Identifier
Created
Classification
Origin
09PARIS629
2009-05-07 07:18:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Paris
Cable title:  

PARIS CLUB - APRIL 2009 TOUR D'HORIZON AND DISCUSSIONS ON

Tags:  EFIN ECON EAID XM XA XH XB XF FR 
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ZNR UUUUU ZZH
R 070718Z MAY 09
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 6182
INFO RUEATRS/DEPARTMENT OF TREASURY WASHDC
RUEKJCS/SECDEF WASHINGTON DC
RUEHAB/AMEMBASSY ABIDJAN 1399
RUEHGB/AMEMBASSY BAGHDAD 0291
RUEHRL/AMEMBASSY BERLIN 7005
RUEHSW/AMEMBASSY BERN 2240
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RUEHTC/AMEMBASSY THE HAGUE 3140
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RUEHBS/USEU BRUSSELS 2576
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RUEHBUL/AMEMBASSY KABUL 0767
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UNCLAS SECTION 01 OF 17 PARIS 000629 


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 XM XA XH XB XF FR
SUBJECT: PARIS CLUB - APRIL 2009 TOUR D'HORIZON AND DISCUSSIONS ON
METHODOLOGICAL ISSUES

UNCLAS SECTION 01 OF 17 PARIS 000629


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 XM XA XH XB XF FR
SUBJECT: PARIS CLUB - APRIL 2009 TOUR D'HORIZON AND DISCUSSIONS ON
METHODOLOGICAL ISSUES


1. (SBU) Summary: During the January 2009 Paris Club Tour d'Horizon,
creditors agreed to consider committing upfront to a debt reduction
for Seychelles, although they agreed that conditions should be
stringent. While Haiti's situation was challenging, the
International Monetary Fund (IMF) believed that a review of Haiti's
performance on its program under the Poverty Reduction Growth
Facility (PRGF) could take place in February, with Completion Point
later in 2009. The IMF reported DRC's performance had been
encouraging under very challenging circumstances and the Fund was
proceeding with plans for a rapid access Exogenous Shock Facility
and for a PRGF program around midyear. The DRC has reportedly also
made some progress renegotiating the proposed $9 billion Chinese
loan package, but details were not available. Guinea had been set
to reach Completion Point in early 2009, with negotiations in March,
but this had fallen away as a result of December's coup, with no
current prospects for getting back on track. The Club also
discussed Afghanistan, Argentina, Burundi, Cote d'Ivoire, Ecuador,
Grenada, Iraq, Mongolia, Serbia, and Sri Lanka.


2. (SBU) Methodological issues discussed included outreach to
non-Club creditors, the Club's Annual Report, and "new types of debt
buyback offers and repayment profile adjustments to developing
countries." The U.S. delegation warned that elements of the
proposed buyback options raised significant legal, budgetary and

PARIS 00000629 002 OF 017


policy issues, and that the issue of comparability of treatment
clauses in voluntary operations needed to be resolved before the
Club considers any more such operations. End Summary.

--------------
Afghanistan
--------------


3. (SBU) The U.S. and others had asked to put Afghanistan on the
agenda because of recent developments regarding the country's IMF

program. The IMF reported that the situation remained challenging,
because of drought, increasing violence, and a weak government. GDP
was expected to grow 3.5% in the current fiscal year (ending
sometime in March),with inflation above 30%. Revenue collections
were weak, in part because of the poor security situation, but also
because of undervaluation of fuel imports and poor customs
enforcement. Performance on structural benchmarks was also poor.
The February PRGF program review had consequently been delayed, but
a mission would be leaving for Kabul toward the end of January and a
review could take place in April or May if agreement were reached
during the mission.


4. (SBU) The Bank reported that under IDA 15, Afghanistan is set to
receive $650 million during FY09-11, with $230 million in FY09,

PARIS 00000629 003 OF 017


including $30 million in budget support. There had been progress on
triggers, but more effort was needed, including on tracking
poverty-reducing expenditures, mining, civil service reform and
pensions. PRSP implementation and macro performance were both weak,
although the trigger on debt management had been met, with a
contract having been concluded for a debt management system. Debt
reporting was on track, and even on a website, while Afghanistan had
normalized relations with several creditors and been prudent with
new borrowing.

--------------
Burundi
--------------


5. (SBU) Burundi's Completion Point remains on track, with Board
decisions planned for late January and negotiations in March. HIPC
relief would be worth about $832 million in Net Present Value (NPV)
terms, with the Multilateral Debt Relief Initiative (MDRI) adding
another $117 million. The ratio of NPV of public debt to exports
would fall from 967% at end-2007 to 148% at end-2009. Burundi would
no longer be in debt distress, but would remain at high risk,
needing grants and highly-concessional lending as well as a stronger
export base.


PARIS 00000629 004 OF 017


--------------
Cote d'Ivoire
--------------


6. (SBU) The IMF reported that the Board had discussed the
preliminary HIPC document, which found the country eligible for HIPC
under the revenue window on the basis of end-2007 data. In response
to Executive Directors' comments, the proposed triggers (e.g.,
public financial management, transparency) might be strengthened but
also streamlined. The Board had emphasized the importance of good
performance under the EPCA program, if Decision Point were to be
brought at the same time as the PRGF program.


7. (SBU) The IMF did not yet have end-2008 data on which to judge
performance, but it appeared that fiscal performance had been
"mixed," with some cuts in spending on the new capital, declining
oil and cocoa-related revenues, and issues relating to taxes on
staples, meaning that the primary fiscal target may have been
missed. A mission was planned for early-February; it would review
the EPCA performance through end-2008 and explore the PRGF and 2009
budget. If the mission's assessment were positive, a Board date
could come in March, following financing assurances at the March
Club meeting.


PARIS 00000629 005 OF 017



8. (SBU) The Bank representative noted that the Board discussion of
the preliminary paper had been a major step, but that significant
challenges remained, including clearance of AfDB arrears and
reaching agreement on the PRGF program and Completion Point
triggers. Cote d'Ivoire had also recently requested $60 million
from IDA's Debt Reduction Facility (DRF) to clear $827 million in
commercial debt arrears. The amount requested appeared not to match
the need and the Bank was not sure whether the DRF could or should
address just arrears, rather than the total commercial debt
(estimated at $2.3 billion.

---
DRC
---


9. (SBU) The IMF reported that DRC had been subjected to major
shocks - the international financial crisis, the collapse of metals
prices, especially those of copper and cobalt, and the escalating
conflict in the eastern part of the country. As a result, revenues
were less than expected and security expenditures higher, causing a
deterioration in the fiscal position. Inflation had risen, and the
GDP growth estimate for 2008 lowered from 10% to 8%. Given these
issues, performance under the SMP had been broadly satisfactory,
with end-September quantitative targets mostly met and good

PARIS 00000629 006 OF 017


performance on structural benchmarks.


10. (SBU) A December Fund mission had reached preliminary agreement
on 2009 policies, which would include zero borrowing from the
central bank, a fiscal deficit below 2.6% of GDP, and tight monetary
policy to reduce inflation to 12% by year-end (from 24% at
end-2008),all in the context of growth estimated at 4.5% of GDP.
Nevertheless, there was severe pressure from the deteriorated terms
of trade - gross reserves were down to less than $100 million (one
week of imports) and a $600m gap was projected for 2009, leading the
Fund to examine a rapid access ESF program for 25% of quota, $200m.
While the World Bank and others would also help fill the balance of
payments gap, the Fund expected further growth in bilateral arrears.



11. (SBU) The IMF also reported good progress on resolving
misreporting issues dating from 2005 spending, with an audit to be
completed in February to confirm the government's remedial measures.
If resolved, the issue would be brought to the Board along with the
ESF program, perhaps in late February or early March. A PRGF
program would not come before mid-2009, meaning that Completion
Point would likely come no earlier than 2010.


12. (SBU) The IMF reported the DRC and China had apparently agreed

PARIS 00000629 007 OF 017


to drop the second infrastructure tranche (of $3 billion),and had
initiated discussions on sovereign guarantees and concessionality,
but no further details were available. The Letter of Intent for the
ESF would commit DRC not to proceed with the loan unless it was
compatible with sustainability. The World Bank representative had
similar information, adding that Zoellick had raised the matter
during a visit to China. Construction of Phase I of infrastructure
has apparently begun. The Bank was also planning fast-track
assistance under emergency procedures, with a late January/early
February Board meeting planned for a $100 million program. The
Secretariat reported that a PRC firm had taken over a South African
company's work on the mining feasibility study, which was due by
end-March. The Paris Club chair noted need for early international
support for countries like the DRC, where officials' weak technical
capacity made them ill-equipped to negotiate contracts with China.

--------------
Ecuador
--------------


13. (SBU) The discussion focused on Ecuador's recent bond default
and the November 2008 public debt audit commission's report that
purported to justify it. The Secretariat observed that the
Ecuadorian authorities had distanced themselves from the report's

PARIS 00000629 008 OF 017


conclusions on the Club and mentioned the discussions relating to
Ecuador's $50 million IDB loan. The World Bank reported some delay
in payment, but Ecuador has generally paid on time. The Bank is
reviewing disbursements and grants carefully; by June one operation
and four trust funds will remain. In a winding down strategy, the
Bank approved the last operation in December 2007, but is watching
the macro impact of oil and other factors.

--------------
Grenada
--------------


14. (SBU) Grenada had requested an extension of its treatment to
correspond with its Fund program, and at the December meeting the
Club agreed to a U.S. suggestion that Grenada be asked to provide an
update on comparable treatment before making a decision. Grenada
responded to the request, indicating that it was seeking comparable
treatment from Taiwan, but that it had not approached Algeria and
that it did not wish to request comparable treatment from Kuwait or
Trinidad and Tobago, as they were both disbursing new loans - a
clear violation of Grenada's obligations to the Club. (Grenada also
indicated that Libya had informally agreed to debt forgiveness, but
that this had not been formalized; Libya was not billing, however,
and Grenada was not paying.) The U.S. argued that this information

PARIS 00000629 009 OF 017


did not support an extension. The UK asked about implications of
not granting an extension. The Secretariat stressed the language in
the Agreed Minute which required Grenada to pursue comparability of
treatment from its other creditors. IMF said implications were
limited and Grenada could manage if the Club denied the extension.


--------------
Guinea
--------------


15. (SBU) In December, the IMF representative had reported that
Guinea was on track for Completion Point in early 2009, with
negotiations in March. All that had changed as a result of the
military coup following the death of President Conte. The new
ruling body blocked some mining operations, launched audits of
ministries, lowered prices and promoted military personnel,
presumably raising the wage bill. The AU and ECOWAS condemned the
coup and suspended GOG participation. No data had been provided
since the coup. The Fund was unable to engage until members
recognized the new regime, so delays on the PRGF and Completion
Point were inevitable.

--------------

PARIS 00000629 010 OF 017


Haiti
--------------


16. (SBU) The IMF reported that there had been riots over food and
fuel prices, forcing the Prime Minister to resign. The four storms
that hit Haiti in August and September had imposed losses estimated
at 15% of GDP, and the U.S. and Canadian slowdowns were reducing
exports and remittance flows. As a result, the current account
deficit was higher than expected, 2.6% of GDP, although inflation
had receded from 20% in September to 14% in November. Performance
had actually been "broadly satisfactory," although for 2009 there
was a pressing need to respond to the humanitarian crisis and to
repair infrastructure damaged by the storms. Inflation was expected
to be below 10% due to lower global food and fuel prices, but the
balance of payments would be worsened by the loss of crops (60% of
harvest destroyed) and by the need for higher fuel imports to supply
new power plants.


17. (SBU) The fourth review of Haiti's program would likely take
place during the first half of February, with the fifth review and
Completion Point in mid-2009. There would also be a donors'
conference towards the end of March 2009. The Bank reported that
progress on triggers was satisfactory, and had helped IDA increase
interim debt relief.

PARIS 00000629 011 OF 017



--------------
Iraq
--------------


18. (SBU) The Secretariat reported that the final tranche of Iraq's
treatment took effect on December 17, as agreed, and that the Club
would issue a press release. The Fund noted the very successful
completion of Iraq's SBA, and reported that a mission in mid-March
would discuss a follow-on program. The Bank indicated that an
interim strategy note foresaw assistance of some $500 million, all
from IBRD, since there had been current account and fiscal
deterioration as a result of the fall in oil prices. Creditors
received Iraq's letter apologizing for problems with the first round
of payments, which had been due on January 2.

--------------
Mongolia
--------------


19. (SBU) The IMF reported that Mongolia had performed well over the
past few years, with growth averaging 9% per annum and per capita
income doubling, driven by gold and copper mining. The country had
been running significant fiscal surpluses, and its debt had fallen

PARIS 00000629 012 OF 017


from 51% of GDP at end-2004 to 24% at end-2007. The boom had come
to an abrupt end with the price of copper plunging 68% since July.
There was pressure on the exchange rate, and a loss of confidence
that had led to a bank run. The fiscal situation was worsening,
with revenues from minerals having fallen by fully 3% of GDP in
2008, and expected to fall a further 6% of GDP in 2009. The balance
of payments shifted from a surplus of 2.7% of GDP in 2007 to a
projected 9% deficit in 2009. The country lost 40% of its reserves
to just two and a half months of import cover. A mission was in
Ulaanbaatar to discuss a possible SBA in the next three weeks, but
revenue sources were hard to find. The Bank, participating in the
Fund mission and reprioritizing its support, believed that an
additional $75 million in concessional resources was needed, of
which the Bank could provide perhaps $10-15 million. Additional
support would be needed from other donors.

--------------
Serbia
--------------


20. (SBU) The Netherlands noted that Serbia's SBA was being
discussed at the IMF the following day, and complained that the IMF
paper had reported that "negotiations on settling remaining official
external arrears are ongoing" and that "restructuring agreements

PARIS 00000629 013 OF 017


were concluded with Paris and London Club creditors in 2001 and
2004, respectively, and are being implemented." Neither of these
statements was true, according to the Netherlands, and the Serbs
were acting in bad faith. A tour de table revealed that a number of
countries had not yet signed agreements with Serbia, although there
were differences as to whether there were serious obstacles. The
Secretariat said it would draft a letter to send to the Serbian
authorities.

--------------
Seychelles
--------------


21. (SBU) The IMF reported that the country's program was being
implemented "with determination," and that all December 2008
quantitative indicators appeared to have been met. The 2009 budget
was in line with the program, although structural measures were
still being implemented. The slowdown had been worse than expected
because of weak tourism, although inflation had increased from a 32%
annual rate in October to 60% in November as a result of the
depreciation, goods and services tax changes, and increases in
managed prices. The first review mission would head to Seychelles
in the first half of February, with discussion of the results
possibly in late March. The Bank reiterated its draft two-year

PARIS 00000629 014 OF 017


interim strategy to provide budget support of $9 million in both
2009 and 2010.


22. (SBU) The Secretariat argued for stringent conditions,
suggesting that the agreement cover three years and that it
therefore be conditioned on a follow-up Fund program. The
Secretariat argued against upfront reduction, suggesting that the
Club choose between reduction towards the end of the agreement or a
three-phase agreement with entry into force conditioned in part on
the progress made with private creditors. Some creditors, including
the U.S. delegation, were concerned about making decisions without
adequate data and without a Debt Sustainability Analysis (DSA).
Germany went a step further, arguing that there was no clear need
for a reduction, since IMF documents referred in some places to
"reduction" and in others to "restructuring." The UK agreed that
conditionality would be crucial, but suggested the Seychelles could
object to a requirement for a follow-up program because of elections
in 2011. After lengthy discussion, including a U.S. request that
the IMF prepare several scenarios for the Club to consider, the Club
provided four possible schedules to the Fund and requested DSAs for
each. These range from a two-year treatment with reduction at the
first review and at the end of each year, to a four-year treatment
with reduction at the ends of years 2, 3 and 4. Negotiations are
scheduled for March.

PARIS 00000629 015 OF 017



--------------
Sri Lanka
--------------


23. (SBU) The IMF representative reported little change in Sri
Lanka's situation since December's pessimistic briefing, except that
reserves had declined by a further $300 million. The Bank indicated
that some of its $318 million in planned assistance for FY09 could
slip to FY10. The Netherlands raised an arcane issue about the
country's DSA - apparently authorities had not consented to
publication of the most recent DSA, which had concluded that the
country was at "high risk" of debt distress. As a result, the
Fund's website still listed the country at "moderate risk," based on
the previous DSA.

--------------
Methodological Discussion: Outreach
--------------


24. (SBU) There was a lengthy discussion of outreach to non-Paris
Club creditors following a working paper and letter circulated by
the Secretariat. Germany began with a strong view that the Club
should carefully examine the claim structure and behavior of

PARIS 00000629 016 OF 017


creditors before proceeding. The Secretariat replied that it had
two aims - improving data flow and increasing the provision of
comparable treatment. It particularly asked members for their views
on allowing three "category 1" creditors - Brazil, Israel and Korea
- to participate fully in tours d'horizon, including methodology
discussions.


25. (SBU) Most creditors agreed that the Club should remain
flexible, considering steps and invitations on a case-by-case basis.
All creditors agreed that asking creditors to share data was a good
first step, but the U.S. - supported by Belgium and Germany -
successfully argued that it was premature to invite full
participation in tours (in particular, the methodology discussions),
and that the Club should first examine Brazil, Israel and Korea's
responses on data sharing and their record on providing comparable
treatment.

-------------- -------------- -------------- --------------
Methodological Discussion: New Types of Debt Buyback Offers
and Repayment Profile Adjustments to Developing Countries
-------------- -------------- -------------- --------------


26. (SBU) The Secretariat suggested new kinds of treatment that the
Club might provide, and changes to Club methodology in estimating

PARIS 00000629 017 OF 017


market prices used in buybacks. It also suggested the Club consider
embedding prepayment options in reschedulings and willingness to
help smooth payments for countries managing their debts. The
embedding option was not well received, with many creditors arguing
that it would add another level of complexity to negotiations; the
idea was shelved. There was more openness to the payment-smoothing
proposal, although creditors generally stated that they needed more
time to consider the idea. The U.S. raised significant concerns
about both embedding and smoothing, noting that they raised
significant legal, budgetary and policy issues. The U.S. also
called for resolution of comparability of treatment clauses in
voluntary buybacks and prepayments before any future buyback
operation.

PEKALA