Commentary: Iraqi Debt: Fast-Track the Restructuring

The staggering load must be lightened, and quickly, to ensure a recovery

Lurking beneath the furor over continued casualties and the lack of even basic services in Iraq is a sleeper issue that could prove just as important to the nation's future: Iraq's crushing debt load, estimated at $216 billion. Without substantial relief -- and soon -- any new government would start out a financial cripple, unable to tap global markets or the World Bank for new capital, and overly dependent on the largesse of the U.S. and other donors.

So how much should Iraq repay -- and who should get it? From superhawk Richard N. Perle on the right to Britain's Jubilee Research on the far left, calls grow for renunciation of Iraq's loans, war reparations, and oil exploration contracts signed after the invasion of Kuwait. "The debt accumulated under Saddam should be forgiven entirely because it did not benefit the people, and they should not be burdened with it," Perle says. On the other side, creditors such as the Gulf States, France, Germany, and Russia say the potentially oil-rich country should pay most of what it owes.

The issue is a flashpoint in Congress, where some are incensed at pouring billions in taxpayer funds into Iraq while nations that opposed the U.S. invasion get debts paid. They would add to Iraq's burden by converting $20.3 billion in American reconstruction aid into a loan. "In the long term, Iraq will be a prosperous nation and has the ability to repay America a portion of these costs," said Senator Susan M. Collins (R-Me.) at a recent hearing.

DANGER. None of these alternatives is workable. Writing off all the debt because the Saddam regime was odious would set a precedent that could be used whenever any corrupt dictator is ousted. (And again, when the coup leaders are in turn deposed.) "You have to worry about the danger to the international financial system if you allow countries to renounce debt on the grounds that the previous government was not legitimate," warns Michael Kremer, a Harvard University economist.

But it's clear that Iraq can't service its current debt -- and the U.S. should not add to it. Today, Iraq's debt amounts to perhaps 10 times its gross domestic product. German reparations after World War I were only double GDP yet proved so oppressive they helped spark World War II. And there's plenty of precedent for slashing a nation's debt when it becomes too onerous. The Paris Club, a group of major country creditors, trimmed the Federal Republic of Yugoslavia's burden by two-thirds in 2001. Poland and Egypt both got 50% writedowns a decade ago.

NO CHOICE. Iraq may need far more relief. Former U.S. Treasury official Edwin M. Truman, now at Washington's Institute for International Economics, calculates that, with a projected $20 billion in export earnings, Iraq could service interest -- but not principal -- on $80 billion in debt. But even that 60% haircut may not be enough. Will creditors accept less than that? "They don't have any choice," Truman says. "It's not as if anybody is going to get paid very much."

The world community is slowly coming to that conclusion. Iraq's major creditors have already agreed to give Baghdad a free ride until the end of 2004 on its $127 billion or so in loans. The Paris Club and G-7 group of industrialized nations hope to complete a debt workout by that time. Finance experts say they can't move any faster, because it could take months just to figure out exactly how much Iraq owes and to whom. Creditors like this slow track: If the Iraqi economy improves while they dicker, Baghdad can pay back more.

But the debt overhang can only slow Iraq's recovery. Washington must push to get the debt workout on a fast track -- and must ensure that far more than 60% of the debt is eliminated. As for the $57 billion in contracts signed in the past decade, mostly for energy exploration that was to take place after sanctions were lifted, many should simply be ditched. And the the United Nations Compensation Committee should whittle down an estimated $32 billion in war reparations going primarily to Kuwaut. So far, the U.S. can't guarantee Iraqis a steady source of electricity or physical security. But it can make major strides to bolster the country's financial security.

By Stan Crock

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