An agreement on Iraq's $40 billion debt to Paris Club official creditors is likely to be reached by November, according to Jean-Pierre Jouyet, chairman of the Club, in an interview with Emerging Markets.
The first step to any restructuring is an IMF programme for the war-torn nation but now that the Fund has approved one - for $436 million - it paves the way for the Paris Club deal. Jouyet says that although Iraq has proven to be the most political and delicate issue in the Paris Club's history, the creditor group is hopeful of striking an agreement within the next two months, most likely after the US presidential election.
The news will come as a huge relief for Iraq's finance minister, Adil Abdul Mahdi, who is hopeful of a Paris Club deal as soon as possible. In an exclusive interview with Emerging Markets, Abdul Mahdi says an agreement will be crucial for Iraq as it begins to resolve its $120 billion of debt. The Paris Club only represents about one-third of this debt; the biggest portion lies with the Gulf states.
"We are fully engaged [with the Paris Club]," says Abdul Mahdi. "We met Mr. Jouyet, we have met various creditors and we are engaged on this topic - at full speed." Abdul Mahdi's comments come amid spiralling violence in Baghdad which yesterday claimed 41 lives in a series of coordinated attacks.
He also expects to sign a formal letter of intent with the Fund this weekend. "It will only be an occasion to finalize what we've already been discussing," he says. The minister says the issue of Iraq's debt restructuring will top the informal agenda this weekend. "In the bilateral context, the Annual Meeting will be dominated by this question. Many members support Iraq's debt restructuring," he says.
But the extent of the debt reduction is still at issue. "A write-off of 90% to 95% is achievable. It is the only achievable figure for Iraq," insists the finance minister.
Yet difficulties have been exaggerated recently by divergent opinions among creditor nations, notably France, which has been most vocal in its opposition to the joint US and Iraqi position of a write-off of up to 95%. This fact alone ensures lively debate over the weekend.
France, along with Russia and Germany, are arguing that Iraq, with its potentially vast oil wealth, should not get better treatment than other heavily indebted poor nations. It is insisting on a debt write-off of no more than 50%. Abdul Mahdi argues that it is precisely because of the potential returns to the international community that there should be a swift and substantial write off. "We are telling them: 'Yes, Iraq is an oil producer' and that is a very important issue for the write-off because this is really about reconstructing Iraq. Because we are an oil producer we can eventually use the oil budget to everyone's advantage. All the creditors will benefit from that. It is a mutually beneficial scenario."
Iraq has $2 trillion in oil reserves which could, in principle, attract substantial foreign investment - but only if the sovereign debt situation is worked out first.
"Iraq is a special case. There were three almost international scale wars in Iraq. It is really in a very critical situation. Development in Iraq is really very important to the security of the region and the security of the world," says Abdul Mahdi.
The question of oil - another acutely relevant issue for this weekend's meeting - is at the heart of Abdul Mahdi's argument. "The world economy needs oil. If Iraq can come back to oil exports, even 3.5 million barrels, this will be something that the whole world will benefit from. If Iraq introduces itself into the world oil markets, it could mean at least a $2 decrease in the oil price."