Baker to Press Arab Lands to Forgive Huge Iraqi Debt

By STEVEN R. WEISMAN

Published: January 5, 2004  

WASHINGTON, Jan. 4 — After getting European and Asian nations to help Iraq with its debts, former Secretary of State James A. Baker III faces a new challenge as he tries to persuade wary Arab nations to forgive an even larger debt, including the financial legacy of Iraq's violent history in the region.

A White House official said that Mr. Baker might leave for the Middle East later this month. He visited European and Asian countries in two trips in December after being designated by Mr. Bush as a special envoy on debts.

Administration officials and experts say that the Middle East debts, estimated at about $45 billion, compared with $40 billion for the group of leading industrial countries known as the Paris Club, contains large sums lent to Iraq by Saudi Arabia and other Persian Gulf countries during Iraq's war with Iran in the 1980's.

Under Saddam Hussein, Iraq called on its Arab neighbors to help supply and pay for arms for the war effort. Baghdad later insisted that the aid was in the form of grants, not loans, and therefore repayment was not required.

The newly reconstituted Iraqi Finance Ministry is doing research on the validity of that claim, administration officials said, complicating Mr. Baker's mission.

"The paper trail is not what you would find in a normal government-to-government debt situation," said an administration official. "All these arrangements, whether there were grants or loans, is being researched by the Iraqis. There's a lot of data collection to be done."

In Europe and Asia, Mr. Baker, who is also a former treasury secretary, won commitments for what officials said would be a "substantial" reduction of Iraq's total debt, estimated by a London-based brokerage firm at $116 billion.

"The trick is, what does `substantial' mean," said an official who traveled with Mr. Baker. "His purpose was to establish the principle that debt reduction is needed, and to build a consensus toward an agreement this year. Now, everybody is at the table with a common understanding."

Mr. Baker has refused to translate the words "substantial" into percentages of how much of Iraq's debt might be forgiven. In addition, the $116 billion does not count perhaps another $100 billion in war reparations sought by Kuwait and other countries.

Specialists who have been in contact with the World Bank, the International Monetary Fund and the Paris Club — a group of 18 rich countries that negotiate debt relief for poor nations — say that the target is likely to be agreement to forgive two-thirds of the debt.

Whether it is realistic to get the Arab countries, some of which are poorer than the Europeans and Japan, to forgive two-thirds of their debt is not clear.

"The model that they are likely to follow is Serbia after the Balkan wars," said Richard Segal, director of research at Exotix Ltd., the brokerage firm that estimated Iraq's debts at $116 billion. "It's premature to set a percentage now, but two- thirds is the figure being discussed."

Mr. Segal said that Mr. Baker's trips to Europe and Asia were successful because the countries he approached — many of which opposed the American invasion of Iraq — seemed willing to move beyond their concerns and to do what was best for a new government in Baghdad.

Some creditor countries had initially balked at forgiving Iraq's debts because of its vast untapped oil reserves. Others said they did not want to negotiate Iraq's future finances with someone who was effectively an emissary of an occupying power. 

Mr. Baker's mission succeeded in putting such talk to rest, though it could come up again when the Paris Club countries get down to specifics later this year, especially when they engage in discussions with the government of Iraq that is due to be installed by June 30.

The Baker strategy is described as a deliberate effort to sew up a broad agreement of rich countries on debt forgiveness and then try to persuade other countries in the region, and other creditor countries of lesser means, to go along with it.

"That is the strategy that most large debtors have followed after periods when they have been isolated internationally like Iraq," said Mr. Segal. "Normally, when that period of isolation ends, and a friendly government is reinstated, you reach a Paris Club restructuring before anything else."

Mr. Segal's research estimated that Iraq's total debt of $116 billion could be broken down as follows: $45.5 billion by the countries of the Middle East and Persian Gulf; $41.5 billion by the Paris Club; $5 billion by former Soviet bloc countries in Eastern Europe; and $9 billion held by other major countries, including China with about $5 billion. The remainder of the debt is held by private creditors. 

Of the $41.5 billion in Paris Club debt, the largest shares are held by Japan, Russia, France, Germany, the United States, Italy and Britain.

Mr. Segal said that Mr. Baker was hampered in his negotiations by the disclosure before his trip that the United States would punish some creditor countries that did not support the war by withholding construction contracts for the rebuilding of Iraq from their companies.

But Mr. Segal said this action did no more than cloud the atmosphere at the talks, and that the Paris Club countries would not be persuaded by such a small issue as construction contracts.

"The way most people saw this was that it was just a case of bad bedside manners," he said. "But I think a lot of it has blown over."