing the bulk of their arrears,
asking them to clear remaining arrears, and holding out the prospect
of a Paris Club treatment of late interest once Angola has arranged
an appropriate IMF program.

--------------
ARGENTINA
--------------


PARIS 00000328 003 OF 010



4. (SBU) The Secretariat said it still has not received an official
proposal from Argentina, despite numerous press reports to the
contrary as well as an Argentine press release following January 23
meetings in Berlin with Germany's Minister of Economics and
Planning. According to creditor data as of November 2006, Argentina
owed the Paris Club $6.5 billion, consisting of $3.8 billion in
arrears (excluding late interest),$2.1 billion in outstanding
principal, and $0.7 billion in late interest. These figures do not
include the $835 million Spanish loan granted in 2001, all of which
is in arrears. Germany, the Netherlands, and Sweden, expressed a
willingness to consider innovative solutions if necessary to
conclude a deal. Japan, the UK, Canada, and the U.S. countered that
the Paris Club should remain firm in its position that Argentina
must clear arrears immediately, especially considering the current
level of Argentine reserves, which the IMF estimated to be close to
$33 billion. Italy reiterated that Argentina needed to settle with
holdout bondholders; Germany responded that the holdouts were a
separate issue. Sweden and Denmark said the cover policy of their
export credit agencies could not be dictated by the Paris Club - a
possible indication that some creditors will resume export financing
to Argentina even before arrears have been completely cleared. The
Secretariat will continue to urge Argentina to make a realistic

SIPDIS
proposal to the Club.

--------------
CAMBODIA
--------------


5. (SBU) Russia still has not concluded a bilateral agreement with
Cambodia implementing the 1995 Paris Club agreed minute. Russia and
Cambodia continue to disagree on what interest rate should apply to
rescheduled post-cutoff date debt. Japan reported that Cambodia
unexpectedly prepaid the entire balance ($4.2 million) of its
previously rescheduled debt. As a result, Japan would not be
affected by any future Paris Club treatment of Cambodia's debt as
long as no post-cutoff date debt is treated. On the margins of the
meeting, the U.S. reassured the Japanese delegation that the U.S.

PARIS 00000328 004 OF 010


does not intend to promote use of a different cutoff date in a
future Paris Club negotiation with Cambodia. The U.S. noted it was
awaiting a response from the authorities to the draft bilateral
agreement. The Secretariat will send a letter to Cambodia pointing
out that unilateral prepayments violate Paris Club solidarity and
urging Cambodia to normalize relations with its creditors.

--------------
CAMEROON
--------------


6. (U) The Secretariat will send a letter to Cameroon granting its
request to extend until June 30, 2007, the deadline for concluding
bilateral agreements. The Secretariat will also urge the GOC to
respond promptly to creditors in implementing the Cambodia's June
2006 Completion Point treatment. Thus far, only five creditors
(Austria, Japan, Italy, Spain, and the U.S.) have concluded
bilateral agreements.

--------------
CENTRAL AFRICAN REPUBLIC
--------------


7. (U) The Secretariat will invite CAR to come to the Paris Club in
April for negotiations, rather than in March as originally thought.
CAR is eligible for a flow treatment on "Naples terms" (67 percent
reduction of debt service on non-concessional loans, with a
rescheduling of the remaining amounts; and rescheduling of upcoming
installments on concessional loans). The postponement is due to a
delay in the preparation of CAR's preliminary HIPC document, which
the IMF now expects to present to its Executive Board in early
March.

--------------
COMOROS
--------------


PARIS 00000328 005 OF 010



8. (U) Comoros will be HIPC-eligible once it starts an IMF program.
France and Italy are the only Paris Club creditors (The U.S. holds
no debt.) Once a Poverty Reduction and Growth Facility (PRGF) is
approved, possibly as early as March, France intends to invite
Comoros together with its two principal non-Paris Club creditors,
Kuwait and the United Arab Emirates, to the Paris Club for
negotiations. Comoros stands to receive a flow treatment on "Naples
terms."

--------------
CONGO-BRAZZAVILLE
--------------


9. (U) The Secretariat will send a letter to the authorities
notifying them that the third phase of the April 2006 Paris Club
agreement, which topped up Congo-B's "Naples" treatment to "Cologne"
terms (increasing to 90 percent the ratio of non-ODA debt service
treated),will not enter into force. The third phase covers
principal and interest payments falling due from October 2006
through September 2007 and is conditioned on completion of a fourth
review of Congo-B's PRGF before January 31, 2007. The IMF said
that, as a result of major fiscal slippages, it cannot recommend
completion of the third review of the program, and that the
authorities will need to establish a track record of at least six
months on a Staff Monitored Program before a PRGF can resume. The
U.S. will suspend interim HIPC relief in accordance with its HIPC
policy.

--------------
DEMOCRATIC REPUBLIC OF THE CONGO
--------------


10. (U) The IMF said a new PRGF could be in place by the summer. In
the best case scenario, the DRC could reach completion point as
early as six months later, at the time of the first review of the
program. The Secretariat will send a letter to the DRC authorities
stating that the consolidation period of the current agreement

PARIS 00000328 006 OF 010


cannot be extended in the absence of a PRGF and will respond to a
letter from the DRC's debt management office asking for information
about 2007 debt service to Paris Club creditors. The Secretariat
also said it will soon ask creditors for data on DRC debt since the
country has reported great difficulties in knowing what debt is owed
to the Club.

--------------
ECUADOR
--------------


11. (U) According to the IMF, the authorities have not yet decided
what their debt management strategy will be, notwithstanding public
statements that they intend to restructure "illegitimate" debts and
debts to private sector creditors. IMF staff told the authorities
that a unilateral restructuring would yield little benefit. The
World Bank noted that Ecuadorian bonds are now the riskiest among
emerging markets, with spreads having increased to 950 basis
points.

--------------
THE GAMBIA
--------------


12. (U) The Secretariat will inform the authorities that creditors
provided assurances for Gambia's new PRGF and urge them to clear all
arrears. If performance under the program is satisfactory, Gambia
could reach completion point at the time of the first review. The
bulk of Gambia's $1.6 million Paris Club debt is owed to Norway.
(The U.S. is not a creditor.)

--------------
IRAQ
--------------


13. (SBU) The U.S. followed up on its previous request that Germany
explain its attempt to collect 100 percent of a post-1990 pre-cutoff

PARIS 00000328 007 OF 010


date claim on Iraq. Germany gave a confusing explanation,
characterizing the claim as a loan made by the former German
Democratic Republic in local Iraqi currency for medical devices
delivered through 2005. Germany asserted that it was merely trying
to recover German money in an Iraqi account which the Iraqi
authorities had requested not be treated in the 2004 Paris Club
agreement. At the request of the U.S., Germany will provide a
written explanation to creditors. Russia expressed hope it might
receive "legal authority" to sign its agreement with Iraq before the
next Paris Club meeting in March. In a side conversation, the head
of the Russian delegation suggested that the delay was due to
technical reasons inside the government. (Russia remains the only
Paris Club creditor that has yet to conclude its bilateral agreement
implementing the December 2004 agreed minute.)

--------------
JORDAN
--------------


14. (U) Once it has received a comfort letter from the IMF (required
because Jordan has completed its IMF program),the Secretariat will
inform the authorities that the fifth and final phase of Jordan's
2002 rescheduling, covering principal and interest payments falling
due in 2007, has entered into force. The IMF said the comfort
letter is in production and will be sent to the Secretariat
shortly.

--------------
KENYA
--------------


15. (U) Kenya's PRGF has been extended until February 28 to allow
time for completion of the second review. Creditors will decide at
the March meeting whether to enter into force the third and final
phase of Kenya's 2004 rescheduling, which is conditioned on
completion of the review. The third phase covers principal and
interest payments falling due in 2006.

PARIS 00000328 008 OF 010



--------------
LEBANON
--------------


16. (U) The IMF said the authorities have requested Emergency
Post-Conflict Assistance (EPCA) and announced an ambitious reform
program designed to reduce external debt from its current level of
188 to 50 percent of GDP by 2011 through fiscal adjustment and
privatization. IMF staff believes these measures alone will not be
sufficient to restore debt sustainability and must be combined with
robust grant support from donors. The U.S. and France said they
would announce substantial assistance packages at the donors'
conference.

--------------
MACEDONIA
--------------


17. (U) Creditors accepted Macedonia's offer to prepay at face value
its previously rescheduled Paris Club debt (both ODA and non-ODA).
The total amount eligible to be prepaid is $104 million. The U.S.
is Macedonia's largest creditor, with Ex-Im holding $36 million in
previously rescheduled non-ODA debt, all of which is prepayable
without penalty. Macedonia said the prepayment was motivated by a
desire to use surplus revenues generated by recent privatizations to
reduce debt service costs and improve the country's credit rating.

--------------
PAKISTAN
--------------


18. (U) Belgium announced that it intends to conclude a debt-for-aid
swap with Pakistan, which will fund several Asian Development
Bank-led health and education projects worth 30 million euros.
Russia reported $4.7 million in arrears, but said it would not try
to block the debt swap. The Secretariat will remind Pakistan to

PARIS 00000328 009 OF 010


clear any arrears that may exist.

--------------
RUSSIA
--------------


19. (U) Russia summarized its new policy to forgive 100 percent of
debts owed by HIPC countries that reach completion point. Countries
that will benefit immediately are Benin, Ethiopia, Guyana,
Madagascar, Mozambique, Tanzania, and Zambia. The combined stock of
debt owed by these countries to Russia after reaching completion
point amounts to $526 million. The cancellation of this debt will
be implemented through debt-for-aid swaps implemented in close
cooperation with the World Bank. Russia intends to extend this
policy to other HIPC countries as soon as they reach completion
point.

--------------
SAO TOME AND PRINCIPE
--------------


20. (U) STP is expected to reach HIPC completion point in late
February or early March. Negotiations in the Paris Club are
tentatively scheduled for April. (The U.S. is not a creditor.)

--------------
SERBIA AND MONTENEGRO
--------------


21. (SBU) The Secretariat contacted the authorities to convey
concerns raised by certain creditors (Japan, Netherlands, Norway)
regarding the decision by Serbia and Montenegro to allocate debt
between themselves according to the final beneficiary principle.
The authorities understood the message without giving any indication
they would change their approach. Serbia asserted no Paris Club
creditor had registered problems with the final beneficiary
principle. (The US and France intend to use the final beneficiary

PARIS 00000328 010 OF 010


principle in their bilateral agreements.) Japan insisted that
Serbia and Montenegro must respect the debtor/guarantor principle
rather than the final beneficiary principle (unless otherwise
specified by the creditor),and asked the Secretariat to consider
further action.

--------------
SIERRA LEONE
--------------


22. (U) The Paris Club, along with Kuwait, which also signed Sierra
Leone's 2001 Paris Club agreement, cancelled 100 percent of Sierra
Leone's bilateral debt. The total value of the debt forgiven
amounted to $363 million, including cancellation of $44 million in
USDA concessional loans under the PL 480 program. Finance Minister
John Benjamin expressed gratitude to the Paris Club for supporting
Sierra Leone during its civil war and for the final completion point
treatment of its bilateral debt. Benjamin also underscored the role
of debt relief in freeing resources to pursue the GOSL's priorities
of improving governance, reducing poverty, and strengthening health
and education programs.

--------------
TONGA
--------------


23. (U) Tonga has asked Germany to extend the maturity of certain
ODA debts. Germany will deal with the issue bilaterally. France is
the only other creditor.

STAPLETON#