France, Germany tepidly agree to help reduce Iraq's foreign debt

Nation owes $120 billion

Bush wants Paris Club countries to forgive 90%


PARIS - Former Secretary of State James A. Baker III received a tepid commitment from France and Germany yesterday to help reduce Iraq's towering foreign debt, a legacy of Saddam Hussein's ruinous wars and the crippling economic sanctions that followed.

The French did not offer to go beyond their previously announced plan to negotiate a debt-reduction plan for Iraq within the framework of the Paris Club, a group of 19 industrialized countries that have jointly worked to alleviate the financial obligations of over- indebted countries since 1956.

"We agreed to reduce the Iraqi debt burden within the mechanism of the Paris Club if possible in 2004," Baker told reporters in the courtyard of the Elysee Palace after meeting with President Jacques Chirac. Chirac made no comment.

In Berlin, after talks between Baker and Chancellor Gerhard Schroeder of Germany, a government spokesman, Bela Anda, said: "Germany and the United States agree that a solution to the debt question is essential for the reconstruction of Iraq."

But another spokesman said only that the United States and Germany would continue to hold talks over Washington's decision to bar countries such as France, Germany and Russia from bidding on reconstruction contracts in Iraq worth about $18.6 billion. The three countries opposed the U.S.-led invasion.

Reducing Iraq's debt is critical to rebuilding Iraq's devastated economy.

Without clearing the country's books of some of the estimated $120 billion in outstanding loans, governments and companies will be reluctant to invest the amount of money needed to get the Iraqi oil industry back on its feet. In addition, much of any oil revenue the country generates would have to go toward interest payments.

This month, President Bush named Baker as his special envoy to address the debt problem. Baker negotiated the restructuring of Latin America's mountain of debt in the 1980s.

His trip is the opening phase of what will be a marathon effort to pare the Iraqi debt from what Paris Club members and other creditors are readily willing to give.

The Bush administration would like to see Paris Club countries cancel as much as 90 percent of the Iraqi debt due them, treatment that in the past has been reserved for so-called heavily indebted poor countries, mostly aid-dependent nations in Africa. With the world's second- largest proven oil reserves, Iraq is unlikely to qualify for that description.

The best deal the Paris Club has ever cut with a developing country was a 66 percent debt reduction for the former Yugoslavia after the ouster of President Slobodan Milosevic.

But the Paris Club holds less than half of Iraq's outstanding debt, and without substantial write-offs by the country's other creditors, even that deal would leave Iraq with a hobbling burden of old loans.

French officials said there had been no effort to tie a more aggressive debt reduction to lucrative reconstruction contracts in Iraq, from which French companies have been excluded.

Schroeder, however, is expected to press Baker for a reversal of the U.S. decision to exclude German companies from reconstruction contracts in return for cooperation on more aggressive debt relief. The German leader said last month that he favors forgiving some of Iraq's debt to aid economic recovery.

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