Deal further away on Iraq debt relief

By Stewart Fleming

Date: 07/10/04

THE fissures dividing Europe and the United States on how to go about granting debt relief to highly indebted poor countries have widened at the meetings of the International Monetary Fund (IMF) and World Bank in Washington this week.

In part, this is due to the dispute between the key participants in the G7 about how to go about dealing with Iraq's crippling debt burden.

Informed estimates put this at $350 billion (l285bn), if such items as compensation claims are included. Even if only conventional bilateral sovereign debt is taken into account, a figure of $120bn (l98bn) is being bandied around.

Nobody seriously disputes that Iraq's economy could not cope with such a burden, even if relative peace were secured. But agreeing on what steps to take now is proving impossible.

UK Chancellor Gordon Brown has been leading the charge on debt relief for highly indebted poor countries (HIPCs) since the G7 finance ministers met in Frankfurt in 1999.

He set off for Washington last week with a new proposal. Britain, he said, was prepared to offer 100% debt relief for poor, reforming countries by itself paying off its share of their debts to international financial institutions (IFIs) such as the World Bank.

But the way in which Washington unilateralists have embraced the idea of debt relief has been calculated to obstruct its wider acceptance.

Back in 1999, one of the characteristics of the HIPC initiative was that debt relief would be given in a way that "ensured that the World Bank and other development institutions would be 'made whole'," says Edwin Truman, a former top Federal Reserve official and now a senior fellow at the Institute for International Economics in Washington.

This meant that relief would be granted in a way which would allow the IFIs to get their money back and keep on making new loans.

But once the George W. Bush administration took office, policy began to change. The emphasis switched towards granting wholesale debt relief. This would require the IFIs to take a financial hit, so limiting their lending capacity.

In Europe this has been seen as a back-door way to weaken the IFIs, so despised by President Bush's Christian fundamentalist supporters and also by right-wing intellectuals.

"This US administration does not give a damn about the IFIs," says one well-informed observer.

Now Iraq must join the mix. Almost as soon as the war was over,Washington was calling for a write-off of Iraq's debt.

The goal is to try boost Iraq's economy and increase the prospects of making a success of the Iraq venture.

It helps the American government's cause that it is believed to be owed far less, some $4bn (l3.25bn), than several other G7 creditors such as France ($8bn, or l6.5bn) and Japan ($7bn, some l5.7bn).

Germany is thought to have around $4bn (l3.25bn) outstanding, but Russia and several Arab states are also big creditors.

William Cline, a senior fellow of Washington's Centre for Global Development, says that America's support for a total write-off of poor-country debt has been conflated with this wider campaign to write off 90-95% of Iraq's debt too.

France and Germany seem to be considering a 50% write-off.

The gap, however, is wide enough to make any agreement highly unlikely, while diplomatically narrow enough to make it look as though negotiations are possible.

Washington can continue to be pressured to pay a high price for its pre-emptive war with its "coalitions of the willing".

But, until there is a wider resolution of outstanding issues in Iraq, as little relief for Bush as possible seems to be the basic European idea.

The conflict between Europe and the US on Iraq debt is, however, more than just a continuation of the confrontation over how to deal with the crisis.

Iraq is not really a poor country and mixing it up with the genuinely poor for reasons of realpolitk sets a precedent.

Truman estimates that oil- rich Iraq's income per head could be as high as $2,000 per year ((l1,630). This is significantly higher than for Nigeria, Indonesia or Pakistan, for example, who have been told that they do not qualify for debt relief and must pay their bills.

No surprise, therefore, that Bush has found some unlikely supporters. Non-governmental organizations, which have been campaigning for years for the industrial world to relieve the Third World of its debts, would love to see Iraq establish a precedent for these other, not so poor, nations.

Were Iraq to be granted 100% debt relief, the decision would reverberate around the developing world. Near total relief for Iraq would set off a clamour for equal treatment from other countries. And this would start to undermine the conditionality of IFI lending which, in spite of some of its failures, has made a significant contribution to both financial discipline and vital institutional reform in many countries.

It would make it even easier for dictators to hang on to power by bribing their supporters and to secure their futures by embezzling state funds.

And, by encouraging fiscal indiscipline and undermining pressures for reform, it would make a world which has demonstrated its vulnerability to financial crises in the recent past, even more unstable.

• Stewart Fleming is a former US editor of Financial Times and is now a freelance journalist in Brussels.

Article reports on the dispute between EU Member States and the United States on how to go about granting debt relief to highly indebted poor countries, especially I the case of Iraq.