U.S., Key Allies Discuss Debt Relief

The world’s wealthiest countries agreed Saturday on the need to reduce or restructure Iraq’s massive foreign debt, but they insisted on giving the United Nations a central role in setting the rules of postwar reconstruction.

The agreements reached by the United States and key allies, including war critics France and Germany, help pave the way for international participation in a rebuilding effort expected to cost as much as $100 billion over several years.

They also suggest that the Bush administration has decided to relinquish some degree of control over postwar decision-making to the U.N. Security Council, the International Monetary Fund and the World Bank.

“We are all agreed on the need for a further Security Council resolution, and on the engagement of the IMF and the World Bank” in rebuilding Iraq, said Gordon Brown, Britain’s chancellor of the exchequer. “We also agreed today on the importance of addressing the debt issue.”

The bargains were struck in closed sessions Friday and Saturday by officials from the Group of 7 industrialized nations -- the U.S., Britain, France, Germany, Italy, Canada and Japan. They were subsequently endorsed by the IMF steering committee, which is meeting in Washington this weekend in tandem with its counterpart at the World Bank.

A communique issued by G-7 finance ministers and central bank governors said the nations “recognize the need for a multilateral effort to help Iraq.” It called for a U.N. Security Council resolution on reconstruction, and the beginning of discussions on granting debt relief to Iraq.

But potentially troublesome details were left unresolved, including the extent of Iraqi debt relief, whether it would involve canceling loan balances or relaxing repayment terms, how the reductions would be allocated among nations, and the precise role of the U.N., IMF and World Bank in overseeing reconstruction.

“We were not trying to write a U.N. resolution,” Brown said. “There are many issues, including what the international financial institutions might do, that could be the subject of that resolution.”

Still, officials said the agreements represented an important diplomatic breakthrough. The Bush administration’s efforts to make the case for debt relief and set the stage for IMF and World Bank intervention had been resisted by France, Germany and other allies, in part because of U.S. reluctance to cede decision-making power to the United Nations.

Estimates of Iraq’s debt -- the amount it owes international lenders -- range from about $60 billion to as much as $130 billion, depending on whether accrued interest is included. Among its biggest creditors are Saudi Arabia at $25 billion, Kuwait at $13 billion, and France and Russia at $8 billion each.

In addition, other countries and commercial interests have lodged more than $200 billion in compensation claims for goods and services provided to Iraq and for reparations from the 1980-88 Iran-Iraq and 1991 Persian Gulf wars. Nearly $60 billion is also owed under contracts signed by Saddam Hussein’s government for future sales or services, including oil drilling deals.

IMF Managing Director Horst Koehler said it was “a bit premature to judge” whether Iraq’s creditors would be asked to write off their IOUs from Hussein’s government or simply agree to make payback terms more accommodating.

Koehler said the international community needed to collect more data about the extent of Iraq’s obligations before it could set the terms of debt relief. “Certainly, it will be an element of a more comprehensive process,” he said.

U.S. Treasury Secretary John W. Snow said G-7 officials wanted to determine “how to proceed with the resolution of the debt, recognizing that the Iraqi people cannot and should not bear the burdens of those current, very large debt levels.”

Finance ministers said they would refer the matter to the Paris Club, a group of 19 sovereign creditors that includes the G-7 nations, as well as Russia and several other countries that have lent substantial sums to Iraq.

Although Iraq sits atop the world’s second-biggest oil reserves, its annual oil revenue will be limited to about $20 billion for the next few years because of production limitations. That’s not enough to cover the interest payments on its obligations, let alone finance government operations or underwrite reconstruction initiatives expected to cost $20 billion annually.

Some Iraqi debt relief advocates have said the country’s burden needs to be reduced by 75% or more to give it a chance of rebuilding its economy after three decades of war, sanctions and financial mismanagement under Hussein.

The decision to help Iraq was hailed by organizations that have been pressing rich nations to provide more debt relief to the world’s poorest countries, most of which are in sub-Saharan Africa.

“If it’s fair to cancel the debt of Iraq because of the brutal regime of Saddam Hussein, we should look toward the debts in African countries that were also incurred by brutal regimes,” said Marie Clarke, national coordinator of Jubilee USA Network, a coalition of more than 60 religious and nonprofit groups.

The agreement on IMF and World Bank involvement removes another obstacle to reconstruction. The institutions ordinarily play key roles in coordinating post-crisis intervention, but they have been kept on the sidelines in Iraq because of tensions among member nations.

U.S. officials lobbied aggressively in recent days for the IMF and World Bank to start making assessments of Iraq’s reconstruction needs and providing technical assistance to interim authorities. But officials at the two institutions balked, saying they needed authorization from their governing boards to proceed. France and Germany, among others, indicated that they were opposed as long as other issues remained in dispute, including the U.N.’s supervisory role.

Snow said the G-7 ministers unanimously supported IMF and World Bank involvement in the planning process. But the accord apparently did not include an authorization to provide loans or grants to Iraq’s new government.

“We agreed that the international financial institutions ... should provide technical assistance, should lend their expertise in Iraq and should undertake a preliminary needs assessment study,” he said.