from Follow the Money

Cheney is wrong: $80 billion in debt relief if not equal to $80 billion in cash

October 6, 2004

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Last night, Vice President Cheney claimed that US allies were contributing $80 billion to the war in Iraq by providing Iraq with debt relief. He compared this $80 billion in debt relief to the cash the US is laying out to keep a large army in Iraq, and to pay for Iraq’s reconstruction/ training Iraq’s army/ training Iraq’s police. To me, this does not pass the smell test. THe debt deal has yet to be done. Plus, forgiving debts that won’t ever be paid provides Iraq with no new resources, and contributes little to meeting Iraq’s immediate need for financing. Debt relief is not the same as cash aid, or even new loans. Using U.S. budget numbers, $80 billion in debt forgiveness is worth more like $8 billion, not $80 billion.Cheney’s argument is misleading on several levels.

1: There is not yet agreement on the amount of debt relief that Iraq will receive. Iraq just got an IMF program, the first step toward getting debt relief, but there are still tons of obstacles to a deal. First, the Paris Club (the group of major creditor countries) has to agree on terms with Iraqis -- something that has not yet happened. Then Iraq has to get a deal with its non Paris Club creditors, both other Arab states and private creditors. The debts Iraq owes to other Arab states are important -- the $45 billion Iraq is esimated to owe the Gulf states exceeds the $42-43 billion Iraq owes the Paris Club creditors (Iraq also owes roughly $12 billion to private creditors, and another $15 billion to countries in Eastern europe and elsewhere that are not in the Paris Club -- Richard Segal of Exotix provides the best estimates). There are also still differences to sort out inside the Paris Club. Iraq has roughly $120 billion in debt . The US is pushing for 90-95% debt reduction. France and Germany are saying 50%. The UK is saying 80%, I think. Russia and Japan are probably closer to France and Germany than the US. France and Germany are wrong on this: 50% debt reduction is not enough, it would leave Iraq with $60 billion in debt, too much for a $30 billion economy. And in addition to debt, Iraq also owes war reparations from the first Gulf war. To get $80 billion, Cheney is assuming that the roughly $108 billion ($120-$12 owed to private creditors) will be reduced to $28 billion -- and that deal has not been done.

2: Forgiving $80 billion is worth a lot less than $80 billion. The US already has put a price tag on forgiving the 95% of the $4 billion or so that Iraq owes the US (roughly $2 billion in pricipal and $2 billion in interest arrears). It will cost cost $360 million, not close to $4 billion, because the US never expected to be paid in full. In other words, it costs the US about $100 million for every $1 billion in Iraqi debt it forgives, so forgiving $3.8 billion (95% of 4 billion) costs around $360 million. Applying a similar methodology to estimate the costs other countries would incur from reducing their claims on Iraq suggests that forgiving $80 billion in debt is roughly equal to providing $8 billion in cash. Of course, the budget cost of forgiving debt is not the same across countries, but $8 billion is a better estimate of the price tag of forgiving $80 billion in non-performing Iraqi debt than $80 billion. $8 billion is something, but it is also a lot less than the $18 billion US economic aid package, let alone the military costs the US is incurring. 3: Debt relief won’t improve Iraq’s current cash flow, or provide funds for new investments in Iraq’s infrastructure/ funds to accelerate the training of a new army. Remember, Iraq is not paying anything on its debt right now, so a deal that cut Iraq’s debt from $120 billion to $40 billion and then had Iraq make even tiny interest payments on its debt would INCREASE, the current burden of Iraq’s debt. Paying something is more than paying nothing. Iraq would gain far more from cutting the pace at which is paying its gulf war reparations, as such payments are currently eating up 5% of its oil revenues.

4: Debt relief won’t suddenly let Iraq start borrowing again. Even if Iraq’s debt was reduced by 2/3s to $40 billion, it would still not be in a position to take on new debt -- its debt to GDP ratio would be more than 100%, and it would still owe reparations. In the near term, no matter what, Iraq needs grants, not new loans. I disagree with those -- not just Dick Cheney -- who argue that debt is major obstacle to Iraq’s reconstruction in the short-run. Debt relief is important in due time, but it is far from a pressing need. The lack of security, and the fact that is not clear who will be governing Iraq (or for that matter, if Iraq will remain a country) in a year, let alone two or three years, is a far bigger barrier to investment/ new borrowing than Iraq’s debt overhang. Debt is being addressed now because it is something that does not hinge on improving the security situation. A debt deal can be done without ever going to Baghdad. In sum, forgiving debt that is currently not being paid, and that never will be paid, is in no way comparable to providing new money, money that can be used to build infrastructure, pay the salaries of the police, pay for training an army, etc. It is easy to see why Cheney wants to get a big number out of debt relief, but it is still misleading. He is counting chickens before they hatch, and comparing apples (debt relief) and oranges (cash aid).

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