[stop-imf] Wall Street Journal Editorial on Iraq's Debt and Jubilee response

[Robert Weissman]

Wall Street Journal Editorial Page


REVIEW & OUTLOOK

Indebted to Saddam
Debt relief is more important to Iraq than donations.

Monday, October 27, 2003 12:01 a.m. EST

Yesterday's rocket attack on the Al-Rasheed hotel in Baghdad will no
doubt dominate this morning's headlines, in part because of the narrow
miss of Deputy Defense Secretary Paul
Wolfowitz. But the bigger news in the long run is still likely to be the
weekend's Madrid donor conference and the progress it represents toward
a self-governing Iraq.

We'll save a full tally for another day, but consider what's happening
on the donor and debt fronts. In one sense the 70 nations in Madrid were
a tad stingy in coughing up about $13
billion for Iraq, much of it in the form of loans. Our former best
friends, France and Germany, contributed zip and Arab nations offered
only a modest amount. The better news is that
many small and less financially flush states contributed--Vietnam
offered rice and Sri Lanka promised tea.

Nonetheless, the $33 billion total aid package, including $20 billion
from the U.S. that Congress is expected to approve, will give the Iraqi
economy a nice immediate boost. But the
best news is that the conference is over and now the far more important
consideration of what to do with Iraq's debts can begin. Although Iraq
is potentially a rich, rich country, its
economy cannot prosper unless it attracts private capital. And no
investor is going to shovel in that capital until Iraq's debt is under cont=
rol.



The best current guess on Iraq's debt comes to $150-to-$200 billion.
Worse, Iraq also needs somewhere in the neighborhood of $10 billion a
year over the next five years for
rebuilding power plants and other reconstruction. And worse still is
that these amounts must be handled in a way that does not decimate
Iraq's domestic operating budget, which needs
to run in the neighborhood of $13 billion a year.

The donor contributions will relieve some of this pressure and oil
revenue should cover the operating budget. The hooker here is that
although estimates for oil revenue are around
$13-$18 billion for the next several years, 5% of any oil revenue must
go to the United Nations for reparations payments. Simply put, things
look tight.

All of which explains why proper debt relief is so important to get
Iraq's economy humming again. Debt restructuring involves four somewhat
flexible parts: a haircut to the amount
owed, the size of interest payments on remaining debt, the grace period
during which no payments are made, and the length of time before the
debt is extinguished.

Obviously, these parts are related. A big haircut could call forth
higher interest payments and vice versa, while a long grace period might
require a shorter repayment period, and vice
versa. There are thus lots of ways to produce a reasonable package. The
Bush Administration says it plans to seek "substantial" debt reduction.

To our mind, that would mean a haircut of 80%, interest of 5%, a grace
period of five years and a maturity of 20 years. Big numbers, sure, but
it is hard to feel sorry for global
creditors who lent to Saddam Hussein's regime. A substantial haircut is
also important to persuade balky Congresspersons that U.S. money will go
to Iraqis and not to pay off French
and Russian debt.

The sheer size of Iraq's debt has prompted some people to call for
repudiation under the doctrine of "odious debt." This doctrine has two
attractions. It relieves Iraqis from debt burdens
undertaken by a hideous tyrant for hideous purposes, and it puts future
creditors to other hideous tyrants on notice that such debts might go unpai=
d.

But a complete repudiation would also have costs, notably to Iraq
itself. The main point of economic reconstruction is to restore Iraq's
access to global credit markets, and creditors are
never thrilled to see contracts repudiated. Future creditors--especially
private ones--would be encouraged to see Iraq making at least some
payments on existing debt. Just as important,
a repudiation of this magnitude would rattle debt markets and cause risk
premiums to rise.



The best solution is a balance that liberates a newly democratic Iraq
from most of the burden of Saddam-era debt but also helps it to lure new
private foreign capital. Iraq's economy
needs some breathing room to get private capital in and working, and a
generous but sensible program of debt reduction is the crucial next step.



----


October 27, 2003<?xml:namespace prefix =3D o ns =3D
"urn:schemas-microsoft-com:office:office" />



Dear Editor,



Thank you for your timely and insightful editorial in today=92s paper,
"Indebted to Saddam
Debt relief is more important to Iraq than donations." Indeed, without
substantial debt cancellation, we cannot expect for Iraq=92s economy to
get on-line much less start
=93humming=94 again, even with the optimistic estimates of oil revenue.



As the article suggests, the doctrine of odious debt could help to
relieve unjust debt while addressing creditor culpability in financing
Saddam. But it is not the case that
invocation of the =93odious debt=94 doctrine would mean a complete
repudiation of debt. Rather than repudiation, an arbitration court with
equal representation of creditors and
debtors could ascertain which loans were indeed odious. The court would
likely find odious that Iraq owes Russia $9-12 billion primarily for MIG
fighters and helicopters,
Iraq owes France between $1.7 billion to $4 billion predominantly for
F-1 fighters and Exocet air-to-surface missiles, and that billions went
to fund Saddam=92s personal
interests including the palaces, monuments to his reign, and into bank
accounts in Switzerland, Luxembourg, France and Austria.



However, the court would likely find that the $4 billion owed to the
U.S. was a part of an export-credit agreement where Iraq gained credit
to purchase food and textiles from
the U.S. This agreement benefited U.S. exporters and it would be
difficult to argue that food and clothing did not benefit the Iraqi
people. This debt would not likely be found
to be odious, and thus could still be on the table for repayment



Beyond canceling Iraq=92s odious debts, we must ask if it is wise to
demand that the Iraqi people pay debt service to the same nations that
it has been in conflict with Iraq for
the past decade. Have we forgotten so quickly that Hitler campaigned on
the issue of debt cancellation for Germany after WWI, and then was
successfully elected into power,
preparing the way for a second world war? Should we not do as the allied
powers did 50 years ago, after WWII, and employ debt cancellation as a
demonstration of good faith
and a tool to generate regional stability?



Marie Clarke Brill

Executive Director

Jubilee USA Network

222 East Capitol Street NE

Washington, DC 20003

202-255-7849 - cell

202-783-0215 =96 work

703- 642-1692 - home