UNEXEPCTED DIFFICULTIES IN PARIS CLUB NEGOTIATION WITH

UNCLAS SECTION 01 OF 02 PARIS 002003

SENSITIVE
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 FR DJ
SUBJECT: UNEXEPCTED DIFFICULTIES IN PARIS CLUB NEGOTIATION WITH
DJIBOUTI


1. (SBU) Summary. What should have been easy negotiations with
Djibouti during the second day of the October 2008 Paris Club
meeting turned out to be unexpectedly difficult due to a knotty
problem of inter-creditor equity and to Djibouti's last-minute
desire to exclude some loans that had already been reconciled.
Creditors agreed to provide a fairly generous Evian Terms treatment
to Djibouti. After spirited discussion, creditors agreed to include
a sentence indicating that certain debts could be removed from the
agreement, but only by mutual consent. The Finance Minister did not
appear for the negotiation, and the Finance Ministry's Secretary
General appeared clearly uncomfortable assuming negotiating
authority in his absence. He ended the long day after signing the
agreement by stating this was only the first step and that the real
negotiations would begin during completion of bilateral agreements.
End Summary.


2. (SBU) The second day of the meeting was occupied with
negotiations of Evian Terms treatment to support Djibouti's new
PRGF. It had been expected that the negotiations would be very
straightforward, but this proved not to be the case. Part of the
problem was that the Djiboutians were ill-prepared. Their letter to
the Club requesting treatment had not specified the treatment they
sought, and they seemed not to know what was expected of them. The
Finance Minister did not appear all day, despite the fact that he
was in Paris and strenuous efforts were made to reach him. Instead
the negotiations were conducted by the Finance Ministry
Secretary-General, who clearly felt that he lacked the needed
authority.


3. (SBU) Agreement on terms was reached fairly easily, with the
country being granted Houston terms on pre-cut-off debt, with 100%
deferral on post cut-off and short term debts and on moratorium
interest. The major sticking point was one of inter-creditor equity
- Djibouti had requested that debts of Djibouti's port authority -
guaranteed by the Netherlands - be excluded, on the grounds that the
port dominated the economy, was financially viable, and was current
on its debts. The Djibouti delegation raised a fear that a
restructuring could threaten the viability of the port or have a
negative impact on its operator, Dubai Ports Authority, the major
investor in the country.


4. (SBU) Spain objected on the grounds that all of the Netherlands'
claims would be excluded from rescheduling, while its own claims -
most of which were in arrears - would be treated. This would be in
clear violation of the principles in the new working paper on
seniority. (Germany was in a similar position to Spain, with even
larger arrears, but was relatively quiet.) The Secretariat
reiterated that the seniority principles were to be flexibly
applied, and all agreed that there was tension between the desire to
help Djibouti and the principle of inter-creditor equity. After a
spirited discussion, Spain conceded. (The amounts involved were
small, but Spain argued on principle.)


5. (SBU) The Djibouti delegation balked at signing the Agreed
Minute, arguing that they wanted to exclude some debts to Spain and
Germany, even though they had signed reconciliations that included
these debts. The delegation stated that the loans were "odious",
though the IMF Mission Chief indicated in a side conversation that
they meant "invalid".


6. (SBU) After a very lengthy discussion, involved creditors agreed
to a sentence indicating that debts could be removed from the
agreement by mutual consent. When the Secretariat invited

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observers' comments, the U.S. delegation expressed misgivings about
the sentence, as it would allow reopening numbers after a
negotiation was completed - meaning that creditors could never be
sure the Club was not being overly generous. (Note: On the other
hand, agreeing to any exclusion after the fact could be seen as
providing more generous treatment than the Club, which the U.S. has
always supported. End note.) The Secretariat indicated that the
sentence had been included before, in an agreement with Brazil, and
that in any case the mutual consent provision made it legally
ineffective.


7. (SBU) The Djiboutians refused to sign until the IMF told them
that, if they did not, Djibouti's PRGF would be deemed off-track.
In his concluding remarks, the Djiboutian Secretary-General
indicated that the Agreed Minute represented only the first phase of
the negotiations, and that they looked forward to clarifying issues
in negotiations to complete the bilateral agreements.

STAPLETON



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