In October 2004, representatives from the G-8 and 11 other countries will meet without fanfare or press coverage in a quiet room in the French Finance Ministry. It is unlikely that their lunchtime dessert will actually be a cake decorated with the stripes and green stars of the Iraqi flag, but they will certainly be intent on grabbing as large a slice as they can of the metaphorical cake in their minds. The outcome of their meeting will have tremendous significance for 26 million Iraqis.

Formed in 1954 to protect the interests of powerful creditors against the risk of poor countries default- ing on debts, the Paris Club has become the muscle enforcing the neo-liberal economic policies known as “the Washington consensus.” Although the Paris Club coats its rulings in a honeyed language of debt “forgiveness” and development aid, its aim is to further the financial interests of its members. The Paris Club was deeply divided over the 2003 invasion of Iraq. In the 1980s, however, its members were of like mind as, jockeying for Cold War influence and fearing the Islamic Revolution in Iran, they financed the regime of Saddam Hussein with some $21 billion of loans and export credits.

The loans helped to bankroll the Iran-Iraq war and the Anfal genocide and contributed to the 1990 economic crisis that spurred Saddam to invade Kuwait. For the next 13 years, when UN sanctions barred Iraq from trade and financial activities, the debts were forgotten. Then, a few days after the fall of Baghdad, as public buildings across the city were being looted and burned, the G-7 finance ministers held their annual meeting in the runup to the G-8 summit at Evian. Out of the blue, the issue of Saddam’s debt shot to the top of their agenda. Iraqi economists and activists raced to dig up details of the long-neglected debts and uncovered a shocking picture. The total amount of debt — including interest accumulated during the sanctions decade — was unclear, but plausible estimates put it around $120-130 billion, ten times Iraq’s expected export earnings in 2004. There was even evidence than some loans had been directly related to the purchase of components and the construction of factories that produced the kind of chemical weapons used at Halabja in 1988.

Clearly, much of this enormous debt qualifies as “odious” — it was assumed by a dictatorial regime to finance activities that, often to the lenders’ knowledge, were against the interests of the Iraqi people. Numerous experts, including Nobel Prize-winning economist and former World Bank president Joseph Stiglitz, endorsed the formation of an international debt tribunal would disqualify odious loans and enable fair negotiation between Iraq and legitimate creditors. But the Paris Club has refused to consider this approach. Instead, the cartel of creditors continues to insist on the status quo — recently rebranded as the Evian approach — whereby these hardly honest brokers decide how much an indebted country should repay and on what timetable. The repayment is linked to fulfillment of economic conditions laid down by the International Monetary Fund.

In December 2003, Republican heavyweight James Baker took on the role of Special Presidential Envoy on Iraqi Debt. In August, the Bush administration had sidelined a proposed Iraq Freedom from Debt Act in Congress, but Baker’s appointment suggested that at last the US was taking the issue seriously. When Baker visited Iraq in 1989, he had pledged to secure an additional $1 billion of US loans for the old regime. By March of 2004, however, despite jetting off to almost a dozen countries, he had not yet visited Iraq to consult with the people he was claiming to represent.

Iraqis have made their views very clear. Perweez Mohammed of the Patriotic Union of Kurdistan says: “The creditors’ cooperation enabled Saddam to preside over atrocities such as Halabja. Saddam never spent money for the benefit of the Iraqi people, just for himself and his followers.” Thousands of Iraqis have signed the Jubilee Iraq petition calling for writing off Saddam’s odious debt and dozens of them have played a key role in campaigning for this goal. Since the inception of the interim government on June 28, Iraqi officials have been speaking out with increasing confidence on the debt issue. The interim finance minister, Adil Abd al-Mahdi, told Gulf News: “We are asking for some major forgiveness, to wipe off at least 95 percent of the debt or 100 percent. We will have hard discussions with the IMF and the Paris Club in the coming months.” Central Bank Governor Sinan al-Shabibi says he is seeking “the biggest reduction ever.” This new assertiveness is a positive development, but Iraq will have a tough time facing down the Paris Club nevertheless.

The Paris Club discussed Iraq at its monthly meeting on June 11. One anonymous official told Reuters that the US was arguing for a 90 percent reduction, while Japan and Britain were talking about 80 percent, Russia 65 percent, and France and Germany 50 percent. These figures fit with numerous statements made by officials of the various nations over the last year. The implication is that the Club is likely to agree on a reduction of around 65-70 percent — and that is insufficient. With $40 billion of debt left on the books (and possibly much more if non-Paris Club creditors such as Bulgaria refuse to accept comparable terms) and a conservative 5 percent interest rate, Iraq would be required to pay $2 billion a year in interest alone, and more than double that when principal payments are included. Under even more conservative assumptions (including just 3 percent interest), Iraqi economist Ali Merza predicts that, with anything less than 77 per- cent debt reduction, Iraq will face a serious balance of payments gap that will have to be financed with new loans from 2004-2014.

The Paris Club members have made it clear that they intend to get a deal signed and sealed in 2004. A statement at the EU-US summit in Ireland on June 25 reiterated the creditors’ position: “Reduction should be provided in connection with an IMF program, and be sufficient to ensure sustainability taking into account the recent IMF analysis. We encourage governments within the Paris Club, and non-Paris Club creditors, to achieve that objective in 2004.” The October Paris Club meeting is likely to be decisive.

The danger is that, once the Paris Club has reached a consensus, the US will twist the arm of the interim Iraqi government until it signs a sub-optimal agreement and also accepts the IMF structural adjustment package upon which gradual debt reduction will be conditioned. It would be understandable if the interim government decides to invest its energy in fighting more immediate battles. Nevertheless, giving into the US and the Paris Club now could have very serious consequences as already insufficient resources for social spending are further depleted to finance debt repayment. Since April 2003, Iraq has paid $1.45 billion in reparations to Kuwait and others, more than the combined health and education budgets prepared by the Ministry of Planning for 2004. With at least $2 billion in debt service on top of continuing reparations payments, and with the social friction caused by IMF structural adjustment, it will be very hard to tackle the unemployment and devastated social services which are afflicting the Iraqi people and feeding crime, corruption and violence. The coming months are critical for informing the Iraqi people about the danger and supporting them in taking a strong stand — one which makes sense legally, morally, economically and politically — demanding a clean slate and, in particular, refusing to inherit any of the odious debt incurred by Saddam.

How to cite this article:

Justin Alexander "The Paris Club, the Washington Consensus and the Baghdad Cake," Middle East Report 232 (Fall 2004).

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