Iraq's Debt Relief: Procedure and Potential Implications for International Debt Relief

Prepared for Members and Committees of Congress

Following the ouster of the Saddam Hussein regime in spring 2003, Iraq’s external debt was
estimated to be around $130 billion. Reducing this debt to a sustainable level has been a priority
of the U.S. government. Since 2003, debt relief negotiations have taken place in a variety of fora
and led to the cancellation of a significant amount of Iraq’s external debt.
Iraq’s external debt comprised four components: Paris Club bilateral debt ($42.5 billion), non-
Paris Club bilateral debt ($67.4 billion), commercial debt ($20 billion) and multilateral debt ($0.5
billion). Debt relief negotiations first led to an 80% reduction of the Paris Club debt. The Paris
Club agreement also set the terms for non-Paris Club and commercial debt cancellation levels. A
provision of the Paris Club agreement is that Iraq cannot accept a debt cancellation agreement
with other creditors on more favorable terms for Iraq than those reached with the Paris Club.
Thus, Iraq is expected to receive no more than an 80% cancellation from all of its creditors.
Negotiations with non-Paris Club creditors are ongoing, and resolution of the commercial debt is
largely complete.
The negotiations and process of providing debt relief to Iraq may shed some light on the
approaches bilateral and corporate creditors take toward providing international debt relief to
middle-income countries who would not be eligible for the debt relief already provided to the
poorest countries. In light of Iraq’s experience, three new precedents appear to have taken shape:
(1) a willingness by the international community to grant a stay on the enforcement of creditor
rights to collect unpaid sovereign debt; (2) an increased flexibility in Paris Club debt relief
decisions; and (3) an unwillingness by successor regimes to claim that their debt is “odious” and
repudiate it.
This report will be updated as events warrant.

Iraq’s External Debt.........................................................................................................................1
Paris Club Debt Claims.............................................................................................................1
Non-Paris Club Debt Claims.....................................................................................................3
Commercial Debt Claims..........................................................................................................3
The Debt Relief Effort.....................................................................................................................4
Paris Club Debt Relief..............................................................................................................5
Evian Approach...................................................................................................................5
Iraq’s Paris Club Agreement...............................................................................................6
Non-Paris Club Debt Relief......................................................................................................7
Commercial Debt Relief...........................................................................................................9
Potential Policy Precedents for International Debt Relief.............................................................10
Granting a Stay on the Enforcement of Creditor Rights.........................................................10
Flexibility of Paris Club Agreements......................................................................................12
Implementing an Odious Debt Strategy..................................................................................13
Figure 1. Regional Distribution of Iraq’s Commercial Claims, 2005..............................................4
Table 1. Total Iraq Paris Club Debt, 2003.......................................................................................2
Table 2. Non-Paris Club Debt (Various Estimates).........................................................................3
Table 3. Paris Club Debt Relief as of September 2008...................................................................7
Table 4. Non-Paris Club Debt Relief as of September 2008...........................................................9
Author Contact Information..........................................................................................................15

Iraq’s debt relief has been a priority for both the Bush Administration and Congress. Debt relief is
important to U.S. interests for several reasons, including releasing funds to help support Iraq’s
budget, pay for Iraq’s security, and reestablish Iraq’s financial standing with international
creditors and the financial markets.
Iraq’s Saddam-era debt is estimated at $130 billion and has been the focus of numerous
negotiations over the past three years among bilateral, multilateral, and commercial creditors. 1
These negotiations led to an 80% reduction of Paris Club and commercial debt. Negotiations
with non-Paris Club bilateral creditors including Saudi Arabia and other Persian Gulf countries
are ongoing. The United States forgave its Saddam-era debt, worth $4.1 billion, in November


This report proceeds in three parts. The first provides a snapshot of the Iraq debt situation
following the ouster of the Saddam regime. The second discusses subsequent debt relief
negotiations and their resolution. The third presents three possible implications for future debt
relief cases that arise from Iraq’s experience. They are: (1) a willingness by the international
community to grant a stay on the enforcement of creditor rights, (2) an increased flexibility in
Paris Club debt relief decisions, and (3) an unwillingness by successor regimes to claim that their
debt is odious and repudiate it.

The precise dimensions of Iraq’s foreign debt obligations are unknown. This is due to
disagreements on what Iraq actually owes and how interest on this debt should be calculated (or if 2
it should be counted at all). Iraq’s external debt following the end of the Saddam regime was
approximately $130 billion. This debt comprised four components: official Paris Club bilateral
creditors ($42.5 billion), official non-Paris Club bilateral creditors ($67.4 billion), commercial 3
creditors ($20 billion) and multilateral creditors ($0.5 billion). The first three major components
are discussed below.
At the time of Iraq’s Paris Club debt relief agreement on November 14, 2004, it was determined 4
that Iraq’s total external debt to Paris Club countries was $37.15 billion, including interest. Later

1 The Paris Club is the forum where major creditor countries negotiate terms for restructuring or resolving official
government-to-government debt. It includes the United States and 18 other permanent members: Austria, Australia,
Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, Norway, Russia, Spain,
Sweden, Switzerland, and the United Kingdom. Other creditors are allowed to participate in negotiations on an ad-hoc
2 Creditor countries use different interest rates and levy different penalties for Iraq’s payment arrears. Hence, the debt
owed to each creditor can grow at different rates. In addition, Iraq could claim that it should not be expected to pay debt
(or interest) accrued after the United Nations Security Council imposed sanctions in 1990 that made it illegal for
financial institutions to process Iraq’s financial transactions.
3 Iraq’s debts to the World Bank and the IMF were cleared in 2004, largely by contributions from Paris Club donor
4 Iraq Paris Club Debt Treatment, November 14, 2004. Available at
countries.php ?IDENTIFIANT=397&P OSITION=0&P AY_ ISO_ ID=IQ&CONTINENT_ ID=o rien t_afric_ en &TYP E_T

IMF estimates put the figure at $42.5 billion.5 On July 10, 2003, the Paris Club issued a country-
by-country breakdown of its member states’ claims against Iraq. These figures are reproduced in
Table 1.
Iraq’s debt to the United States consisted of loan guarantees issued between 1983 and 1993 by the
U.S. Department of Agriculture for the sale of U.S. agricultural products to Iraq. Iraq defaulted on
$2.19 billion of these guaranteed loans in 1991, just prior to the first Gulf War. The U.S.
Department of Agriculture paid off the creditors and assumed the debt. By the end of the Saddam
regime, accumulated interest increased Iraq’s U.S. debt to approximately $4.1 billion.
Table 1. Total Iraq Paris Club Debt, 2003
(in U.S. $ millions, excluding interest)
Creditor Nation Debt Owed
Japan $4,108.6
Russia $3,450.0
France $2,993.7
Germany $2,303.9
United States $2,192.0
Italy $1,726.0
United Kingdom $930.8
Austria $813.1
Canada $564.2
Australia $499.3
Spain $321.2
Brazil $192.9
Sweden $185.8
Belgium $184.5
Finland $152.2
Switzerland $117.5
Netherlands $96.7
South Korea $54.7
Denmark $30.8
Total $20,917.9
Source: The Paris Club

5 Iraq: First Review Under the Stand-By Arrangement and Financing Assurances Review Staff Report; International
Monetary Fund, September 15, 2008.

The majority of Iraq’s external official debt is owed to non-Paris Club states. The IMF is the only
definitive source for non-Paris Club debt and it has not made a country-by-country breakdown of
this debt available. In the absence of such a breakdown, CRS has reviewed estimates compiled by
Jubilee Iraq, an affiliate of the Jubilee organizations which campaign for international debt relief.
These estimates are presented in Table 2. These are unofficial figures, representing only Jubilee
Iraq’s compilation of figures reported in the press, think tank reports, or official government 6
Table 2. Non-Paris Club Debt (Various Estimates)
(in U.S. $ million)
Creditor Nation Debt Owed
Saudi Arabia $30,000
Kuwait $27,000
China $5,800
Qatar $4,00
United Arab Emirates $3,800
Romania $2,50
Serbia $2,000
Turkey $1,80
Bulgaria $1,700
Jordan $1,30
Poland $564
Czech Republic $147
Morocco $32
South Africa $24
Hungary $17
India $1
Source: Jubilee Iraq
In 2003, Iraq’s debt to commercial creditors was estimated to be $15 billion. In 2005, after further
evaluation of claims by Iraq’s government, the figure was raised to $20 billion. Commercial
claims are geographically dispersed (Error! Reference source not found.) and most claims are 7
relatively small. Of all the claims received, 36% of the claims were less than $1 million and 37%

6 For the full Jubilee Iraq compilation, see
7 Meeting with Iraqs Commercial Claimants, Iraq Debt Reconciliation Office, May 4, 2005.

were between $1 and $10 million. U.S. dollar-denominated debt accounted for 72% of all claims, 8
with the remainder denominated primarily in Japanese Yen (17%) and in Euros (8%).
Figure 1. Regional Distribution of Iraq’s Commercial Claims, 2005
North AmericaOther
Middle East2%2%


Central and
Eastern Europe
12%Western Europe




Source: Iraq Debt Collection Office

Following the ouster of Saddam Hussein, the international community began the process of 9
helping Iraq rebuild its economy. An integral component of economic reconstruction following
any conflict is resolving old debts and regaining access to the international financial community.
Iraq, however, was a unique case. Unlike many of the world’s poorest countries, Iraq is
considered a middle-income country because of its substantial petroleum reserves. Iraq would
likely be able to service its existing debts once its petroleum industry was functioning. Many
analysts thus argued that Iraq appeared to be a good candidate for so-called “debt flow”
treatment, involving rescheduling its official debts until it had the capacity to repay instead of
cancelling them completely as is done for the poorest countries, which lack any natural resources
that can be used to generate revenue. Others asserted that if Iraq’s future oil revenues were used
to fund repayment of old debts, not enough would remain to fund its current and future economic

8 Ibid.
9 See CRS Report RL31944, Iraq's Economy: Past, Present, Future, by Jonathan E. Sanford.

Discussion of cancelling Iraq’s debt began soon after the ouster of the Hussein regime. Led by the
Bush Administration, a consensus was reached that Iraq would receive debt relief on terms that
were unique in light of its economic resources, but not unprecedented given the political situation.
Debt relief has been provided to various countries for political and economic reasons. The United
States, for example, has provided special bilateral debt relief to Egypt, Pakistan, Jordan, and
Poland, among many other countries.
The Paris Club is an informal arrangement among creditor countries to abide by a fixed set of
rules and principles for debt relief that have been agreed on by its members. Paris Club members
meet periodically to reschedule, and in some cases collectively cancel, the debts owed to them by
other countries. The U.S. share of any Paris Club debt relief must be appropriated by Congress.
Since the Paris Club was the most organized of all of Iraq’s creditors, and included the major
industrialized countries, it was able to start the debt relief negotiations and establish the
precedents that other bilateral and commercial creditors would need to follow.
In September 2003, the G7 Finance Ministers called on the Paris Club “to make its best effort to 10
complete the restructuring of Iraq’s debt before the end of 2004.” President Bush appointed
former U.S. Secretary of State James A. Baker III as his personal envoy on the issue of Iraq’s debt
in December 2003. Secretary Baker traveled to Europe, Asia, and the Middle East for discussions
with foreign government officials in countries open to providing some debt relief to Iraq.
The Baker appointment, and the ensuing supportive response from other Paris Club countries,
showed that the major creditor countries were interested in cancelling Iraq’s external debt even
though Iraq had the natural resources to eventually service its debts by itself. Prior to the Iraq
case, Paris Club debt cancellation (rather than debt rescheduling) was only available for the
poorest countries. Paris Club members began offering debt cancellation in addition to debt
rescheduling in 1988. At the 1988 Toronto meeting of G7 Finance Ministers, Paris Club members 11
agreed to extend to poor countries up to one-third forgiveness of their bilateral debts. Over the
next decade, the Paris Club gradually increased the amount of debt that it would be willing to 12
cancel from 33.33% in 1988 to 90% in 1999. Iraq, however, did not qualify for poor country
debt relief due to its substantial petroleum reserves. Thus, Paris Club members would need to
create a new framework, the Evian Approach, to cancel Iraq’s debts.
Strong Bush Administration support for Iraq debt relief likely contributed to the Paris Club’s
reshaping of its approach to debt relief in the runup to the 2003 Evian G8 Summit. The new
Evian Approach introduces a new strategy for determining Paris Club debt relief levels that is
more flexible and can provide debt cancellation to a greater number of countries then was
available under prior Paris Club rules.

10 Statement of G7 Finance Ministers and Central Bank Governors, September 20, 2003.
11 Many Paris Club policy decisions are decided during periodic finance ministers meetings of the G7 countries.
12 More information on Paris Club debt treatment options is available at the Paris Club website:

Instead of using economic indicators to determine eligibility for debt relief, as had previously
been done, all potential debt relief cases are now divided into two groups: the heavily indebted 13
poor countries (HIPC) and non-HIPC countries. HIPC countries will continue to receive
assistance under Cologne terms, which sanction up to 90% debt cancellation. All other countries
will be assessed on a case-by-case basis.
Under the Evian Approach, a country seeking debt relief first undergoes an IMF debt
sustainability analysis. This analysis determines whether the country suffers from a liquidity
problem, a debt sustainability problem, or both. If the IMF determines that the country suffers
from a temporary liquidity problem, its debts are rescheduled until a later date. If the country is
also determined to suffer from debt sustainability problems, where it lacks the current resources
to meet its debt obligations and the amount of the debt adversely affects its future ability to pay,
the country is eligible for debt cancellation. During the Iraq discussions, Paris Club members
determined that Iraq possessed an unsustainable amount of external debt, and began negotiating
to cancel Iraq’s debts.
On November 21, 2004, the United States and other Paris Club members agreed on a debt relief
program for Iraq providing a three-phase debt reduction of 80% of Iraq’s external debts. Going
into the Paris Club meeting to consider Iraq’s debt, the United States was reportedly pressing for
a 95% reduction of all of Iraq’s debt to Paris Club members, while the Europeans, led by France
and Russia, wanted only a 50% reduction. According to one press account, Germany agreed to
support a compromise figure of an 80% reduction, thus tipping the negotiations toward that 14
figure. According to the official Paris Club program, the terms of the Iraq deal are:
First Reduction: cancels 30% of the debt upon signing the bilateral agreements implementing
the Paris Club agreement;
Second Reduction: cancels an additional 30% after an IMF program is signed; and
Third Reduction: cancels the final 20% of debt on completion of the last IMF Board review of
three years of implementation of the IMF program.
When fully implemented, the Paris Club’s treatment of Iraq’s debt will reduce the total debt owed
to Paris Club countries from $38.9 billion to $7.8 billion. This remainder (20% of the original
total), will be rescheduled over a period of 23 years with an initial six-year grace period of
On December 17, 2004, the United States forgave $4.1 billion (half principal and half interest)—
100% of the debt Iraq owed to the United States. However, since the United States writes off debt
in net present value terms, not face value, the amount required was much less than the $4.1
billion. The fair market value of Iraq’s debt was determined to be $360 million by the U.S.

13 CRS Report RL33073, Debt Relief for Heavily Indebted Poor Countries: Issues for Congress, by Martin A. Weiss.
14 Manmohan Singh and Jochen Andritzky, “How the Iraq Deal Was Done,” Euromoney, September 2005.

Treasury and was appropriated in a reallocation of financial resources for Iraq approved by
Congress on September 29, 2004.
Unlike the United States, most Paris Club members waited until Iraq signed an agreement with
the IMF in December 2005 to implement their debt relief. Beginning in December 2005,
remaining Paris Club members formally implemented their Paris Club debt relief agreement. The
last Paris Club country to formally agree to a debt relief agreement with Iraq was Russia, which
granted a debt reduction of 60 percent as of end-2005 on a reduced stock of debt of $4.5 billion 15
on February 11, 2008.
These agreements commenced the first two stages of Paris Club debt relief. In accordance with
the Paris Club agreement under the new Evian Approach, 30% of bilateral debt would be
immediately cancelled following signing the bilateral agreement and 30% would be cancelled
following the signing of the IMF Agreement. The remainder of the debt would be cancelled
following the successful completion of the IMF program.
Table 3 provides additional information on Paris Club debt relief to date:
Table 3. Paris Club Debt Relief as of September 2008
in U.S. $ billion
Paris Club Creditors Nominal Debt Stock
Before debt restructuring $42.5
Debt relief to date $25.8
Of which:
First debt reduction, end-2004 $14.3
Second debt reduction, end-2005 $11.5
Outstanding $16.7
Source: IMF
In some country debt relief negotiations conducted by the Paris Club, non-Paris club members
participate on an ad-hoc basis. In the Iraq case, however, approximately two-thirds of Iraq’s debt
is held by non-Paris Club countries. Including those countries in the Paris Club negotiations may
have been unfeasible and could have made a resolution much more difficult.
Arab creditor countries were not included in the Paris Club discussions, yet Iraq’s Paris Club
agreement required Iraq to seek terms that are at least equal to the debt relief negotiated with

15 Iraq: First Review Under the Stand-By Arrangement and Financing Assurances Review Staff Report; International
Monetary Fund, September 15, 2008.

Paris Club members.16 It may prove difficult to obtain such a high rate of debt cancellation from
Iraq’s non-Paris Club creditors. Moreover, since Paris Club debt relief came with strings attached
in the form of IMF conditionality, it may be likely that non-Paris Club members will seek to
attach conditions to any debt relief themselves, possibly in the form of preferential access to Iraqi
oil, or other business and investment opportunities in Iraq.
During January 2004 meetings with representatives from Saudi Arabia, Kuwait, the United Arab
Emirates (UAE), and Qatar—four Persian Gulf countries that, combined, hold approximately $65
billion of Iraq’s debt—Secretary Baker received assurances that the Persian Gulf countries would 17
significantly reduce their Iraq debt holdings once a sovereign Iraqi government was established.
Many observers suggest that Iraq’s neighbors may want to wait on any final debt reduction until
they see whether the future government in Iraq will be friendly to them. Arab creditors that are
Iraq’s Persian Gulf neighbors might also want more formal political arrangements to resolve
Sunni-Shiite disputes in Iraq on terms these creditors (all Sunni-ruled countries) would find 18
sufficiently equitable. To date, the only Gulf country to complete debt relief for Iraq is the UAE. 19
On July 7, 2008, the UAE announced that it was fully writing off its remaining Iraq debt.
In fall 2006, the Iraqi government, the United States, and several international institutions
launched a development program to create an “International Compact with Iraq.” The objective of
the compact is to secure agreement from the Iraqi government to implement political and 20
economic reforms in exchange for increased Arab debt relief and international aid contributions.
U.S. Secretary of State Condoleezza Rice initially raised the issue of Iraqi debt relief during
discussions with Middle Eastern leaders in January 2007. In April 2007, Saudi Arabia reportedly
acknowledged that it would provide debt relief of 80%, in accordance with the Paris Club 21
agreement, although negotiations are continuing. Since then, however, there has been no
indication that debt relief is forthcoming from Saudi Arabia.
Iraq has resolved some of its smaller debts to non-Arab, non-Paris Club creditors. Iraq authorities
have signed agreement with nine non-Paris Club creditors. Of these countries, six provide debt
relief at Paris Club terms (Czech Republic, Hungary, Indonesia, Malaysia, Romania, and South
Africa) and three provided 100% debt relief. The latest agreement was signed with the countries
of the former Yugoslavia on January 21, 2008. According to the IMF, negotiations are under way
with 11 other non-Paris Club creditor countries, representing an estimated stock of debt of about

16 Iraq Paris Club Comparability of Treatment Provision, November 21, 2004.
countries.php ?CONTINENT_ ID=o rien t_afric_ en &DETAI L_DETTE_P AGE=4 &IDENTIFI ANT=3 97&P AY_ ISO_ ID
17 “Baker Secures Promises of Iraq Debt Relief from Gulf Oil States, Agence France Presse, January 21, 2004.
18 See CRS Report RL31339, Iraq: Post-Saddam Governance and Security, by Kenneth Katzman.
19 Iraq: First Review Under the Stand-By Arrangement and Financing Assurances Review Staff Report; International
Monetary Fund, September 15, 2008.
20 The International Compact with Iraq: A Shared Vision, A Mutual Commitment, Draft Outline. Document is available
%205%20Sep.pdf. See also, Final Report of the Iraq Study Group, December 2006, p. 27. According to the study
group,Several U.S. and international officials told us that the compact could be an opportunity to seek greater
international engagement in the country.
21 Barry Schweid, “Saudi’s Said Mulling Loan Relief for Iraq,” Associated Press, April 18, 2007.

$16 billion. Furthermore, a memorandum of understanding has been signed with China, which
holds a remaining stock of Iraqi debt of $8.5 billion.
Table 4 provides summary information on non-Paris Club debt relief for Iraq.
Table 4. Non-Paris Club Debt Relief as of September 2008
(U.S. $ billion)
Non-Paris Club creditors Nominal debt stock
(Concluded agreements only)
Before debt restructuring 9.4
Debt relief to date 7.5
Of which:
Full cancellation 0.2
Cash settlement 5.4
On Paris Club terms 2.0
Outstanding 1.9
Source: IMF
The final portion of Iraq’s debt is commercial claims estimated at around $20 billion. These are
outstanding commercial claims against various Iraqi guarantors that arose prior to the August 6,

1990 U.N. sanctions imposed when Iraq invaded Kuwait. The Iraqi government retained two U.S.

companies, Ernst and Young and Citigroup, to adjudicate these debt claims and to help negotiate
various settlements with small and large Iraqi creditors. The Iraq Debt Reconciliation Office was 22
established in Amman, Jordan in May 2004. On December 9, 2004, Iraq’s Ministry of Finance
posted an official query seeking information about commercial claims, including claims held by
financial institutions, outstanding against the Iraqi government.
On July 26, 2005, Iraq announced the terms for its commercial debt renegotiation. For small
creditors (less than $35 million), Iraq would settle claims through a cash buyback and
cancellation. For larger claims, Iraq would seek a debt-for-debt swap. For small creditors, the
cash purchase price would equal 10.25% of the outstanding claim up to a maximum of $4.3
million paid out. Larger creditors would receive, in line with the 80% debt cancellation
requirement established by the November 2004 Paris Club agreement, new bonds carrying a face
value of $200 for every $1,000 of their old debt. The new bonds are so-called “Eurobonds,”
arranged in London and trading in U.S. dollars. The bonds are guaranteed by the Iraqi
government, will pay an annual coupon of 5.8%, and are due to mature in 2028.
The Eurobonds have been welcomed by investors and the exchange appears to have been
successful. The bonds traded in the grey market prior to issuance at around 11% yield. This is an
optimistic sign for the Iraqi economy. Several developing countries, such as Argentina and Brazil,

22 The Iraq Debt Reconciliation Office.

were forced to pay much higher yields than Iraq did when they re-entered the bond market
following their own recent economic crises.
Iraq concluded its commercial debt settlement in July 2006. A total of $19.7 billion of Iraqi
commercial claims were settled as a result of four installments of the cash buyback offer for small 23
debt holders, and two debt-for-debt exchanges. Iraq reopened its commercial debt-restructuring
program on January 30, 3008. According to the IMF, the offer appears to be successful and results
should be published in the near future.

As Congress considers new international debt relief arrangements, several precedents created by
the Iraq case may be worth considering. In light of Iraq’s experience, three new precedents appear
to have taken shape: (1) a willingness by the international community to grant a stay on the
enforcement of creditor rights to collect unpaid sovereign debt; (2) an increased flexibility in
Paris Club debt relief decisions; and (3) an unwillingness by successor regimes to claim that their
debt is odious and repudiate it.
In the Iraq case, implementing a stay on the enforcement of creditor rights to use litigation to
collect unpaid sovereign debt was a major priority and was implemented by U.N. Security
Council Resolution 1483 shortly after the collapse of the Saddam regime. Implementation of this
stay occurred with very little debate over whether such a comprehensive debt shield should be
In fact, a debate over the general advisability of debt shield mechanisms for countries facing
economic crisis did occur between 2001 and 2003 at the IMF. At the time, there was concern that
several South American countries, including Argentina and Brazil, would default on their
international debts. During this debate, the U.S. Administration led the opposition to a
comprehensive debt shield mechanism and the proposal was eventually withdrawn. It appears that
after Iraq, however, such a debt shield mechanism is feasible if it is introduced in a political
forum such as the United Nations rather than an economic/financial one like the IMF, and that it 24
is an ad-hoc process, not attached to any formal mechanism for debt resolution.
Sovereign bonds (government issued debt) are the primary form of developing country debt.
These bonds are held by many types of investors, both large and small. The common issuance of
sovereign debt represents a major shift in in how developing countries structure their debt. When
countries ran into economic difficulties during the economic crises of the 1980s, their debts
consisted primarily of bank loans issued by a small number of commercial banks. It was

23 Iraq Announces Conclusion of Commercial Debt Settlement. Available at
24 Anna Gelpern, “What Iraq and Argentina Might Learn from Each Other, Chicago Journal of International Law,
Summer 2005.

relatively easy for the banks to work together with delinquent countries and arrange terms to
restructure the debt. There is now a much wider spectrum of investors in sovereign bonds,
creating much costlier and more difficult resolutions. However, outside of the Paris Club, there is
no formal mechanism to coordinate debt restructuring negotiations between creditors and the
debtor government.
To address these concerns, in 2001, the IMF proposed creating the Sovereign Debt Restructuring
Mechanism (SDRM) to help negotiate debt restructurings in general. Among other things, the
IMF’s proposal was designed to afford rights to defaulting countries similar to those afforded
bankrupt companies in the United States under Chapter 11 of U.S. bankruptcy codes. A stand-still
on debt payments was to go into effect, while countries renegotiated their debt contracts with
their creditors through a dispute resolution mechanism administered by the IMF. The debt stand-25
still was considered one of the most important components of the proposed SDRM. It also 26
proved to be the one of the most highly contested issues concerning the SDRM proposal.
The SDRM proposal was rejected by the Bush Administration, the private sector, and many
Members of Congress. The Bush Administration advocated a more decentralized, market-oriented
approach that would include clauses in sovereign bond contracts, known as Collective Action
Clauses (CACs), which would stipulate how the financial contracts would be resolved pending a
financial crisis or default.
A majority of commercial creditors also discouraged the establishment of the SDRM. For
example, the Institute for International Finance (IIF), a global association of financial institutions,
was concerned that an international bankruptcy court could inhibit investor confidence, delay
renewed access of debtor countries to capital markets that use the SDRM, and possibly lead to 27
increased global financial instability through contagion effects in other emerging markets.
According to the IIF, the SDRM also might encourage moral hazard by encouraging other
sovereign borrowers not to pay debts in order to receive stand-still protection.
The essential concern with the SDRM was whether the United States and the international
community should condone an official stay on creditor rights through a litigation shield such as
the SDRM. After two years of debate, the proposal was eventually bypassed at the spring 2003
IMF meetings, when the United States government threw its support behind including CACs in
new bond contracts instead of creating a new IMF function.
However, only a few months after these meetings, the United Nations Security Council Iraq
resolutions were passed, providing essentially the exact protections to Iraq that were rejected at
the IMF. Financial analysts note that immunizing Iraq’s debts from foreign claims through a U.N.
Security Council Resolution is a radical move in the history of sovereign debt negotiations. In the
past, the U.S. government has taken a rather hands-off stance that let the financial markets resolve
debt disputes. This approach, known as the “restrictive approach to state immunity,” and codified
through the Foreign Sovereign Immunities Act of 1976 (P.L. 94-583), established that foreign
states are not immune from jurisdiction regarding, among other things, commercial activity

25A New Approach to Sovereign Debt Restructuring: Preliminary Considerations, International Monetary Fund,”
November 30, 2001, available online at
26 Blustein, Paul, “IMF Cuts Disputed Clause from Debt Plan,” Washington Post, January 8, 2003.
27 Action Plan of the Institute for International Finance, Special Committee on Crisis Prevention and Resolution in
Emerging Markets, April 2002.

including foreign debt.28 Thus, the U.S. government typically allowed creditors to sue foreign
governments regarding debt claims, and remained uninvolved in matters between U.S. creditors 29
and foreign governments.
The Iraq case thus illustrates that the United States and the international community are willing to
shield a debtor from its creditors on an ad-hoc basis, case-by-case without a formal international
bankruptcy regime. This can be accomplished multilaterally through U.N. Security Council
Resolutions or bilaterally through executive orders. Since these measures were not taken in other
recent financial crisis-afflicted countries, such as Argentina or Brazil, it appears that policymakers
are only willing to use such measures selectively, and for countries that exhibit a perceived or
potential threat to U.S. and international security. This understanding is made more explicit by
implementing the stay on debt repayment through the United Nations, a political institution seen
principally as focused on international security, rather than the International Monetary Fund,
which is primarily a financial institution.
In addition to providing a precedent for a comprehensive debt shield, the Iraq case helped
institutionalize increasing flexibility in Paris Club debt restructuring treatments. Prior to Iraq,
Paris Club members adhered to a relatively strict set of rules to determine both which countries
would be eligible for debt relief and the level of that debt relief, based on their economic
situation. However, whenever a new situation arose where Paris Club members wanted to provide
debt relief, but existing rules would not support it, new rules were created offering deeper and
deeper debt reduction. Thus the Toronto Terms, introduced in 1988, begat Houston Terms in
1990, London Terms in 1991, Naples Terms in 1994, Lyon Terms in 1996, and finally Cologne
Terms in 1999, each offering increased debt relief.
Cologne Terms, part of the Heavily Indebted Poor Country Program, allow for up to 100% debt
cancellation for a select group of countries that the IMF and World Bank deem to be the most
heavily indebted. The prevalence of debt reduction in Paris Club operations has led to what some
have called the “slippery slope towards HIPCization,” as increasing amounts of debt cancellation 30
have been requested for countries on geo-political rather than economic grounds. Pakistan, for
example, is not a HIPC country, yet it is considered to be an integral partner in U.S. anti-terror
efforts. When debt relief was sought for Pakistan in 2001, the Paris Club negotiated a special ad-
hoc arrangement on near-Cologne terms even though Pakistan did not economically qualify to
receive such treatment.
Instead of continuing to treat special cases, like Pakistan, under ad-hoc terms, the Paris Club
formalized a new system of more flexible debt relief arrangements with Iraq under the new Evian
Approach. As discussed earlier in the report, following Evian, potential debt-relief cases are
divided into two groups, HIPC and non-HIPC. The 38 poor and indebted countries that are part of

28 For more information on state immunity, see CRS Report RL31258, Suits Against Terrorist States by Victims of
Terrorism, by Jennifer K. Elsea; and Tom McNamara, A Primer on Foreign Sovereign Immunity, Davis Graham &
Stubbs LLP, available at
29 Gelpern, p. 396.
30 Callaghy, Thomas M. “The Paris Club and International Economic Governance: Double Crisis and Debt,” in Brigitte
Granville and Vinod Aggarwal ed., Sovereign Debt: Origins, Management and Restructuring, Royal Institute for
International Affairs, 2003, p. 165.

the HIPC program will continue to receive debt relief under the terms agreed to at Cologne. All
other countries will be treated on a case-by-case basis with any debt relief determined by IMF
debt sustainability analysis, with an option for three-part phased debt relief such as Iraq is
The introduction of Evian terms was crucial for Iraq’s debt relief plan. “Without Evian in place,”
commented Euromoney, “it’s hard to imagine the Paris Club members would have signed off on a 31
deal as nakedly political as Iraq’s.” Some argue that the Evian Approach is unfair, and opens the
door even wider to political debt relief, using resources that could potentially go to increased debt
relief or foreign assistance to poor and developing countries. For example, Indonesia, Kenya, and
Georgia recently emerged from decades of authoritarian rule, and are saddled with extensive
government debt, yet they received nowhere near the level of international exposure that has been 32
given to Iraq. “It’s an outrageous double standard,” according to Salih Booker, the head of 33
Africa Action, a Washington-based lobbying group.
It appears that the new flexibility evidenced by the introduction of the Evian approach is
continuing. Following Evian, Paris Club members introduced even greater flexibility in 2005 by
allowing countries to buy back their debt, a policy that had previously not been allowed. In 2004,
Russia, using proceeds generated by record high petroleum prices, approached the Paris Club and
requested to buyback some of its debt. Germany refused to participate, scuttling a Paris Club deal.
A deal was eventually agreed on in May 2005 that allowed Russia to repay $15 billion in debts at 34
par. According to this agreement, Russia’s debts were paid ahead of schedule without requiring
a pre-payment penalty.
Following the Russia agreement, additional buyback deals were reached with Nigeria and Peru.
In October 2005, a deal was reached where Nigeria was allowed to buy back some of its debt at a
discount, leading to debt relief worth $18 billion and a total reduction of Nigeria’s Paris Club debt
from $36 billion to $6 billion. The Peru buyback, like Russia’s, was at par, and will lead to Peru
pre-paying $17 billion of its Paris Club debt.
As some analysts have illustrated, introducing flexibility into Paris Club arrangements was well 35
underway prior to its handling of the Iraq case. However, it appears that the precedent set by
Iraq may open the door to increased debt relief for middle-income countries. Combined with the
new willingness to engage in debt-buybacks, resolving international debt may be easier in the
coming years.
Some analysts have argued that Iraq’s debt is odious, and therefore may be repudiated under
international law. There are three generally agreed upon components of the legal principle of
odious debt: (1) the general population does not consent to the borrowing; (2) the proceeds do not

31 Manmohan Singh and Jochen Andritzky, “Paris Club Members Adapt to New Rules,Euromoney, September, 2005.
32 Joseph Siegle, “After Iraq, let’s forgive some other debts, International Herald Tribune, February 19, 2004.
33 Quoted in Sudarson Raghavan, “African Advocates to U.S.: Reduce Our Debt Like Iraqs,The Miami Herald,
February 20, 2004.
34 “Paris Club Reaches $15B ln Debt Repayment Deal With Russia, MosNews, May 13, 2005, available at
35 See Lex Rieffel, Restructuring Sovereign Debt: The Case for Ad Hoc Machinery, Brookings Institution Press, 2003.

benefit the general population or the state; (3) and the creditor knows both of these facts at the 36
time of lending. However, the concept of odious debt does not appear to be well established in
international law and has never been cited by either a national or international tribunal as reason 37
to repudiate a debt claim.
Repudiating Iraq’s debts under the concept of odious debts was raised by some Members of
Congress in 2003 in H.R. 2482, The Iraq Freedom From Debt Act, introduced by Representative
Carolyn Maloney. The bill, which was not enacted, called on the IMF and the World Bank to
cancel Iraq’s odious debt and called on Congress and the President to urge fellow Iraqi creditors
to cancel their owed debt as well.
Iraqi officials have steadfastly claimed that they would not seek repudiation under the odious debt
concept. In an interview with Euromoney in September 2004, Iraq’s Minister of Finance, Adil
Abdul Mahdi said:
Iraqs need for very substantial debt relief derives from the economic realities facing a post-
conflict country that has endured decades of financial corruption and mismanagement under
the Saddam regime. Principles of public international law such as the odious debt doctrine, 38
whatever their legal vitality, are not the reason why Iraq is seeking this relief.
Iraq preferred to seek a reduction of its debts through normal and official channels. The Paris
Club’s Iraq agreement, reached three months after the Minister’s Euromoney interview, provided
an 80% total reduction and set the parameters for the ongoing debt reduction efforts with non-
Paris Club and commercial creditors. This allowed Iraq to receive its debt relief without the
potential destruction of creditor relationships than can come about with a debt default.
In retrospect, it appears that an odious debt approach may have been difficult for Iraq since many
of Iraq’s debts were taken for economic development or commercial purposes and appear 39
legitimate. None of the debt in question was borrowed during the period when Iraq was under
U.N. sanctions, when large amounts of Iraq’s oil revenue were diverted for the construction of
Saddam Hussein’s palaces and other indulgences. It is also not evident that, at least to a degree
greater than in other countries, the proceeds of the development loans were diverted for personal
use or to fund oppression within Iraq.
Iraq’s refusal to use an odious debt approach begs the question: under what circumstances could
the odious debt principle be applied? In its current form, the odious debt doctrine, according to
one analyst, “offers no meaningful guidance to shape decisions on lending to emerging 40
markets.” One proposal is for the IMF or some other international body to assess a regime’s
legitimacy and make an odiousness determination, thus allowing any future government to
declare any sovereign debt incurred by the previous “illegitimate” regime odious and repudiate 41
it. Such a sanctions regime may act as an incentive to creditors, both private and public, not to

36 Todd Moss, Scott Standley, and Nancy Birdsall, “Double Standards, Debt Treatment, and World Bank Country
Classification: The Case of Nigeria,Center for Global Development, November 2004, p. 33, and Gelpern, p. 403.
37 Gelpern, pg. 406. See also the discussion in CRS Report RL31944, Iraq's Economy: Past, Present, Future, by
Jonathan E. Sanford.
38 Cited in Gelpern, p. 406.
39 CRS Report RL31944, Iraq's Economy: Past, Present, Future, by Jonathan E. Sanford.
40 Gelpern, 412.
41 Michael Kremer and Seema Jayachandran, “Odious Debt: When Dictators Borrow, Who Repays the Loan?” The

loan to problem regimes knowing that a successor government could legitimately repudiate the
former regime’s debts. U.S. foreign assistance to the new regime could also be made contingent
on repudiation of odious debts.
On the other hand, the United States, or other nations, may not necessarily agree with the
odiousness determination for various political reasons. It also may be difficult to make such a
determination while a problem regime is in place, especially if other forms of political and
economic statecraft are being employed.
However, given that the odious debt concept appears unusable in its current format, refashioning
the odious debt concept as a sanctions regime represents one possible way to reduce the flow of
financial resources to undesirable governments. Such a system would create additional incentives
for creditor governments and the commercial sector to avoid lending to these regimes by creating
the legal precedents necessary for a successor regime to repudiate so-called odious debt.
Martin A. Weiss
Analyst in International Trade and Finance, 7-5407

Brookings Review, Spring 2003.