Nations ponder Iraq's 'odious' debt millstone

By COLIN DONALD Herald correspondent

LONDON - Deep disagreement over Iraq's crippling debt burden is expected to reanimate old quarrels and undermine progress at the Iraq donors conference, which meets for two days from Thursday in Madrid.

After the United States Senate last week unexpectedly defied the Bush Administration by converting US$10 billion ($16.8 billion) of his US$20.3 billion Iraq rescue package into a loan, to be negated only if other countries cancel their debts, the US is likely to increase pressure on fellow donors to release Iraq from its burden.

But other major creditor nations, including France, Germany and Russia are insisting that Iraq pays back the money, albeit under easy terms agreed by the Paris Club group of creditor nations.

Already pressure from the Americans on the issue at the recent G7 meeting in Washington has prompted the German Finance Minister Hans Eichel to vow; "We do not only expect to get our money back, we will get our money back."

Estimates of the debt incurred by the Saddam regime, mainly before the 1990 invasion of Kuwait, stand at around US$150 billion, though if reparations from the invasion of Kuwait are included, the figure rises to about US$350 billion.

The most prolific donors were, in descending order, the neighbouring Gulf states, Japan, Russia, France and Germany.

Experts agree that servicing even US$80 billion in debt would cripple a reasonably prosperous nation, but in Iraq's case the extent of the burden raises the spectre of post World War I Germany, where a new political regime was strangled by punitive measures.

Although the Paris Club nations, including the US and Britain, have agreed to freeze debt discussions pending an improvement in Iraq's security and infrastructural situation - envisaged at the "end of 2004" - as always with Iraq diplomacy, the substantive discussions are taking place behind the scenes.

"The debt issue is a crucial part of the process of rebuilding Iraq to be discussed in Madrid," says Nile Gardiner of the Heritage Foundation, a Washington think tank whose alumni are highly placed in the Bush Administration and the State Department.

"Unless a more permanent solution is found, Iraq faces 100 years of debt, it will be impossible for it to get back on its feet.

"It's very hard for those European Governments who were propping up the Saddam regime with loans to justify their demands," he said.

The Iraq debt issue has seen the emergence of an unlikely coalition of interests between White House hawks and traditional Paris Club opponents like the British debt relief advocates Jubilee, who are demanding that an independent international body be set up to administer Iraq's debt problem, in which the creditors are barred from setting the terms.

Meanwhile much of last week's Congressional resistance to President George W. Bush's Iraq reconstruction package, which totals US$87 billion with provision for military operations, has been expressed as anger at Iraq's other creditors.

In the House of Representatives and in the Senate, there was anger that billions of taxpayer funds were being poured into Iraq while countries that opposed US intervention exert pressure to extract money.

The emerging US attitude to Iraq's debt hangover is based on the concept of "odious debt", which claims that a new Government, and its taxpayers, should not be held responsible for the sins of a previous dictatorship.

As Richard Perle, former chairman of the Pentagon's Defence Policy Board has put it: "The debt accumulated under Saddam should be forgiven entirely because it did not benefit the people and they should not be burdened by it."

Apart from the dangers of precedent, the main counter-argument used by Iraq's major creditors, is that, despite Iraq's sufferings, its potential oil revenues make it a less deserving candidate for debt forgiveness than many Third World countries.

"We know the current situation is not ideal and we are not pressing for repayment," said Marie Masdupry, a spokeswoman for the French Foreign Ministry.

"But when the time comes France has to make a decision. Iraq is not a poor country, and we will be waiting with the other creditors."

Edward Truman of Washington's Institute for International Economics, calculates that Iraq will only be able to service interest on US$80 billion, or 60 per cent less than it now owes. The Madrid conference will be an important indicator of where the political advantage lies in regard to the debt issue.

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More than 150 countries are expected to attend the Madrid conference.

Spain's Finance Minister Rodrigo Rato said that US$15 billion ($25.25 billion) to US$20 billion would be a reasonable goal for the meeting.

Japan is pledging US$1.5 billion, Britain US$900 million, the European Union US$230 million.

Spain said it would provide $US300 million for Iraq reconstruction through 2007, and South Korea has offered US$200 million over the same period.

Herald Feature: Iraq