France, Germany and Russia finally agreed on Sunday to forgive up to 80% of Iraq’s debts, removing the major obstacle to a broader agreement among Paris Club creditors to reschedule some $40 billion of Saddam-era debt.
The near certainty of the deal was first reported by Emerging Markets on the eve of the IMF Annual Meetings in October, in an exclusive interview with Paris Club chairman Jean-Pierre Jouyet. At the time Jouyet said he expected the deal to get wrapped up in November, after the US elections. He suggested that behind-the-scenes talks had been fruitful, despite speculation over a growing transatlantic rift between creditors.
“There is an agreement among Paris Club creditors that Iraq’s debt, which is estimated around $125 billion, is not sustainable and that a substantial debt reduction is needed,” Jouyet told Emerging Markets.
The deal ends a long-standing dispute between France, Germany and Russia on the one hand, and the US and Iraq on the other, over the extent of a possible write off. “It’s not the first time that we’ve faced a very delicate and a very political issue. But it’s perhaps the most political and delicate issue yet,” said Jouyet.
The Europeans argued that Iraq, with its potentially vast oil wealth, should not get better treatment than other heavily indebted poor nations. They insisted on a debt write-off of no more than 50%. In contrast, the Iraqi and US governments urged a near total write off.
Speaking exclusively to Emerging Markets before the latest agreement, Iraqi finance Minister said: “A write-off of 90% to 95% is achievable. It is the only achievable figure for Iraq."
Nevertheless, the current deal will ease the financial burden to be shouldered by a future Iraqi government. The agreement will relieve Iraq of $33 billion of debt and, crucially, it will also serve as a benchmark for other holders of Iraq's total sovereign debt. The 19 Paris Club countries hold roughly a third of Iraq’s debt.
Although writing off Iraq’s debt is a vital component for the country’s long term stability, Jouyet plays down it’s overall impact. “The debt agreement is part of the stabilization. To be frank, the main stabilization is a political issue. We can help, but it is not the cornerstone of the stabilization.”