Alea Iacta Est

80% of Iraq debts forgiven by Paris Club

It has taken less time than expected for the Paris Club to decide what percentage of the outstanding Iraq debt will be forgiven. The political contradictions between Europe, the United States of America and Russia appeared to have less influence in this area than was thought.
Driven by different feelings, the above mentioned major creditors in the Paris Club did not want to have a new foe amongst themselves and felt an urge to show their generosity. The result achieved on November 21st, 2004, is remarkable; only 20% of the face value of the outstanding debt will have to be repaid by Iraq. It must seem unjust though to a lot of other debtors, like Argentina and several African countries, that a country, full of possibilities to repay a large portion of its outstanding debt, receives preferential treatment whereas they have to negotiate for months every single percentage of forgiveness.
1. General background
The protagonists of the Paris Club all had their reasons for not letting the negotiations drag on for years and to come to a quick deal for the Iraq case, containing a considerable effort from their side. For obvious reasons, the United States presented themselves as the great defender of the Iraq cause. The rhetoric of bringing freedom and democracy to the country could not be upheld without making substantial efforts in the debt field. After the quarrels over the Iraq situation in the period preceding the second Gulf War, many European nations were terrified of starting up a new round of heavy tensions with the big brother from the other side of the ocean. Of course, it was also of big help to suppress discussions with France by promising that Total would not be pushed out of the oil market in post-war Iraq. With two sides already on the same side of the fence, Russia had little choice than to follow suit, however, not before obtaining some additional concessions relating to its own outstanding debt and its current position on the Iraq market.
2. Influence of the decision
However, this decision of the Paris Club is not the end of discussions in respect of the Iraq debt, it is merely the beginning. A lot of creditors think that the decision of the Paris Club settles everything, once and for all. However, this is far from the truth. An agreement in the bosom of the Paris Club is only the big frame setting, the rough borders of the playing field in which the various players can have their “faites vos jeux”. Besides the fact that only a first hurdle in the negotiations has been tackled, the impact of the decision is also limited by the very scope of the Paris Club itself. In first instance, we will take a closer look at the limitations of the decision of the Paris Club. A next chapter will then examine why the declaration of the Paris Club has ultimately an influence in the long term.
    2.1. Limitations of the Paris Club
    2.1.1. A framework decision to be worked out.
A lot of confusion has emerged among creditors of Iraq. Lots of them tend to think that it is only a matter of time before all Iraq debts will be settled at 20% of the face value and expect this to happen as soon as the newly elected government will be installed. However, this view is far too optimistic. The Paris Club agreement is only a general indicator which will need to be put into practice by bilateral negotiations between Iraq and every single Paris Club creditor country. It goes without saying that these bilateral negotiations and the execution of a reached agreement can take several years and even decades. The Paris Club itself is for the moment referring to 23 years. In the end, the various bilateral agreements can also contain a set of additional requirements for the creditor country which makes the agreed 20% to be far less in reality, due to debt swaps, preferential treatment a.o.Moreover, it depends to be seen for each and every single creditor whether its own government will include or try to include their debt in the bilateral negotiations. And even in case their own government is willing, it is not certain that Iraq will accept. Indeed, the Paris Club has set a range of rules to which the debt in question has to adhere in order to fall within the scope of the Paris Club agreements.
    2.1.2. Limitation of the scope of the Paris Club
Before a debt can be considered to fall within the Paris Club arrangements, it will have to live up to the following standards : a public sector debt, on a medium or long term (longer than one year). Although these requirements are not applied severely (for instance, a private debt insured by a public entity can be included), most of the western creditors do not fall within the scope of these requirements. Invoices, bank guarantees and letters of credit with a maturity date of less than 365 days can never be included and not all private western creditors were insured by their national credit insurer. The conclusion to be drawn is quite simple ; not a lot of the private debts on Iraq will fall within the Paris Club negotiated agreements and those creditors whose debts are included have to be aware that they will have to probably wait an-other 23 years before 20% of the principal of the debt will have been repaid. As such, it seems that they should really consider whether it is worth while joining up.
Yet, despite the limitations of the Paris Club agreement, it will also have influence and leave its fingerprints on further negotiations and efforts of private creditors.
    2.1.3. Only an agreement, not a repayment
Finally, one may not forget that re-scheduling agreements only exist on paper and do not guarantee payment in reality. Many creditors have concluded rescheduling agreements, to repay outstanding debts in instalments, with (African) countries only to find out some months later that these rescheduling agreements are not honoured. When this happens, practice has learnt that in the end it always leads to debt forgiveness.
    2.2. Influence of the Paris Club agreement
A general Paris Club agreement is always a blueprint for further debt negotiations, a precedent voluntarily invoked by the debtor to influence private creditors to forgive a similar or even higher percent-age of the outstanding amount. This will not be different for Iraq, especially taking into account the generosity shown by the creditor governments. It is only a matter of time before the London Club (the informal group of creditor banking institutions) will follow its governmental equivalent from the French capital. Needless to be said that it is difficult then for the private creditor, standing on its own and with fewer influence than the London and Paris Club to urge for a better deal.
A second point of influence of the Paris Club agreement is the fact that the debt repayment will be institutionalised. This is a rather positive element, how-ever, containing some dangers. When a certain (governmental) body is established, trusted with the debt repayment, certain requirements for the debts in question will be set out. Not living up to one of these requirements will then be enough for Iraq to escape refunding.
A parallel between Iraq and the situation after the collapse of the former Soviet Union can be drawn. Russia, as successor of the Soviet Union, and the Paris Club reached an agreement over new IMF support upon condition that Russia would take on its behalf the repayment of the old USSR debts. Russia agreed and instructed the Vnesheconombank - up till then the bank responsible for foreign payments in the Soviet Union - to take the burden of control of any repayment on its behalf. Vnesheconombank drew up a register containing the accepted unpaid debts and sticks to this register to decide which out-standing debt will be repaid. A misfortune for those who do not appear in the register since their debt is not eligible for payment.A similar procedure is taking place in Iraq. The outstanding debt, of which no one knows exact total, is being mapped out and the creditors are being registered. Since a lot of documents have been destroyed during the two Gulf wars, this is not an easy nor straightforward process and therefore requires active intervention from the creditors themselves. Most creditors are not aware of this however and undertake no action at all. The result of this inactivity may be that already now, or in some years time, their debt is forgotten or untraceable and they will not be repaid.
3. Conclusion
As things stand today, only governmental debts will be repaid for 20% of the principal over a period of around 23 years. Although not certain, the private sector might follow on similar conditions. However, private debts eligible for repayment will have to be registered and this is not yet the case for most western creditors. This is why an organisation like East-West Debt continues to play its role of creditor advisor in the post war Iraq.
4. The importance of East-West Debt
Having people aboard with an expertise of 17 years in the Iraq market, East-West Debt knows its way around and understands what needs to be done in the interests of the creditor. Indeed, not only can East-West Debt make sure that the concerned Iraq debts get registered in name of the creditor, it can also make it possible that a creditor receives a quicker or a higher payment than the one promised in the current Paris Club agreement. This seems impossible, but it is absolutely not.
    4.1. Registration of the Iraq debt
East-West Debt knows its way around the current Iraq labyrinth. As such, we have helped our clients in order to get their debt registered as soon as possible. This is certainly not overly zealous, if one looks at the total of the Iraq outstanding debt. Although a democratically elected government of Iraq will probably try to please the creditor countries, it will also seize every possible opportunity to lighten the debt burden. Any excuse will then do not to include certain debts in the total of claims eligible for repayment. Our advice was therefore not to take any risk and to register. Companies with outstanding Iraq claims should take action now and, if interested, can contact East-West Debt to assist them.
    4.2. A quicker repayment
As described, repayment of private Iraq debts can take years and even decades. The mentioned example of Russia shows that this is a fact. Even today, Russia is still repaying former USSR debts of 20 years ago. Taking the debt burden into account, this might even take longer for Iraq. Some creditors do not have that patience. Secondly, it is unknown whether Iraq will invoke the time limitations applicable to debts. Therefore, a quick sale of the debt can be considered. Indeed, some investment funds are buying Iraq debt directly, of course at limited prices, hoping they will receive more for them in the future or because it is interesting in light of a certain swap or transaction. East-West Debt has excellent relations with nearly all of these funds and seeks the most interesting partner for each of its clients in order to ensure them a quick sale for the best price possible.
    4.3. Enforcing the position of the creditor
It is still unsure what the face value of the private debt will be. East-West Debt helps out creditors in order to try to make sure that the principal is set at its highest level possible. By using certain legal tactics this is possible from time to time but honesty obliges to say that solutions might dry up in the near future. Once again, a reason not to wait to contact East-West Debt in order to find out what can be done.In the meantime, plain judicial debt collection of Iraq assets has become nearly impossible although some backdoors have not been completely closed yet. If possible, East-West Debt does not hesitate to maximize any opportunities for the benefit of its clients.
Last but not least, East-West Debt has set up a network of local contacts in Baghdad to continually investigate how the highest possible settlements can be achieved. Indeed, it appears that some creditors get preferential treatment when the right buttons are pushed locally. Do not hesitate to contact us to see whether your particular debt can be included in these preferential schemes. We will continue to closely monitor the situation and in the meantime invite anyone with an outstanding Iraq claim to contact us in order to see whether our assistance can be worth while.
  Article by Didier de Baere, Head of Legal Department East-West Debt

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