Downsizing
Saddam's Odious Debt
Justin Alexander,March 2, 2004
(Justin Alexander works with Jubilee Iraq,
a London-based organization
advocating for Iraqi debt relief.)
In a surprise move on December 5, 2003, George W. Bush named James Baker as
a special envoy charged with seeking "the restructuring and reduction" of
$130 billion in foreign debt piled up by the regime of Saddam Hussein. Until
Baker's appointment, the United States and the international community had
largely sidestepped this minefield, pleading uncertainty about the size of
the debt, the need to focus on more pressing matters or the fact that only a
sovereign Iraqi government can hammer out debt relief agreements in the end.
Since Baker picked up the debt portfolio, however, discussions are happening
at a frenetic pace, with the former secretary of state jetting off to
Europe, Asia and the Middle East to jump-start the conversations.
How did the deposed Iraqi regime, sitting as it did on the second largest
oil reserves in the Persian Gulf, come to owe such a staggering bill? In
brief, loans approved by many other countries financed the regime during its
bloody and expensive war against Iran from 1980-1988, through the genocidal
Anfal campaign against the Iraqi Kurds and right up until Iraq invaded
Kuwait in 1990. As hundreds of thousands of Iraqis were killed and Iraq's
once vibrant economy went into a tailspin, Saddam Hussein's government
converted a $36 billion cash reserve into an enormous foreign debt. After
the conclusion of the Iran-Iraq war, a dire economic and fiscal crisis in
Iraq, including the annual $3 billion cost of debt service, was the
immediate motivation for the invasion of Kuwait. The 13 years of
comprehensive economic sanctions which followed, during which time Iraq
could not make payments on the loans because it had no legal source of
foreign currency, caused the debt to increase through interest to its
present level. The UN ceasefire resolution after the 1991 Gulf war added war
reparations to the already crushing financial load.
Upon the announcement of Baker's mission, White House Press Secretary Scott
McClellan staked out the moral high ground, telling reporters that "the
future of the Iraqi people should not be mortgaged to the enormous burden of
debt incurred to enrich Saddam Hussein's regime." Some journalists
immediately pointed out the special envoy's potential conflicts of interest,
including his senior partnership in the law firm Baker Botts, which
represents the government of Saudi Arabia, the country claiming the largest
amount of debt. In response, Baker agreed to forego earnings from clients
with obvious connections to the debt. Others argued that Baker's track
record on debt relief is dubious. As treasury secretary under Ronald Reagan,
he developed the unsuccessful Baker Plan which provided poor, indebted
countries with new loans to service old ones -- provided that these
countries adhered to damaging economic policies prescribed by the
International Monetary Fund. Those with good memories recalled that in 1989,
when he was secretary of state, Baker met in Baghdad with Tariq Aziz, then
the Iraqi foreign minister, and promised to increase US lending to Iraq to
$1 billion in the ensuing year. Still others commented wryly that the Texan
lawyer had been summoned yet again to clean up a Bush family mess, as if his
mission were primarily an exigency of American electoral politics.
But the problem of the debt burden imposed upon Iraq by its imprisoned
former dictator is real and severe. The more important measures of the
success or failure of the Baker mission, and the administration's
intentions, will be the extent to which Baker tackles the core of the
problem and the extent to which he consults Iraqis about their country's
economic needs. For all of his international travels, the Republican master
diplomat has yet to visit Iraq.
TALKING ABOUT TALKING
Media reports on Baker's itinerary to date have often given the misleading
impression that the countries he visited had written off Saddam's debt on
the spot. In fact, the agreements that Baker has secured, while important,
are only agreements to start negotiating.
In the five weeks between December 16, 2003 and January 22, 2004, the former
secretary of state went on a whistlestop tour of world leaders, visiting ten
of the former Iraqi regime's major creditors in Europe, Asia and the Gulf.
He appeared to receive a universally positive reception, and was given a
further boost by Saddam's capture a few days before his first meetings with
French President Jacques Chirac and German Chancellor Gerhard Schroeder.
Those meetings produced a joint statement to the effect that "France,
Germany and the United States agree that there should be substantial debt
reduction for Iraq in the Paris Club in 2004." The Paris Club is an informal
roundtable of major creditor governments, including the so-called G-8
countries, whose role, according to its website, "is to find coordinated and
sustainable solutions to the payment difficulties experienced by debtor
nations." Paris Club negotiations normally end in agreements to reduce and
defer a poor country's loan payments dependent on strict conditions -- not
forgive them outright. Still, the US-French-German statement, coming after
the bitter transatlantic disagreements over the legality and necessity of
the Iraq invasion, was received internationally as a public sign of
rapprochement. Similar statements favoring a standard Paris Club deal
followed in Italy, Britain and Russia.
The next leg of Baker's journey took him to the Far East. Behind the scenes,
Japan had been the most resistant of Iraq's creditors to a Paris Club deal,
preferring to extend a moratorium on repayments for a few years, in the hope
that Iraq's economy would recover to a point at which it could fully service
the debt. So the Japanese foreign ministry's statement after Baker's
conclave with Prime Minister Junichiro Koizumi was a kind of breakthrough:
"Japan would be prepared to eliminate the vast majority of its Iraqi
debt...in the context of a Paris Club agreement." Chinese Premier Wen
Jiabao's agreement was "a little bit less definitive," as Baker put it in
the February 11 Washington Times, but was followed by an announcement that
"China is considering [the possibility that it may] write off Iraq's debt
[because] we are sympathetic to the humanitarian situation." A planned trip
to South Korea was canceled for reasons that are unclear (though probably
because the bulk of the Korean claims are held by companies such as Hyundai
rather than the government).
Baker arrived in the Gulf on January 20 and secured commitments from Qatar
and the United Arab Emirates to write off "most of" the debt incurred by the
former Iraqi regime with their treasuries, according to statements from
their respective state news agencies. Kuwait was a little less forthright,
with Prime Minister Sheikh Sabah Al Ahmad Al Sabah merely saying after his
meeting with Bush's emissary that "Kuwait is willing to begin negotiations
regarding this issue." The prime minister stressed the need for an Iraqi
government with which to negotiate and, as per Kuwait's long-standing
position, insisted that war reparations owed to Kuwait under the 1991
ceasefire resolution were a separate issue entirely. In Saudi Arabia, the
kingdom's de facto ruler Crown Prince Abdallah said that he was ready to
enter into negotiations "to substantially reduce the Iraqi debt." Will all
these talks about downsizing the debt actually ameliorate the problem, or
only lead to more talking?
SELF-INTEREST SOCIETY
Baker appears to be optimistic. In a speech at the Center for Strategic and
International Studies (CSIS), a center-right Washington think tank, the
special envoy explained the agenda behind his globe-trotting. "What I have
asked of the major creditors is agreement on three principles. First, that
Iraq cannot be reconstructed successfully without debt reduction. Second,
that any reduction must be substantial, or a vast majority of the total
debt. And third, that we must begin now to have any chance to complete the
project in 2004." He added that his remit did not include war reparations or
privately held debt, and emphasized that "Iraq's debts are simply too
onerous and the issues too complicated and too urgent to wait...until a new
Iraqi government is formed."
But Baker's reliance on the mechanism of the Paris Club is not a good sign.
The Paris Club is a self-interest society, in which creditors attempt to
salvage as much as they can from a country in danger of defaulting on debt
payments. Yet the $130 billion debt left by the Baathist regime is so vast
that the technically correct service payments would probably exceed Iraq's
entire annual revenue. A Congressional Budget Office (CBO) study released in
January points out that the current Iraqi budget only allows $200 million
annually for debt service, equivalent to just $10 billion of debt at an
extremely low 2 percent interest rate. The only way the regime's creditors
can hope to retrieve anything is by substantially reducing the size and
changing the schedule of their claims.
By how much will the Paris Club reduce the debt load? Baker has been careful
not to cite a figure, saying, reasonably enough, that "the exact size of the
reductions is the most difficult issue, and you cannot put it up front if
you want to have any hope for diplomatic progress." The consensus appears to
be that the burden will shrink by about two thirds, though the Paris Club
has not yet officially agreed upon this amount. Yugoslavia's debt was
reduced by two thirds after the demise of the Slobodan Milosevic regime, and
World Bank President James Wolfensohn has given this figure as appropriate
for Iraq. At the recent meeting of the G-8 countries in Florida, Russian
Finance Minister Alexei Kudrin appeared to confirm the figure, saying: "The
Paris Club conditions [agreed upon for Afghanistan] will be applied in Iraq,
but in the Iraqi case it is 65 percent, not 80 percent." At the donor
conference in Abu Dhabi on February 28, the Iraqi interim planning
minister, Mahdi Hafedh, told reporters that "in principle we have a 60
percent reduction," but later retracted the statement, apparently prompted
by the US. "My remarks have been misunderstood," said Hafedh."I did not mean
to imply there is a specific percentage of debt reduction at this time....
[It] will of course have to be agreed upon by negotiations among the
parties."
FALLING SHORT
The Paris Club only holds about a third ($40 billon) of the debt claims
being made of Iraq. The Club always requires debtor countries to seek
comparable debt relief terms from other creditors, but has no legal
authority to require other creditors to follow its lead. Some creditors seem
adamant that they will not agree to this scale of debt relief. The Korean
company Hyundai, which is claiming about $1.1 billion, has stated: "We are
100 percent confident that Hyundai will eventually redeem all of its
outstanding income from Iraq." Eastern European countries such as Bulgaria
and Romania -- each of which claims about $1.7 billion -- have also been
insistent about repayment. In the best-case Paris Club scenario, assuming
that all the other creditors are in agreement, the debt might be reduced to
about $45 billion. This amount may sound significant, but on top of it must
be added $28 billion and climbing in reparations, as well as new loans to
Iraq that are being contracted to fund the huge reconstruction operation.
CSIS has argued that "any plan that does not include reparations, and that
results in Iraq owing more than $35 billion overall, is unwise." That is
less than half of the amount expected to remain owed to Saddam's creditors
after the best-case Paris Club deal. The CBO study constructed various
scenarios to demonstrate "how sensitive Iraqi reconstruction funding is to
the debt issue," including worst-case scenarios which "leave no funds in the
Iraqi budget for capital investment and produce substantial shortfalls in
the government's ability to meet its day-to-day operating expenses." Debt
relief as designed by the Paris Club is not based on consideration of the
economic and social needs of the indebted country, but on fixing debt at a
level which will maximize debt service revenues for the creditors over the
long term. There is no way for Iraq to begin to service $130 billion of
debt; without debt relief, therefore, it will default and the creditors will
receive nothing. But even after a reduction to $45 billion, Iraq might still
have to "sustain" regular payments of $4-5 billion a year. Such
"sustainable" debt payments would divert a quarter or more of government
revenues away from essential social spending and reconstruction.
ODIOUS AND DANGEROUS
Aside from falling short in financial terms, the kind of Paris Club deal
being brokered by James Baker has two major problems. First, it completely
ignores the issue of whether the claims against Iraq are legitimate in the
first place. Second, it will require Iraq to follow the dictates of the IMF,
which will devalue Iraqi democracy and could be socially devastating.
There is considerable controversy about whether the Gulf countries' claims
represent genuine debts. Iraqis maintain that the Gulf states made grants to
assist the deposed regime in the war with Iran, in order to protect
themselves from the perceived external threat from Iran and the perceived
internal threat of Islamic revolution. Certainly, no official loan documents
have been produced by Gulf countries to prove that the funds they provided
were intended to be repaid. Even if such documents do emerge, they will not
address the most serious question of legitimacy, namely, that loans made to
support Saddam Hussein's aggression are what is known in international law
as "odious."
The doctrine of odious debt states that when creditors lend to a dictatorial
regime which they know is not using the loans to benefit the population,
then debt payment cannot be demanded of those people once they are free.
Iraq, which was an increasingly prosperous country until Saddam came to
power, expanded the military and invaded Iran, offers a remarkably clear
case where the doctrine should be applied. Iraqis are firm on this point. As
Perweez Mohammed of the Patriotic Union of Kurdistan put it to a rapporteur
for Jubilee Iraq: "The creditors' cooperation enabled Saddam to preside over
atrocities such as Halabja. Saddam never spent money for the benefit of the
Iraqi people, but just for himself and his followers." As for the creditors,
Hajim al-Hassani of the Iraqi Islamic Party adds that "the Gulf countries
should not receive a single dinar. The Iraqi people lost hundreds of
thousands of lives because of the Iran-Iraq war, which would probably have
ended much earlier without the money they provided."
Marek Belka, the former Polish finance minister who organised the Madrid
donor conference in October 2003, has estimated that "about 90 percent of
Iraq's virtual debt is war-related," while L. Paul Bremer, the chief
civilian administrator of the US-British occupation authority, attributed
the debt before Congress to "Saddam's economic incompetence and aggressive
wars." Yet the Paris Club refuses to consider whether loans might be odious,
and Baker has not yet said anything on the subject.
Typically, Paris Club debt relief is conditional on the acquiescence of
debtor countries in IMF-recommended "structural adjustment" schemes.
Describing a possible Paris Club plan for Iraq, Lex Rieffel from the
Brookings Institution wrote in the February 6 Miami Herald that, after
initial rescheduling until 2005-2006, debt reduction "would be stretched out
over three years with each years reduction linked to meeting performance
targets under a new IMF program." The experience of countries such as
Argentina, where such IMF programs have been disastrous, should be taken as
a warning. The IMF's toolkit of rapid privatization, trade and capital flow
liberalization might exacerbate unemployment and poverty, contributing to
political instability, and create a new class of corrupt oligarchs, as was
the case when Russia's Soviet-style economy was overhauled in great haste.
Even if one believes that IMF policies are likely to be beneficial, their
imposition by force would rob Iraq of an important aspect of sovereignty.
The interim oil minister, Sayyid Ibrahim Bahr al-Uloum, tends to favor IMF
policies, but says with pride: "We are Iraq! We were the cradle of
civilization, and I don't want to see anyone controlling our economy by any
means."
FAIREST WAY FORWARD
James Baker has made significant progress in preparing the way for a Paris
Club agreement on relieving Iraq of the obligation to repay some of Saddam's
debt. More importantly, however, Baker has not yet addressed the view of
Iraqis and many others that most of the debt claims are illegitimate. If the
Bush administration is genuinely committed to empowering Iraqis to build a
peaceful, prosperous and democratic nation, then it should unconditionally
write off American-held debt and reparations claims. Bush should further
instruct his special envoy to work alongside Iraqis for a just solution to
the debt and reparations problem. The fairest way forward would be
transparent international arbitration -- an "odious debt" tribunal -- to
determine which loans benefited the Iraqi people and which merely underwrote
the wars and domestic repression of Saddam Hussein's regime.
Why is the US not promoting this approach? A cynic might suspect that
Washington is embarrassed about how the administrations of Reagan and the
elder George Bush backed Saddam until 1990. Perhaps the White House would
rather not remind anyone of Baker's $1 billion pledge to Tariq Aziz. A cynic
might further surmise that an Iraq with a reduced, but nonetheless
significant, burden of debt will be dependent on foreign aid, presumably
much of it from Washington. With his eye on the quiet negotiations over what
prerogatives the US military will have in Iraq after the June 30 dissolution
of the occupation authority, the younger Bush may prefer a weak, indebted
Iraq that it can control to a debt-free Iraq which could stand on its own
two feet. To prove the cynics wrong, Bush and Baker will have to deliver
much more than a Paris Club deal that reinforces the status quo.
If creditors refuse to place their claims under the light of an odious debt
tribunal, then Iraq will be justified in repudiating the debt. Creditors
might try to bully Iraq by claiming that repudiating odious debt would
threaten future credit ratings. Yet the opposite is true, since a debt-free
Iraq would be much more able to repay future loans. A February 26 report by
Fitch Ratings, a US-British credit rating company, estimated that even if
the debt was reduced by 90 percent to $14 billion -- far more than the Paris
Club is likely to offer -- Iraq would still only qualify for a B+ credit
rating, four notches below investment grade and on a par with Ghana and
Senegal. Something far more dramatic is needed, and only a tribunal or a
repudiation based on the odious debt argument seems to fit the bill. Even
the editors of the Wall Street Journal, not otherwise known for their
forgiving disposition toward debtors, concur. They wrote in April 2003: "We
wouldn't blame Iraq's leaders if they decided that some of those financial
obligations are indeed odious. And given that this is such an extreme case,
international lenders probably wouldn't hold it against them for long."
-----
Jubilee Iraq's field report from Iraq, "Paying for the Executioner's Bullet:
Iraqi Views on Debt and Reparations" (November 2003), is accessible online
at http://www.jubileeiraq.org.
[Home] [english version] [What's a new] [interventi]