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Capital Markets

Why Iraq's debt deal makes sense

Iraq's finance minister, Ali Allawi, argues that debt relief with its official and commercial creditors is crucial to restoring stability to the country

Allawi: debt relief is key
to Iraq's future stability

IN JULY, THE Republic of Iraq announced the terms on which it intends to settle the approximately $20 billion of Saddam-era claims held by its commercial creditors.

Although this is a large number, it represents only a small fraction of the colossal debt stock that was one of Saddam's grisly legacies. In the late 1970s when Saddam seized power, Iraq had about $40 billion in international monetary reserves. By the time he was deposed in 2003, this had dissolved into more than $125 billion of liabilities.

More than $40 billion of Iraq's debt is held by the governmental creditors grouped in the Paris Club. Iraq negotiated with the Paris Club last November the terms of a settlement involving a cancellation of 80% of Paris Club claims and a rescheduling of the balance over a 23-year period. As part of this agreement, Iraq undertook to offer other creditor groups, including both non-Paris Club bilateral creditors and commercial creditors, a settlement that was comparable, in present-value terms, to that agreed with the Paris Club.

The terms announced in July for the settlement of claims held by commercial creditors are strictly comparable to the Paris Club deal. Creditors holding a smaller aggregate amount of Iraqi debt – and these constitute about 85% of the overall number of commercial claimants – will be given an opportunity to sell their outstanding claims back to Iraq (principal together with accrued interest) for a purchase price of 10.25 cents on the dollar.

This represents the net present value of the Paris Club terms translated into a lump-sum cash settlement. Creditors with larger aggregate claims will be invited to swap their claims for new debt instruments of the Republic of Iraq having a comparable value.

Widely different views have been expressed about the appropriate treatment of Iraq's Saddam-era debts. Some have argued that all of this debt, in view of its provenance, should be classified as odious and cancelled outright. Lend to a despot, they say, and you should expect repayment only from the despot. If a country manages to free itself from the incubus of an odious regime, the citizenry should not be forced to carry the burden of that regime's immoral extravagances for generations to come.

Some holders of these claims have offered a different view. A sovereign borrower with Iraq's potential oil wealth, they argue, may need a deferment of its payments, but certainly not a significant write-off of the debt. They point to other recent sovereign debt restructurings, some of which did not call for write-offs, as apt precedents for strategies to address Iraq's debts.

Conventional sovereign debt management precedents are largely inapplicable to Iraq's situation. In no case in modern history has there been such a direct relationship between debt and security. The closest analogy is Germany after World War II, where a post-conflict country with vast economic potential was given massive debt relief as a means of promoting national and regional stability.

The hard realities are these:

  • continued instability in Iraq might result in unimaginably high costs for the region and for the international community generally;

  • stability in Iraq cannot be achieved unless Iraq's economic reconstruction programme prospers;

  • reconstruction will not only consume all of Iraq's internally generated resources for many years to come, it will need massive investment from abroad;

  •  that investment will not materialize if Iraq remains smothered under a visibly unmanageable debt burden.

The conclusion? Iraq's debt burden must be substantially eliminated, very quickly, as one crucial step in restoring stability. I do not for a moment want to suggest that debt relief is a sufficient condition for social and political stability to return to Iraq. But it is certainly a necessary condition.

The costs of Iraq's continuing instability are felt every day by much of the world's population, not just by the countries that have troops deployed in Iraq or have joined the list of bilateral donors. Total oil production around the world is about 82 million barrels a day. If a destabilized Iraq adds, on average, only $2 to the price of a barrel of oil, then more than $1 billion is being paid every week by the oil-importing countries of the world as the price of Iraq's instability.

These were the considerations that influenced Iraq's compromise settlement with its Paris Club creditors last November. That settlement calls for a comparable treatment of all other creditor groups, including both non-Paris Cub bilateral creditors and commercial creditors. Iraq is, on this basis, vigorously tackling the gargantuan debt stock left by the Saddam regime.

Ali Allawi is minister of finance of the Republic of Iraq

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