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IRAQ: The Regime's Debt

Author: Esther Pan
December 31, 2003
This publication is now archived.

What is the status of the administration's Iraq debt-reduction plan?

Presidential envoy James A. Baker III, a former U.S. secretary of state, visited Japan and China December 29-30 and five European nations December 15-19. He secured pledges from the European nations and Japan to reduce the debt Iraq owes them and a promise from China to consider debt forgiveness. Experts say Baker is pushing for as much as 90 percent of the debt to be forgiven or rescheduled. Estimates of Iraq's total indebtedness range as high as $130 billion. The pledges are significant because administration officials have said debt relief is essential for Iraq's economic development and because four of the countries--China, France, Germany, and Russia--were vocal opponents of the U.S.-led invasion of Iraq. Whether the cooperative spirit that greeted Baker can be expanded to other topics remains to be seen.

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Which countries agreed to cooperate on debt reduction?

All the nations Baker visited. The Japanese Foreign Ministry announced December 29 that Japan would forgive "the vast majority of its Iraqi debt," if other countries do the same, and on the same day the official New China News Agency said China "will consider reducing the debts owed by Iraq out of humanitarian concern." A joint statement released December 16 after a meeting between French President Jacques Chirac, German Chancellor Gerhard Schroeder, and Baker read, "Debt reduction is critical if the Iraqi people are to have a chance to build a free and prosperous Iraq." On December 18, Russian President Vladimir Putin announced that Russia would join negotiations to lower Iraq's debt to the Paris Club group of lenders. Baker also secured commitments from British Prime Minister Tony Blair and Italian Prime Minister Silvio Berlusconi.

Baker cancelled a scheduled stop in South Korea on his Asia trip. He has not yet started negotiations with Arab nations owed Iraqi money.

Why was Baker chosen?

As secretary of state in 1991, Baker assembled a coalition of more than 40 nations for a United Nations-approved mission to drive Iraqi invaders out of Kuwait. Many experts say his extensive experience in the region and longstanding personal relationships with many world leaders make him a highly appropriate candidate for the diplomatic assignment. Experts say the choice of Baker, a trusted friend and adviser of President Bush, signals the importance the administration has assigned to reducing Iraq's debt. Baker was named to his post on December 5, 2003.

Were the trips affected by the recent Pentagon ban on contractors?

Baker's task was complicated by a December 10 Pentagon announcement barring nations that did not join the coalition to fight the 2003 Iraq war from bidding for $18.6 billion worth of U.S. reconstruction contracts. But the ban did not seem to cloud negotiations over debt reduction, as many experts had feared it might. A German government spokesperson said Germany's position on the contracts was "clearly stated" in the talks with Baker. Baker described his reception in France as "warm" and called his talks with Chirac "fruitful."

Are non-coalition countries banned from all Iraqi reconstruction work?

No. The Pentagon ban is on primary contractors only; companies that win bids are free to subcontract tasks to corporations from any country. Pledges for Iraqi reconstruction from other countries and money from such international organizations as the International Monetary Fund and the World Bank are also unaffected by the ban.

How much money does Iraq owe?

Most experts agree that Iraq's foreign debt--the money it, as a state, owes other governments--ranges from $120 billion to $130 billion. When reparations for the first Gulf War, compensation claims, and pending contracts are added in, the figure could rise to as high as $300 billion. Some say that, in order to help Iraq's transformation to a modern democracy, some or all of these debts should be forgiven.

How does the debt break down?

The figures vary widely, say experts, because of the difficulty of getting accurate information about Iraq's finances. Many of the debts were informal or unrecorded, so it's difficult to pin down precise figures, some experts say. Iraq also did not service its debts--make payments on them--for more than 10 years, so interest accrued.

What are the accepted estimates of Iraq's debt?

The following list shows the range of Iraq's financial obligations:

Paris Club :

$21 billion before interest, including$4 billion to Japan $3.5 billion to Russia $3 billion to France $2.5 billion to Germany $2 billion to the United States $1.7 billion to Italy

Unpaid contracts :

$57 billion, most of it owed to military contractors

Arab nations :

$40 billion

Other debtors :

$10 billion

Iraq also owes some $200 billion in reparations, mostly to Kuwait and Saudi Arabia, for the first Gulf War.

Including interest, what are the upper estimates of the Paris Club debt?

As much as $40 billion. Joseph Siegle, the Douglas Dillon fellow at the Council on Foreign Relations, says, for example, that the $4 billion Iraq owes to Japan under official Paris Club rules has grown to $7 billion with interest.

What is the Paris Club?

A group of international creditor nations that meets voluntarily to negotiate debt rescheduling and restructuring for nations that owe them money. There are 19 members--most of the European Union countries, Australia, Japan, Russia, and the United States. The group meets 10 or 11 times each year to review issues concerning debtor countries.

When and how did the United States support Iraq?

Official U.S. assistance to Iraq--"overt economic aid and some military assistance"--flowed from 1952-1973, Siegle says. Saddam Hussein came to power in 1979. From 1980-88, experts say, the United States provided millions of dollars in aid to Saddam Hussein for his war against Iran.

How are the reparations decided?

Following the 1991 Gulf War, the United Nations Security Council decided that Iraq would be liable for damages resulting from its invasion of Kuwait. The United Nations set up a Compensation Commission (UNCC) to judge and administer claims brought by foreign governments, corporations, or individuals against Iraq.

How are the claims supposed to be paid?

Initially, the Security Council decided that 30 percent of Iraq's oil revenue would be set aside to pay reparations; this figure was later reduced to 25 percent and then again to 5 percent. The UNCC has registered some 2.6 million claims and awarded $46 billion in damages. Of this figure, nearly $18 billion has already been paid out of Iraqi oil revenues through the U.N. Oil for Food Program. In addition to reparations, Iraq is responsible for paying interest on the claims. It also paid some $278 million in UNCC operating expenses--including lawyers' fees--by November 2002. Experts estimate that some $20 billion to $30 billion in additional reparations will be awarded to claimants.

How much of the money Saddam Hussein borrowed was used to buy military equipment?

Quite a lot, experts say. Jubilee Iraq, an organization dedicated to reducing Iraq's debt load, says that Saddam Hussein's government signed billions of dollars' worth of contracts, mostly for military goods. This includes an estimated $4 billion in orders from French contractors for F1 fighters, air-to-surface missiles, laser guided missiles, attack helicopters, military vehicles, and artillery pieces, and $9 billion committed to Russian contractors for helicopters, MiG fighters, and radar equipment.

How much of it went to civilian purposes?

Much less, experts say. For example, Saddam Hussein borrowed $300 million from Switzerland for building materials and machinery, according to Jubilee Iraq. But, experts warn, he likely used those materials to build either military installations or his exorbitant palaces.

Who supports debt forgiveness?

Top members of the Bush administration, including Deputy Secretary of Defense Paul Wolfowitz. President Bush was so concerned about Iraq's debt load that he threatened to veto a November spending bill if it contained a Senate proposal to make part of its $18.6 billion aid package to Iraq a loan; Bush said the loan would unnecessarily burden the country with more financial obligations. James Wolfensohn, president of the World Bank, has advocated erasing nearly two-thirds of Iraq's debt and rescheduling repayment of the rest on less-stringent terms.

What are the arguments for forgiving the debt?

Many say it's required to give the country a fair chance at economic redevelopment. With so many pressing humanitarian and reconstruction needs, advocates argue, the Iraqi people should not be saddled with repaying debts Saddam Hussein used to prop up his rule. Nobel-prize winning economist Joseph Stiglitz cites Germany after the Versailles Treaty of 1919 as evidence of the damage that heavy reparations can do to a nation. Significant debt forgiveness is "absolutely imperative," says Michael E. O'Hanlon, senior foreign policy fellow at the Brookings Institution. "The debt servicing requirements to be imposed on Iraq [under the current system] are going to be astronomical and punitive, and that's against our interest. We need to be winning the hearts and minds of the Iraqi people, and showing the rest of the Arab world that we're not there to service Western oil interests."

Is that the only pro-forgiveness rationale?

No. Some say that wiping out the debt incurred by a known tyrant will discourage international lending to such types in the future. "Lenders are seeking a legal basis for these claims, but they entered into these contracts with a dictator. It was a risky investment, and it went down the tubes. Governments and global taxpayers shouldn't be required to bail out private investors who made seamy choices," Siegle says. Some advocacy organizations concur; Oxfam says that countries and corporations that lent Saddam Hussein money supported his dictatorship and do not deserve repayment.

What are the arguments against?

Members of the international financial establishment warn that if Iraq defaults on its debts, it could jeopardize its future credit rating and impair its ability to attract foreign direct investment. They say that Iraq's debt burden can be lessened with generous restructuring and repayment schedules that still require the country to fulfill its financial commitments. Some experts also say that forgiving Iraq's debt could set back international development because it could discourage lending to a wide variety of governments, including some that are now authoritarian but could someday be democracies: China, for example. Critics of forgiveness also point out that, as a potentially wealthy country--one that controls the world's second largest oil reserves--Iraq is hardly the most worthy candidate for debt forgiveness.

Who would benefit from debt forgiveness?

The Iraqi people, say some experts, who would be able to apply their oil revenue to rebuilding their country instead of servicing debt. Experts also say the Middle East region will benefit from increased stability and foreign investment in Iraq. "There's a real boom waiting to happen for the region," Siegle says. "If Iraq is given that kind of investment and starts to play its natural role as a trading post, it's going to benefit all those countries."

What is odious debt?

The concept was pioneered in 1927 by Alexander Sack, an expatriate Russian law scholar in Paris. He wrote, "When a despotic regime contracts a debt, not for the needs or in the interests of the state, but rather to strengthen itself, to suppress a popular insurrection, etc., this debt is odious for the people of the entire state. This debt does not bind the nation; it is a debt of the regime ... and consequently it falls with the demise of the regime." Sack went on to say that creditors who lend to dictators "have committed a hostile act against the people" and cannot expect a nation that has overthrown a despot to "assume ... the personal debts of the ruler." Although Sack's definition is widely accepted, there is no formalized international legal structure for either determining which debts are odious or enforcing the forgiveness of such debts.

Can Iraq's debt be classified as odious?

Yes, according to many experts.

Are there precedents for forgiving odious debts?

Yes. In 1883, Mexico repudiated debts incurred by the Austrian Hapsburg Emperor Maximilian to prop up his reign over Mexico between 1863 and 1867 and suppress an uprising there. In 1898, the United States pushed to wipe out debts Cuba owed Spain, on the grounds that the debts prevented the Cuban people from rebelling against Spanish colonial rule. In 1923, the Costa Rican government distanced itself from money lent by Great Britain to Federico Tinoco, the dictator in Costa Rica from 1917-1919. The states of the former Yugoslavia are currently in negotiations to avoid paying back funds lent to Yugoslavia to finance military action against its breakaway republics.

Are other countries paying off odious debt?

Yes. Indonesia, Nigeria, and South Africa, among others, are all currently repaying debt incurred by authoritarian governments.

Will forgiving Iraq's debt build momentum for other countries to have their debts forgiven?

Experts say it might, by focusing attention on the debt burdens of many countries with fewer resources than Iraq. Joseph Stiglitz, the former chief economist of the World Bank and chairman of the Council of Economic Advisers in the Clinton administration, said in a Reuters news report that Washington's argument for Iraqi debt relief could be made about "any number of countries," including Tanzania, Ethiopia, Argentina, Chile, and the Congo. "Iraq is a compelling case [for debt relief], but it has been arbitrarily selected by this administration when there are many other more compelling cases," he said.

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