At this weekend’s meeting of the Group of 20 industrialised and developing countries (G20) in Berlin, the issue of Iraq’s foreign debt was not meant to be on the menu.
But by the end Baghdad’s interim government had crafted a deal with the Paris Club of 19 creditor nations. The deal caught analysts by surprise. Until last week the US had been insisting on the cancellation of 90 to 95 percent of Iraq’s debt while France and Germany wanted just a 50 percent reduction. German finance minister Hans Eichel said on Sunday: “We reached an agreement with US treasury secretary John Snow on a common German-US position which is now the basis for negotiation within the Paris club. We’re still waiting for Russian approval.” Moscow’s approval was not long in coming. Iraq has about 120 billion dollars in debt, of which 39 billion dollars is owed to the Paris Club countries, in loans and interest payments. They have now agreed that by 2008 they will write off four fifths of that. It is to happen in three stages, with 30 per cent being written off right away. Iraq’s biggest difficulty will now be reaching a deal with Arab countries, such as Kuwait, to which it still pays reparations for the 1990 invasion. Baghdad hopes the deal with the Paris Club can create a precedent which will help the country become economically viable. The Paris Club is a loose forum established in 1956 to provide a framework for rescheduling troubled sovereign debt. From the start, it has been based at the French ministry of finance. The first meeting tackled Argentina’s debt. All 19 members are rich nations, and over the years they have lent to numerous developing countries. The main creditor to Iraq has been Japan, followed by Russia, France, Germany and the US. The Paris Club’s new agreement to write off most of a country’s debts towards it is extremely rare. When it has happened it has been for geopolitical reasons, as in Pakistan in 2001 or Poland ten years earlier. In Iraq’s case the deal is seen as a crucial gesture at a time when the shift to democracy via January elections is looking increasingly fragile.