Viewing cable 08PARIS1201
Title: PARIS CLUB: June 2008 Session, Private Sector Meeting,

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08PARIS12012008-06-25 15:10:00 2011-08-30 01:44:00 UNCLASSIFIED Embassy Paris
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UNCLAS SECTION 01 OF 14 PARIS 001201 
 
 
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:  June 2008 Session, Private Sector Meeting, 
and Negotiation with Togo 
 
¶1.  Summary:  At the Paris Club's June 10-12 session, the tour 
d'horizon addressed Burundi, Central African Republic, Grenada, 
Iraq, Libya, Moldova, Sudan and Togo.  Germany requested an informal 
update on Argentina; Russia sought resolution of its promissory note 
issue.  As for methodological issues, the U.S. discussed "Jubilee 
legislation"; Belgium described new legislation, aimed at vulture 
funds, that prevents seizure of international assistance funds; and 
creditors agreed that the Secretariat would revise its working paper 
on possible Paris Club debt treatments for fragile states once the 
IMF and IBRD clarify their approaches.  The June 11 meeting with the 
private sector and some non-Paris Club emerging creditors produced 
ideas for two possible working groups:  one involving Paris Club and 
non-Paris Club creditors to address comparability of treatment and 
other issues; and the second involving Paris Club and private sector 
representatives to discuss so-called vulture funds. 
 
¶2.  In the June 12 negotiation with Togo, creditors provided a 
generous treatment covering $735 million in principal and interest 
payments falling due during Togo's Poverty Reduction and Growth 
Facility (PRGF) program, including immediate cancellation of $347 
million.  The U.S. did not sign the Paris Club Agreed Minutes, but 
provided a side letter stating our intention to treat the debt once 
Togo reaches HIPC decision point.  End summary. 
 
--------- 
Argentina 
--------- 
 
¶3.  Germany requested an informal exchange over lunch.  The 
Secretariat recalled Chairman Musca's contacts with then-Financial 
Secretary Secondini in March, prior to Economy Minister Lousteau's 
resignation.  At that time, the GOA said it wanted to address the 
Paris Club issue by the end of 2008.  Since then, the Secretariat 
had only had informal contacts with the new team.  The Secretariat 
noted Argentina's economic situation, and Italy commented on 
President Fernandez de Kirchner's stance at the June 5 Rome Food 
 
PARIS 00001201  002 OF 014 
 
 
Security Summit, where she criticized the IMF and blamed the World 
Bank for Haiti's difficulties.  The Secretariat stated its clear 
message that, without an IMF program, the GOA could suggest a 
repayment plan, but a formal rescheduling would not be possible. 
Creditors agreed to monitor the economic situation; maintain a 
coordinated message in awaiting a GOA approach; and avoid mingling 
Paris Club and holdout bondholder issues.  The IMF is preparing for 
Article IV discussions (date to be determined), and the Secretariat 
mentioned that a possible end-July Development Committee Deputies 
meeting in Mexico and August 30-31 G-20 Deputies meeting in Rio de 
Janeiro offered opportunities for further contacts. 
 
------- 
Burundi 
------- 
 
¶4.  The IMF reported that its Executive Board will discuss a 
successor Poverty Reduction and Growth Facility (PRGF) program in 
early July; Burundi could reach HIPC completion point at the time of 
its first PRGF review in late 2008/early 2009.  The World Bank 
stressed that real reforms are required to reverse declines in the 
coffee export sector, which accounts for 85 percent of export 
revenues. 
 
¶5.  Creditors agreed in principle on an approach for resuming 
interim HIPC relief for Burundi once a new PRGF program is in place. 
 Assuming the Executive Board approves the PRGF on July 7, creditors 
will retroactively extend the consolidation period of the March 2004 
Paris Club agreement to cover the gap between the two programs.  As 
summarized in a draft Chairman's Summary, creditors that are legally 
required to bill for amounts falling due during the gap period may 
do so, provided they re-credit any amounts paid beyond what is due 
after the application of Cologne terms.  Creditors without such 
legal constraints will either not bill, or inform the debtor of 
amounts due but not demand payment.  Germany and Italy stressed 
that, while the Paris Club's approach for Burundi does set a 
 
PARIS 00001201  003 OF 014 
 
 
precedent, creditors should determine on a case-by-case basis how 
debtor countries in similar situations will be handled in the 
future.  (Background:  Burundi is a test case for the Paris Club's 
methodology, as agreed in a March 12, 2008 working paper, on interim 
relief for HIPC countries whose previous PRGF program went off track 
or expired.  Burundi reached decision point in July 2005, but 
interim relief ended after the PRGF arrangement expired in January 
¶2008.  The U.S. is not a creditor.) 
 
------------------------------ 
Central African Republic (CAR) 
------------------------------ 
 
¶6.  The IMF previewed CAR's second PRGF program review, which the 
IMF Executive Board approved on June 18.  The completed review will 
enable creditors to enter into force the second phase of CAR's 
December 2007 Agreed Minutes, thereby extending the period of 
interim HIPC relief to cover maturities falling due between December 
1, 2007, and November 30, 2008.  The IMF reported that CAR had 
contacted all its non-Paris Club creditors.  Kuwait, Libya, and 
France's Banque Postale had indicated intentions to participate in 
HIPC debt relief.  The World Bank reported that, given rising food 
prices, CAR sought assistance for the agricultural sector and social 
safety nets, in particular.  The Bank endorsed a new Poverty 
Reduction Strategy Paper on May 27; CAR should meet HIPC completion 
point triggers by the end of 2008.  Asked about litigating 
creditors, the IMF awaits replies to its survey, sent to commercial 
creditors, as part of information gathering for its upcoming HIPC 
and MDRI report. 
 
¶7.  The Secretariat discussed how the Paris Club could help CAR 
secure comparable treatment from non-Paris Club creditors.  Mali, 
Niger, Congo and some private creditors had begun contacts with CAR. 
 The Secretariat offered to send letters to official and commercial 
creditors that have not responded to CAR's initial outreach to 
encourage them to start negotiations.  These creditors include Iraq, 
 
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Taiwan, Serbia, Equatorial Guinea, Benin, Cameroon, Senegal, Chad, 
France Telecom, Hopitaux de Paris, Credit Lyonnais, and First 
Curacao.  The Secretariat decided that sending letters to Argentina 
and China would not be constructive.  Noting Kuwait and Saudi 
Arabia's proposed bilateral agreements did not provide comparable 
treatment, the Secretariat also offered to analyze debt 
restructuring offers and to help CAR formulate counteroffers.  The 
Secretariat would lend support to CAR representatives when they 
visit Paris for negotiations with creditors in mid-June. 
 
------- 
Grenada 
------- 
 
¶8.  Creditors postponed a decision on whether to enter into force 
the second phase of Grenada's May 2006 rescheduling, pending the 
Secretariat's preparation of a working paper with options for 
discussion at the July meeting.  The second phase, which covers 
maturities falling due in 2007, is conditioned on completion of the 
"review of the second year" of Grenada's PRGF.  The IMF said 
completion of the first review of the program has been delayed due 
to fiscal slippage in 2007 and slow progress implementing reforms, 
but that performance in 2008 has been more encouraging.  Grenada had 
an end-2007 debt/GDP ratio of 112 percent; it is considering a China 
Exim loan for a port/marina project that could undermine its debt 
sustainability.  The World Bank reported that since a 2005 Hurricane 
Ivan-related emergency loan, Grenada had not been able to access the 
Bank; the Bank questioned the advisability of market-based 
financing.  The Secretariat suggested that creditors consider the 
possibility of not entering into force the second phase, arguing 
that, by not enforcing its own conditionality, the Paris Club risked 
creating moral hazard and treating performing debtor countries 
unfairly.  The IMF cautioned that, while Grenada may have the 
capacity to pay its 2007 maturities, other countries in the future 
may not.  A Paris Club decision not to enter into force a phase of 
debt relief could jeopardize IMF program elements and would be 
 
PARIS 00001201  005 OF 014 
 
 
tantamount to withdrawing financing assurances. 
 
---- 
Iraq 
---- 
 
¶9.  The Secretariat reported that neither Algeria nor Morocco had 
replied to the letters it sent in April.  The Secretariat had 
informal contacts with Poland and Greece, which took note of the 
issue but have not responded.  The Secretariat distributed a letter 
from Brazil's finance minister stating that efforts to conclude a 
bilateral agreement with Iraq to implement the terms of the 2004 
Paris Club agreement have been held up by domestic lawsuits 
involving private and state-owned companies.  The letter states that 
Brazil is "forced to wait until such legal obstacles are overcome" 
and that "given the normal pace of judicial procedures, it appears 
unlikely that such moment will be reached in the short term."  Asked 
by the Secretariat about the timetable for these judicial 
procedures, Brazil's representative said she had no information. 
 
¶10.  Germany denounced Iraqi Minister of Finance Jabr and Central 
Bank Governor Al-Shabibi's May 30 letter to the Secretariat, for 
distribution to Paris Club creditors.  The letter accuses Germany of 
circumventing UN sanctions and failing to restructure a post-1990 
claim, in violation of Iraq's 2004 Paris Club agreement.  Germany 
denied the allegations, blamed Iraq's advisers for the delay in 
resolving the dispute, and challenged the appropriateness of such a 
communication given arbitration underway in Vienna.  A week earlier, 
Germany and Iraq had initialed a bilateral investment treaty in 
preparation for the Prime Minister's visit; during those 
discussions, the GOI had not raised this issue.  Asked about the 
timetable for resolution, Germany hoped the dispute would be settled 
soon and promised to keep the Paris Club informed.  The U.S. 
expressed disappointment that a Paris Club member and a debtor that 
was meeting its commitments were having trouble reaching an 
agreement.  The Secretariat said it was not the role of the Paris 
 
PARIS 00001201  006 OF 014 
 
 
Club to take a position on what amounted to a bilateral issue. 
 
¶11.  Japan inquired about China.  The Secretariat responded that, 
based on information gained at the recent International Compact with 
Iraq conference in Stockholm, Iraq's discussions with China were 
advancing in a satisfactory way, though there was no specific date 
for concluding an agreement. 
 
----- 
Libya 
----- 
 
¶12.  The IMF reported that foreign exchange reserves were scheduled 
to double by 2013, and that Libya established a $40-50 billion 
sovereign wealth fund, the Libya Investment Authority, last year. 
An IMF mission visited Tripoli for Article IV discussions in early 
May; the Executive Board will discuss Libya in mid-July.  In 
November 2007, seven creditors reported arrears.  Six creditors 
(Austria, Denmark, Finland, Netherlands, Sweden, and Switzerland) 
reported, with frustration, no progress since that time.  Russia, on 
the other hand, said it concluded an agreement on trade cooperation 
in April 2008 that also settled the debt issue.  The Netherlands 
urged the remaining Paris Club creditors to maintain solidarity. 
The Netherlands and Denmark had visited Tripoli recently and found 
the authorities to be uncooperative; others echoed the view that 
Libya shows no intention to resolve the issue.  The Secretariat will 
follow up with the authorities at the staff level to find out 
whether the finance minister intends to respond to the Paris Club's 
January 2008 letter, which expressed concern that Libya had 
concluded bilateral agreements with certain creditors while 
remaining in default toward seven Paris Club creditors.  Italy 
indicated that Libya was not negotiating in good faith with many 
private creditors in Italy. 
 
------- 
Moldova 
 
PARIS 00001201  007 OF 014 
 
 
------- 
 
¶13.  The IMF gave an upbeat assessment of Moldova's progress on its 
PRGF, noting some concern about 16 percent inflation in April, and 
said the fourth review is expected to be completed in July.  Once 
the IMF review is completed, the Paris Club intends to enter into 
force the third phase of Moldova's May 2006 Paris Club agreement on 
Houston terms.  The third phase reschedules maturities falling due 
during the period May 1, 2008, to December 31, 2008. 
 
------------------------- 
Russia:  Promissory Notes 
------------------------- 
 
¶14.  Following up on its April 2007 and July 2007 requests, Russia 
asked creditors to either return promissory notes and bills of 
exchange that were cancelled as a result of previous prepayment 
operations or, alternatively, provide a document confirming that 
Russia has paid these claims.  Several creditors stated that they 
had responded to Russia's request in 2007 and had requested GOR 
confirmation of receipt, but were awaiting a response.  Without 
reacting to these comments, Russia repeated its request for letters 
from creditors.  The U.S. does not hold these notes and provided a 
letter in September 2006 acknowledging GOR repayment of debts to the 
U.S. in the context of Russia's August 2006 Paris Club buyback 
operation. 
 
----- 
Sudan 
----- 
 
¶15.  Sudan was on the tour d'horizon agenda to provide background 
for French bank UBAF's presentation during the Paris Club's June 11 
annual meeting with the private sector.  At the outset, the 
Secretariat stated that restoration of peace and safety would have 
to precede normalizing relations with the financial community. 
 
PARIS 00001201  008 OF 014 
 
 
Noting Sudan's protracted arrears, the IMF said it could normalize 
relations with Sudan through an arrears clearance operation and a 
new PRGF program if donors gave their financing assurances and 
provided debt relief.  Sudan's performance under a series of 
Staff-Monitored Programs (SMPs) has been generally satisfactory and 
the economic outlook is favorable (10 percent growth in 2007), 
although the rise in food prices poses a challenge, and the external 
debt overhang ($27 billion debt stock in nominal terms) remains a 
concern.  The Fund reported that Sudan's non-concessional borrowing 
in 2007 was below the limit specified in the SMP and less than in 
¶2006.  Thus far in 2008, however, Sudan has already contracted $522 
million in non-concessional debt, including asset-backed loans for 
oil infrastructure development, approaching the current SMP's $700 
million ceiling. 
 
---- 
Togo 
---- 
 
¶16.  In view of Togo's limited capacity to pay, creditors agreed to 
provide a generous "Naples flow" treatment that included 100 percent 
capitalization of moratorium interest and deferral of post-cut-off 
date and short-term debt.  The agreement treated $735 million in 
arrears and principal and interest payments falling due during 
Togo's three-year PRGF program, and will lead to the immediate 
cancellation of $347 million.  At U.S. request, creditors agreed to 
include a $10,000 de minimis provision. (Togo's debt to the U.S. 
amounts to just $6,200 in arrears to Exim Bank.)  The U.S. was an 
observer and did not sign the Paris Club Agreed Minutes, but 
provided a side letter stating our intention to cancel the debt once 
Togo reaches HIPC decision point, consistent with our domestic 
legislation on debt relief for HIPCs. 
 
------------------------- 
Methodological Discussion 
U.S. Jubilee Legislation 
 
PARIS 00001201  009 OF 014 
 
 
------------------------- 
 
¶17.  The U.S. briefed the Paris Club on the potential impact and 
current status of the House Jubilee Act (H.R. 2634) and the Jubilee 
Bill (S.2166) draft under consideration in the Senate.  We explained 
that the Administration formally opposed the legislation; noted 
that, given the legislative calendar and the current austere budget 
environment, it did not appear likely the Senate would pass its bill 
this year; and explained how both houses   produce a joint bill that 
is sent to the President for consideration.  Creditors posed a 
series of questions.  Belgium asked whether an IMF program was a 
requirement for debt relief (it is not).  The World Bank asked 
whether the bill references the list of IDA-eligible countries at a 
fixed point in time (it does not).  The Secretariat inquired whether 
the U.S. Executive Directors at the IFIs would have specific 
instructions (yes, they would have to use voice and vote to achieve 
the bill's objectives), and whether Congress had provided any 
estimates of the cost of implementing the bill.  The Netherlands 
urged discussion of this legislation at the IMF and World Bank and 
asked whether the legislation was anchored in the IMF/World Bank 
Debt Sustainability Framework (DSF).  Sweden and Norway asked about 
provisions related to odious debts.  Japan asked whether the 
Administration would have another opportunity to testify against the 
bill, and whether the President could veto the bill should it pass 
Congress.  Australia said the bill seemed to ignore progress 
achieved in establishing the DSF, enhancing HIPC and implementing 
the Multilateral Debt Relief Initiative, and promoting sustainable 
lending through the OECD Export Credit Group's guidelines.  The 
Secretariat said that, while it was not for the Paris Club to adopt 
a formal position toward the bill, the U.S. could take home the 
message that the Club was "extremely vigilant" and that, if passed, 
the legislation would cause problems for Paris Club creditors, the 
IFIs, and debt policy doctrine. 
 
-------------------------------- 
Methodological Discussion: 
 
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Belgium's New Legislation 
to Protect Against Vulture Funds 
-------------------------------- 
 
¶18.  Belgium briefed the Paris Club on its efforts since 2004 to 
deal with vulture funds and described a recently passed law aimed at 
preventing the "seizure or cession of public funds for international 
cooperation, notably by vulture funds."  The law, which took effect 
May 27, protects Belgium's aid flows and covers debt rescheduled in 
the Paris Club, but is not retroactive.  Belgium still seeks a way 
to deal with earlier cases.  France commented that it has a similar 
law that protects French ODA flows to HIPC countries.  Italy noted 
discussions in Rome about introducing a similar law to protect ODA 
flows. 
 
-------------------------- 
Methodological Discussion: 
Paris Club Annual Report 
-------------------------- 
 
¶19.  The Secretariat distributed the inaugural publication of the 
Paris Club Annual Report.  The Secretariat, based on the response to 
the report, will consider how to enrich the report next year.  Japan 
said it intends to publish a Japanese translation. 
 
------------------------------------------ 
Methodological Discussion:  Fragile States 
------------------------------------------ 
 
¶20.  Creditors discussed next steps with respect to France's 
proposal that the Paris Club provide unconditional debt relief to 
IDA-only countries under IMF Emergency Post-Conflict Assistance 
programs (EPCAs).  (Under France's proposal, the Paris Club would 
defer all arrears and debt service falling due during the period of 
the EPCA and fully capitalize moratorium interest.  If the country 
obtains a follow-on PRGF program, the deferred amounts would be 
 
PARIS 00001201  011 OF 014 
 
 
rescheduled and the moratorium interest canceled.  The U.S. does not 
support the proposal.)  The Secretariat noted that the Club had not 
reached consensus:  most creditors supported the proposal, but some 
did not for both legal and policy reasons.  The Secretariat will 
circulate a new working paper once the IMF Executive Board conducts 
its further discussion of a possible new instrument, provisionally 
dubbed an "Economic Recovery Assistance Program," for fragile 
states.  In the meantime, creditors agreed to send a letter to 
Guinea-Bissau stating the Paris Club's willingness to provide a debt 
treatment once a PRGF arrangement is in place.  The U.S. had 
suggested such a letter as an alternative to France's proposal. 
 
------------------------------------- 
Meeting with the Private Sector 
and Non-Paris Club Emerging Creditors 
------------------------------------- 
 
¶21.  The Secretariat and Institute for International Finance (IIF) 
co-hosted the Paris Club's eighth annual meeting with the private 
sector.  For the first time, representatives from some emerging 
official creditors also attended:  Abu Dhabi Fund for Development, 
Brazil, Exim Bank of China, Israel, Kuwait Investment Authority, 
South Africa, South Korea and Turkey.  Based on the discussions, the 
Secretariat will attempt to create two voluntary working groups:  1) 
a Paris Club/non-Paris Club working group of official creditors to 
discuss ways to improve information exchange and coordination; and 
2) a Paris Club/private sector working group to discuss vulture fund 
issues.  The presentations and discussion included the following 
topics. 
 
-- South-South Financing:  Representatives from China's EXIM Bank, 
Kuwait, Turkey, South Africa and South Korea gave brief descriptions 
of their lending programs.  Asked how China understood comparability 
of treatment in countries where the PRC is active in Africa, China 
EXIM Bank's representative declined to provide an official view, and 
stressed instead that China's growing involvement in natural 
 
PARIS 00001201  012 OF 014 
 
 
resources reflected its rapid growth in domestic demand.  Turkey 
argued that it is not fair for the Paris Club to try to require 
other creditors to provide comparable treatment.  The Paris Club 
Agreed Minutes set the benchmark; yet in Iraq's case, Paris Club 
creditors held only 36 percent of the debt.  The Paris Club should 
take into account the economic impact of comparable treatment on the 
creditor country. 
 
-- Argentina Default:  Nicola Stock (Italian Task Force Argentina) 
reviewed bondholder efforts to recover funds following the default 
and urged the Paris Club to consider the interests of private 
creditors if it concludes an agreement with Argentina. 
 
-- Vulture Funds:  There was considerable discussion of vulture 
funds.  Hans Humes, Greylock Capital, argued that the term is 
applied too widely, the actual problem is relatively small, and 
proposed legislative responses could harm legitimate creditors and 
investors.  France, the U.S., and UK urged all creditors to provide 
comparable debt relief to qualifying HIPCs, but also expressed legal 
concerns about maintaining contracts and repayment incentives. 
France and the UK encouraged support for HIPCs that face litigation. 
 The UK also encouraged private creditors to participate in IDA Debt 
Reduction Facility operations and to avoid selling claims to 
creditors that do not provide comparable treatment.  Claire Husson 
(Franklin Templeton Investments) argued it does not make sense for 
the private sector not to sell HIPC claims when many developing 
countries' domestic laws allow them to do so.  Charles Dallara (IIF) 
suggested that, where countries are cooperating to resolve debt 
matters, collective action should discourage litigation.  The UK, 
supported by IIF, suggested a Paris Club/private sector working 
group on vulture funds to continue the discussion.  Paris Club 
Chairman Xavier Musca stated his support for the working group and 
the need for a coherent approach to address the free rider problem. 
 
-- Impact of Credit Market Turmoil on Emerging Markets:  Dallara 
described an IIF project to develop a set of voluntary principles 
 
PARIS 00001201  013 OF 014 
 
 
for private sector best practices in response to the weaknesses 
exposed by the credit market turmoil, including areas such as 
compensation structures, risk analysis, and rating agencies.  The 
final report will be released in July.  Robert Gray of HSBC reported 
on implementation of IIF's "Principles for Stable Capital Flows and 
Fair Debt Restructuring in Emerging Markets," stating that the 
Principles have led to improved communication between emerging 
market authorities and investors, particularly through the Group of 
Trustees of the Principles for Stable Capital Flows and Fair Debt 
Restructuring in Emerging Markets, and better emerging market data 
reporting. 
 
-- IMF and World Bank Update:  IMF and World Bank representatives 
provided an update on their work on the Debt Sustainability 
Framework, development of medium-term debt management strategies, 
IDA's grant allocations based on the risk of debt distress, and 
IDA's non-concessional borrowing policy. 
 
-- Sudan:  Patrick Legait (UBAF) discussed the case of Sudan, saying 
it has sovereign debt which has been in default for 23 years.  The 
December 1981 commercial debt rescheduling was based on partial debt 
reconciliation as of December 1979; in October 1985, there was $800 
million in outstanding debt.  A June 1987 repurchasing scheme 
collapsed in April 1988.  At this point, it is difficult to know the 
amount of these claims or what entities hold them.  In late 2007, 
Sudan's Islamic bonds were denominated in euros because of OFAC 
measures and were on three- to four-year terms; the Bank of Sudan 
guaranteed the bonds, with repayment supplied by offshore sales of 
Sudanese oil.  In 2008, Sudan marketed prefinanced guaranteed oil 
access, seeking out Islamic banks, oil traders and insurers.  Legait 
argued that Sudan's actions set a dangerous precedent:  Sudan is 
deliberately ignoring its sovereign debt and successfully raising 
new money (see para 15). 
 
STAPLETON 
 
 
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2