The NYT fronts with news that the U.S. Coalition Provisional Authority is going to give up some power in order to attract donors to the cause of Iraqi reconstruction. We’ll leave the “I told you so” work to others.
Instead we’ll focus on the discussion of debt: $120 billion dollars, in addition to “tens of billions” in unpaid war reparations. The NYT says the World Bank and international funds aren’t going to pony up the loans until that debt is settled. We wondered about this just a few days ago. Much of the debt is owed to France, Germany and Russia, who will almost certainly demand a debt payment plan before they begin participating in any reconstruction effort.
It’s possible the the United States will flex its muscle and force a default to prevent these nations from being paid: Iraq accumulated this debt by breaking the UN embargo, after all. On the other hand, a default would damage the already stuttering Iraqi economy, and the United States would be cutting off its nose to spite its face. That makes a default unlikely.
Instead, the debt will be restructured. This isn’t much better. Ideally, Iraq would arrange to pay the interest on the debt until it is back on its feet — like getting a forbearance on your student loan. That won’t happen, though: again, the gang from Bretton Woods wants to see that debt reduced before they make any meaningful loans.
This dovetails into last week’s spat in the U.S. Congress over a bill offering Iraq $20 billion in aid — a number of Republican Senators mutinied, and demanded that half that amount be converted into a loan. This makes good political sense for the Senators: with cutbacks everywhere in the U.S. budgets, it’s hard to sell a massive foreign aid package to constituents. Unfortunately, a loan would mean exacerbating Iraq’s debt problem.
That means that Iraq will almost certainly have to start paying off its debts — and it will be a terrible burden. “But what about all that oil,” you ask? Iraqi oil won’t close the gap — the UN has $1 billion in contracts under the oil-for-food program, and the infrastructure just can’t handle the required output. The World Bank itself issued an assessment document, acknowledging “it is currently not possible to predict offsetting expenditures on principal and interest payments on Iraq’s very sizeable external debt.”
Someone has to put down their gun, or Iraq will not get the money it needs. This should make the upcoming donor summit in Madrid very interesting.
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