PARIS CLUB: June 2008 Session, Private Sector Meeting,

UNCLAS SECTION 01 OF 14 PARIS 001201 SIPDIS STATE FOR EEB/IFD/OMA TREASURY FOR DO/IDD AND OUSED/IMF SECDEF FOR USDP/DSCA PASS EXIM FOR CLAIMS - MPAREDES PASS USDA FOR CCC -- ALEUNG/WWILLER/JDOSTER PASS USAID FOR CLAIMS -- WFULLER PASS DOD FOR DSCS -- PBERG E.O. 12958: N/A TAGS: EFIN ECON EAID XM XA XH XB XF FR SUBJECT: PARIS CLUB: June 2008 Session, Private Sector Meeting, and Negotiation with Togo ¶1. Summary: At the Paris Club's June 10-12 session, the tour d'horizon addressed Burundi, Central African Republic, Grenada, Iraq, Libya, Moldova, Sudan and Togo. Germany requested an informal update on Argentina; Russia sought resolution of its promissory note issue. As for methodological issues, the U.S. discussed "Jubilee legislation"; Belgium described new legislation, aimed at vulture funds, that prevents seizure of international assistance funds; and creditors agreed that the Secretariat would revise its working paper on possible Paris Club debt treatments for fragile states once the IMF and IBRD clarify their approaches. The June 11 meeting with the private sector and some non-Paris Club emerging creditors produced ideas for two possible working groups: one involving Paris Club and non-Paris Club creditors to address comparability of treatment and other issues; and the second involving Paris Club and private sector representatives to discuss so-called vulture funds. ¶2. In the June 12 negotiation with Togo, creditors provided a generous treatment covering $735 million in principal and interest payments falling due during Togo's Poverty Reduction and Growth Facility (PRGF) program, including immediate cancellation of $347 million. The U.S. did not sign the Paris Club Agreed Minutes, but provided a side letter stating our intention to treat the debt once Togo reaches HIPC decision point. End summary. -------------- Argentina -------------- ¶3. Germany requested an informal exchange over lunch. The Secretariat recalled Chairman Musca's contacts with then-Financial Secretary Secondini in March, prior to Economy Minister Lousteau's resignation. At that time, the GOA said it wanted to address the Paris Club issue by the end of 2008. Since then, the Secretariat had only had informal contacts with the new team. The Secretariat noted Argentina's economic situation, and Italy commented on President Fernandez de Kirchner's stance at the June 5 Rome Food PARIS 00001201 002 OF 014 Security Summit, where she criticized the IMF and blamed the World Bank for Haiti's difficulties. The Secretariat stated its clear message that, without an IMF program, the GOA could suggest a repayment plan, but a formal rescheduling would not be possible. Creditors agreed to monitor the economic situation; maintain a coordinated message in awaiting a GOA approach; and avoid mingling Paris Club and holdout bondholder issues. The IMF is preparing for Article IV discussions (date to be determined),and the Secretariat mentioned that a possible end-July Development Committee Deputies meeting in Mexico and August 30-31 G-20 Deputies meeting in Rio de Janeiro offered opportunities for further contacts. -------------- Burundi -------------- ¶4. The IMF reported that its Executive Board will discuss a successor Poverty Reduction and Growth Facility (PRGF) program in early July; Burundi could reach HIPC completion point at the time of its first PRGF review in late 2008/early 2009. The World Bank stressed that real reforms are required to reverse declines in the coffee export sector, which accounts for 85 percent of export revenues. ¶5. Creditors agreed in principle on an approach for resuming interim HIPC relief for Burundi once a new PRGF program is in place. Assuming the Executive Board approves the PRGF on July 7, creditors will retroactively extend the consolidation period of the March 2004 Paris Club agreement to cover the gap between the two programs. As summarized in a draft Chairman's Summary, creditors that are legally required to bill for amounts falling due during the gap period may do so, provided they re-credit any amounts paid beyond what is due after the application of Cologne terms. Creditors without such legal constraints will either not bill, or inform the debtor of amounts due but not demand payment. Germany and Italy stressed that, while the Paris Club's approach for Burundi does set a PARIS 00001201 003 OF 014 precedent, creditors should determine on a case-by-case basis how debtor countries in similar situations will be handled in the future. (Background: Burundi is a test case for the Paris Club's methodology, as agreed in a March 12, 2008 working paper, on interim relief for HIPC countries whose previous PRGF program went off track or expired. Burundi reached decision point in July 2005, but interim relief ended after the PRGF arrangement expired in January ¶2008. The U.S. is not a creditor.) -------------- Central African Republic (CAR) -------------- ¶6. The IMF previewed CAR's second PRGF program review, which the IMF Executive Board approved on June 18. The completed review will enable creditors to enter into force the second phase of CAR's December 2007 Agreed Minutes, thereby extending the period of interim HIPC relief to cover maturities falling due between December 1, 2007, and November 30, 2008. The IMF reported that CAR had contacted all its non-Paris Club creditors. Kuwait, Libya, and France's Banque Postale had indicated intentions to participate in HIPC debt relief. The World Bank reported that, given rising food prices, CAR sought assistance for the agricultural sector and social safety nets, in particular. The Bank endorsed a new Poverty Reduction Strategy Paper on May 27; CAR should meet HIPC completion point triggers by the end of 2008. Asked about litigating creditors, the IMF awaits replies to its survey, sent to commercial creditors, as part of information gathering for its upcoming HIPC and MDRI report. ¶7. The Secretariat discussed how the Paris Club could help CAR secure comparable treatment from non-Paris Club creditors. Mali, Niger, Congo and some private creditors had begun contacts with CAR. The Secretariat offered to send letters to official and commercial creditors that have not responded to CAR's initial outreach to encourage them to start negotiations. These creditors include Iraq, PARIS 00001201 004 OF 014 Taiwan, Serbia, Equatorial Guinea, Benin, Cameroon, Senegal, Chad, France Telecom, Hopitaux de Paris, Credit Lyonnais, and First Curacao. The Secretariat decided that sending letters to Argentina and China would not be constructive. Noting Kuwait and Saudi Arabia's proposed bilateral agreements did not provide comparable treatment, the Secretariat also offered to analyze debt restructuring offers and to help CAR formulate counteroffers. The Secretariat would lend support to CAR representatives when they visit Paris for negotiations with creditors in mid-June. -------------- Grenada -------------- ¶8. Creditors postponed a decision on whether to enter into force the second phase of Grenada's May 2006 rescheduling, pending the Secretariat's preparation of a working paper with options for discussion at the July meeting. The second phase, which covers maturities falling due in 2007, is conditioned on completion of the "review of the second year" of Grenada's PRGF. The IMF said completion of the first review of the program has been delayed due to fiscal slippage in 2007 and slow progress implementing reforms, but that performance in 2008 has been more encouraging. Grenada had an end-2007 debt/GDP ratio of 112 percent; it is considering a China Exim loan for a port/marina project that could undermine its debt sustainability. The World Bank reported that since a 2005 Hurricane Ivan-related emergency loan, Grenada had not been able to access the Bank; the Bank questioned the advisability of market-based financing. The Secretariat suggested that creditors consider the possibility of not entering into force the second phase, arguing that, by not enforcing its own conditionality, the Paris Club risked creating moral hazard and treating performing debtor countries unfairly. The IMF cautioned that, while Grenada may have the capacity to pay its 2007 maturities, other countries in the future may not. A Paris Club decision not to enter into force a phase of debt relief could jeopardize IMF program elements and would be PARIS 00001201 005 OF 014 tantamount to withdrawing financing assurances. -------------- Iraq -------------- ¶9. The Secretariat reported that neither Algeria nor Morocco had replied to the letters it sent in April. The Secretariat had informal contacts with Poland and Greece, which took note of the issue but have not responded. The Secretariat distributed a letter from Brazil's finance minister stating that efforts to conclude a bilateral agreement with Iraq to implement the terms of the 2004 Paris Club agreement have been held up by domestic lawsuits involving private and state-owned companies. The letter states that Brazil is "forced to wait until such legal obstacles are overcome" and that "given the normal pace of judicial procedures, it appears unlikely that such moment will be reached in the short term." Asked by the Secretariat about the timetable for these judicial procedures, Brazil's representative said she had no information. ¶10. Germany denounced Iraqi Minister of Finance Jabr and Central Bank Governor Al-Shabibi's May 30 letter to the Secretariat, for distribution to Paris Club creditors. The letter accuses Germany of circumventing UN sanctions and failing to restructure a post-1990 claim, in violation of Iraq's 2004 Paris Club agreement. Germany denied the allegations, blamed Iraq's advisers for the delay in resolving the dispute, and challenged the appropriateness of such a communication given arbitration underway in Vienna. A week earlier, Germany and Iraq had initialed a bilateral investment treaty in preparation for the Prime Minister's visit; during those discussions, the GOI had not raised this issue. Asked about the timetable for resolution, Germany hoped the dispute would be settled soon and promised to keep the Paris Club informed. The U.S. expressed disappointment that a Paris Club member and a debtor that was meeting its commitments were having trouble reaching an agreement. The Secretariat said it was not the role of the Paris PARIS 00001201 006 OF 014 Club to take a position on what amounted to a bilateral issue. ¶11. Japan inquired about China. The Secretariat responded that, based on information gained at the recent International Compact with Iraq conference in Stockholm, Iraq's discussions with China were advancing in a satisfactory way, though there was no specific date for concluding an agreement. -------------- Libya -------------- ¶12. The IMF reported that foreign exchange reserves were scheduled to double by 2013, and that Libya established a $40-50 billion sovereign wealth fund, the Libya Investment Authority, last year. An IMF mission visited Tripoli for Article IV discussions in early May; the Executive Board will discuss Libya in mid-July. In November 2007, seven creditors reported arrears. Six creditors (Austria, Denmark, Finland, Netherlands, Sweden, and Switzerland) reported, with frustration, no progress since that time. Russia, on the other hand, said it concluded an agreement on trade cooperation in April 2008 that also settled the debt issue. The Netherlands urged the remaining Paris Club creditors to maintain solidarity. The Netherlands and Denmark had visited Tripoli recently and found the authorities to be uncooperative; others echoed the view that Libya shows no intention to resolve the issue. The Secretariat will follow up with the authorities at the staff level to find out whether the finance minister intends to respond to the Paris Club's January 2008 letter, which expressed concern that Libya had concluded bilateral agreements with certain creditors while remaining in default toward seven Paris Club creditors. Italy indicated that Libya was not negotiating in good faith with many private creditors in Italy. -------------- Moldova PARIS 00001201 007 OF 014 -------------- ¶13. The IMF gave an upbeat assessment of Moldova's progress on its PRGF, noting some concern about 16 percent inflation in April, and said the fourth review is expected to be completed in July. Once the IMF review is completed, the Paris Club intends to enter into force the third phase of Moldova's May 2006 Paris Club agreement on Houston terms. The third phase reschedules maturities falling due during the period May 1, 2008, to December 31, 2008. -------------- Russia: Promissory Notes -------------- ¶14. Following up on its April 2007 and July 2007 requests, Russia asked creditors to either return promissory notes and bills of exchange that were cancelled as a result of previous prepayment operations or, alternatively, provide a document confirming that Russia has paid these claims. Several creditors stated that they had responded to Russia's request in 2007 and had requested GOR confirmation of receipt, but were awaiting a response. Without reacting to these comments, Russia repeated its request for letters from creditors. The U.S. does not hold these notes and provided a letter in September 2006 acknowledging GOR repayment of debts to the U.S. in the context of Russia's August 2006 Paris Club buyback operation. -------------- Sudan -------------- ¶15. Sudan was on the tour d'horizon agenda to provide background for French bank UBAF's presentation during the Paris Club's June 11 annual meeting with the private sector. At the outset, the Secretariat stated that restoration of peace and safety would have to precede normalizing relations with the financial community. PARIS 00001201 008 OF 014 Noting Sudan's protracted arrears, the IMF said it could normalize relations with Sudan through an arrears clearance operation and a new PRGF program if donors gave their financing assurances and provided debt relief. Sudan's performance under a series of Staff-Monitored Programs (SMPs) has been generally satisfactory and the economic outlook is favorable (10 percent growth in 2007), although the rise in food prices poses a challenge, and the external debt overhang ($27 billion debt stock in nominal terms) remains a concern. The Fund reported that Sudan's non-concessional borrowing in 2007 was below the limit specified in the SMP and less than in ¶2006. Thus far in 2008, however, Sudan has already contracted $522 million in non-concessional debt, including asset-backed loans for oil infrastructure development, approaching the current SMP's $700 million ceiling. -------------- Togo -------------- ¶16. In view of Togo's limited capacity to pay, creditors agreed to provide a generous "Naples flow" treatment that included 100 percent capitalization of moratorium interest and deferral of post-cut-off date and short-term debt. The agreement treated $735 million in arrears and principal and interest payments falling due during Togo's three-year PRGF program, and will lead to the immediate cancellation of $347 million. At U.S. request, creditors agreed to include a $10,000 de minimis provision. (Togo's debt to the U.S. amounts to just $6,200 in arrears to Exim Bank.) The U.S. was an observer and did not sign the Paris Club Agreed Minutes, but provided a side letter stating our intention to cancel the debt once Togo reaches HIPC decision point, consistent with our domestic legislation on debt relief for HIPCs. -------------- Methodological Discussion U.S. Jubilee Legislation PARIS 00001201 009 OF 014 -------------- ¶17. The U.S. briefed the Paris Club on the potential impact and current status of the House Jubilee Act (H.R. 2634) and the Jubilee Bill (S.2166) draft under consideration in the Senate. We explained that the Administration formally opposed the legislation; noted that, given the legislative calendar and the current austere budget environment, it did not appear likely the Senate would pass its bill this year; and explained how both houses produce a joint bill that is sent to the President for consideration. Creditors posed a series of questions. Belgium asked whether an IMF program was a requirement for debt relief (it is not). The World Bank asked whether the bill references the list of IDA-eligible countries at a fixed point in time (it does not). The Secretariat inquired whether the U.S. Executive Directors at the IFIs would have specific instructions (yes, they would have to use voice and vote to achieve the bill's objectives),and whether Congress had provided any estimates of the cost of implementing the bill. The Netherlands urged discussion of this legislation at the IMF and World Bank and asked whether the legislation was anchored in the IMF/World Bank Debt Sustainability Framework (DSF). Sweden and Norway asked about provisions related to odious debts. Japan asked whether the Administration would have another opportunity to testify against the bill, and whether the President could veto the bill should it pass Congress. Australia said the bill seemed to ignore progress achieved in establishing the DSF, enhancing HIPC and implementing the Multilateral Debt Relief Initiative, and promoting sustainable lending through the OECD Export Credit Group's guidelines. The Secretariat said that, while it was not for the Paris Club to adopt a formal position toward the bill, the U.S. could take home the message that the Club was "extremely vigilant" and that, if passed, the legislation would cause problems for Paris Club creditors, the IFIs, and debt policy doctrine. -------------- Methodological Discussion: PARIS 00001201 010 OF 014 Belgium's New Legislation to Protect Against Vulture Funds -------------- ¶18. Belgium briefed the Paris Club on its efforts since 2004 to deal with vulture funds and described a recently passed law aimed at preventing the "seizure or cession of public funds for international cooperation, notably by vulture funds." The law, which took effect May 27, protects Belgium's aid flows and covers debt rescheduled in the Paris Club, but is not retroactive. Belgium still seeks a way to deal with earlier cases. France commented that it has a similar law that protects French ODA flows to HIPC countries. Italy noted discussions in Rome about introducing a similar law to protect ODA flows. -------------- Methodological Discussion: Paris Club Annual Report -------------- ¶19. The Secretariat distributed the inaugural publication of the Paris Club Annual Report. The Secretariat, based on the response to the report, will consider how to enrich the report next year. Japan said it intends to publish a Japanese translation. -------------- Methodological Discussion: Fragile States -------------- ¶20. Creditors discussed next steps with respect to France's proposal that the Paris Club provide unconditional debt relief to IDA-only countries under IMF Emergency Post-Conflict Assistance programs (EPCAs). (Under France's proposal, the Paris Club would defer all arrears and debt service falling due during the period of the EPCA and fully capitalize moratorium interest. If the country obtains a follow-on PRGF program, the deferred amounts would be PARIS 00001201 011 OF 014 rescheduled and the moratorium interest canceled. The U.S. does not support the proposal.) The Secretariat noted that the Club had not reached consensus: most creditors supported the proposal, but some did not for both legal and policy reasons. The Secretariat will circulate a new working paper once the IMF Executive Board conducts its further discussion of a possible new instrument, provisionally dubbed an "Economic Recovery Assistance Program," for fragile states. In the meantime, creditors agreed to send a letter to Guinea-Bissau stating the Paris Club's willingness to provide a debt treatment once a PRGF arrangement is in place. The U.S. had suggested such a letter as an alternative to France's proposal. -------------- Meeting with the Private Sector and Non-Paris Club Emerging Creditors -------------- ¶21. The Secretariat and Institute for International Finance (IIF) co-hosted the Paris Club's eighth annual meeting with the private sector. For the first time, representatives from some emerging official creditors also attended: Abu Dhabi Fund for Development, Brazil, Exim Bank of China, Israel, Kuwait Investment Authority, South Africa, South Korea and Turkey. Based on the discussions, the Secretariat will attempt to create two voluntary working groups: 1) a Paris Club/non-Paris Club working group of official creditors to discuss ways to improve information exchange and coordination; and 2) a Paris Club/private sector working group to discuss vulture fund issues. The presentations and discussion included the following topics. -- South-South Financing: Representatives from China's EXIM Bank, Kuwait, Turkey, South Africa and South Korea gave brief descriptions of their lending programs. Asked how China understood comparability of treatment in countries where the PRC is active in Africa, China EXIM Bank's representative declined to provide an official view, and stressed instead that China's growing involvement in natural PARIS 00001201 012 OF 014 resources reflected its rapid growth in domestic demand. Turkey argued that it is not fair for the Paris Club to try to require other creditors to provide comparable treatment. The Paris Club Agreed Minutes set the benchmark; yet in Iraq's case, Paris Club creditors held only 36 percent of the debt. The Paris Club should take into account the economic impact of comparable treatment on the creditor country. -- Argentina Default: Nicola Stock (Italian Task Force Argentina) reviewed bondholder efforts to recover funds following the default and urged the Paris Club to consider the interests of private creditors if it concludes an agreement with Argentina. -- Vulture Funds: There was considerable discussion of vulture funds. Hans Humes, Greylock Capital, argued that the term is applied too widely, the actual problem is relatively small, and proposed legislative responses could harm legitimate creditors and investors. France, the U.S., and UK urged all creditors to provide comparable debt relief to qualifying HIPCs, but also expressed legal concerns about maintaining contracts and repayment incentives. France and the UK encouraged support for HIPCs that face litigation. The UK also encouraged private creditors to participate in IDA Debt Reduction Facility operations and to avoid selling claims to creditors that do not provide comparable treatment. Claire Husson (Franklin Templeton Investments) argued it does not make sense for the private sector not to sell HIPC claims when many developing countries' domestic laws allow them to do so. Charles Dallara (IIF) suggested that, where countries are cooperating to resolve debt matters, collective action should discourage litigation. The UK, supported by IIF, suggested a Paris Club/private sector working group on vulture funds to continue the discussion. Paris Club Chairman Xavier Musca stated his support for the working group and the need for a coherent approach to address the free rider problem. -- Impact of Credit Market Turmoil on Emerging Markets: Dallara described an IIF project to develop a set of voluntary principles PARIS 00001201 013 OF 014 for private sector best practices in response to the weaknesses exposed by the credit market turmoil, including areas such as compensation structures, risk analysis, and rating agencies. The final report will be released in July. Robert Gray of HSBC reported on implementation of IIF's "Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets," stating that the Principles have led to improved communication between emerging market authorities and investors, particularly through the Group of Trustees of the Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets, and better emerging market data reporting. -- IMF and World Bank Update: IMF and World Bank representatives provided an update on their work on the Debt Sustainability Framework, development of medium-term debt management strategies, IDA's grant allocations based on the risk of debt distress, and IDA's non-concessional borrowing policy. -- Sudan: Patrick Legait (UBAF) discussed the case of Sudan, saying it has sovereign debt which has been in default for 23 years. The December 1981 commercial debt rescheduling was based on partial debt reconciliation as of December 1979; in October 1985, there was $800 million in outstanding debt. A June 1987 repurchasing scheme collapsed in April 1988. At this point, it is difficult to know the amount of these claims or what entities hold them. In late 2007, Sudan's Islamic bonds were denominated in euros because of OFAC measures and were on three- to four-year terms; the Bank of Sudan guaranteed the bonds, with repayment supplied by offshore sales of Sudanese oil. In 2008, Sudan marketed prefinanced guaranteed oil access, seeking out Islamic banks, oil traders and insurers. Legait argued that Sudan's actions set a dangerous precedent: Sudan is deliberately ignoring its sovereign debt and successfully raising new money (see para 15). STAPLETON PARIS 00001201 014 OF 014 2