WSJ, The Importance of Debt Relief

[Laurie Mylroie]

Wall Street Journal
REVIEW  OUTLOOK
Indebted to Saddam
Debt relief is more important to Iraq than donations.
Monday, October 27, 2003 12:01 a.m. EST

Yesterday's rocket attack on the Al-Rasheed hotel in Baghdad will no doubt
dominate this morning's headlines, in part because of the narrow miss of
Deputy Defense Secretary Paul Wolfowitz. But the bigger news in the long run
is still likely to be the weekend's Madrid donor conference and the progress
it represents toward a self-governing Iraq.

We'll save a full tally for another day, but consider what's happening on
the donor and debt fronts. In one sense the 70 nations in Madrid were a tad
stingy in coughing up about $13 billion for Iraq, much of it in the form of
loans. Our former best friends, France and Germany, contributed zip and Arab
nations offered only a modest amount. The better news is that many small and
less financially flush states contributed--Vietnam offered rice and Sri
Lanka promised tea.

Nonetheless, the $33 billion total aid package, including $20 billion from
the U.S. that Congress is expected to approve, will give the Iraqi economy a
nice immediate boost. But the best news is that the conference is over and
now the far more important consideration of what to do with Iraq's debts can
begin. Although Iraq is potentially a rich, rich country, its economy cannot
prosper unless it attracts private capital. And no investor is going to
shovel in that capital until Iraq's debt is under control.

The best current guess on Iraq's debt comes to $150-to-$200 billion. Worse,
Iraq also needs somewhere in the neighborhood of $10 billion a year over the
next five years for rebuilding power plants and other reconstruction. And
worse still is that these amounts must be handled in a way that does not
decimate Iraq's domestic operating budget, which needs to run in the
neighborhood of $13 billion a year.

The donor contributions will relieve some of this pressure and oil revenue
should cover the operating budget. The hooker here is that although
estimates for oil revenue are around $13-$18 billion for the next several
years, 5% of any oil revenue must go to the United Nations for reparations
payments. Simply put, things look tight.

All of which explains why proper debt relief is so important to get Iraq's
economy humming again. Debt restructuring involves four somewhat flexible
parts: a haircut to the amount owed, the size of interest payments on
remaining debt, the grace period during which no payments are made, and the
length of time before the debt is extinguished.

Obviously, these parts are related. A big haircut could call forth higher
interest payments and vice versa, while a long grace period might require a
shorter repayment period, and vice versa. There are thus lots of ways to
produce a reasonable package. The Bush Administration says it plans to seek
substantial debt reduction.

To our mind, that would mean a haircut of 80%, interest of 5%, a grace
period of five years and a maturity of 20 years. Big numbers, sure, but it
is hard to feel sorry for global creditors who lent to Saddam Hussein's
regime. A substantial haircut is also important to persuade balky
Congresspersons that U.S. money will go to Iraqis and not to pay off French
and Russian debt.

The sheer size of Iraq's debt has prompted some people to call for
repudiation under the doctrine of odious debt. This doctrine has two
attractions. It relieves Iraqis from debt burdens undertaken by a hideous
tyrant for hideous purposes, and it puts future creditors to other hideous
tyrants on notice that such debts might go unpaid.

But a complete repudiation would also have costs, notably to Iraq itself.
The main point of economic reconstruction is to restore Iraq's access to
global credit markets, and creditors are never thrilled to see contracts
repudiated. Future creditors--especially private ones--would be encouraged
to see Iraq making at least some payments on existing debt. Just as
important, a repudiation of this magnitude would rattle debt markets and
cause risk premiums to rise.

The best solution is a balance that liberates a newly democratic Iraq from
most of the burden of Saddam-era debt but also helps it to lure new private
foreign capital. Iraq's economy needs some breathing room to get private
capital in and working, and a generous but sensible program of debt
reduction is the crucial next step.

Saddam Ally at Rashid Hotel?, Wash Times

[Laurie Mylroie]

October 27, 2003
The Washington Times
Saddam ally an insider at hotel hit by rockets
By Paul Martin

BAGHDAD - A contractor supplying kitchen staff and secretaries for the
Al Rasheed Hotel, the scene of yesterday's rocket attacks, was allied to
Saddam Hussein's security services and might have been providing
intelligence to the anti-U.S. resistance, an Iraqi informant said yesterday.
The hotel is one of the most sensitive sites in Baghdad, serving as
office and residence to top coalition officials as well as many members of
the Iraqi Governing Council.
Resistance fighters fired a barrage of rockets into the hotel yesterday,
killing an American colonel and wounding 17 persons. Deputy Defense
Secretary Paul Wolfowitz, who was staying at the hotel, was unhurt.
The informant, who works with the newly trained Iraqi police, detailed
his charges about a fifth column in the hotel kitchen in a letter to U.S.
coalition officials almost two months ago but appears to have been ignored.
The Washington Times turned over another copy of the letter to a
lieutenant colonel in the U.S. Army's 1st Armored Division yesterday and was
told it would be investigated.
The informant, who identifies himself fully in his letter but declined
to have his name published, focuses his charges on Muslel Muhammed Farhan
Al-Dilemi, 53, the manager of the Al-Tamoor Trading Co. which provides
services to the hotel.
Mr. Al-Dilemi used to meet with [Saddam´s] heads of security,
intelligence and ... most of the Ba'ath Party officials, the Sept. 2 letter
says, adding that the walls of his office are decorated with photographs of
him posing with top Ba'athist officials.
The letter says Mr. Al-Dilemi placed several people with jobs in the
hotel kitchen and staffed the hotel with a number of beautiful secretaries
for whom he arranged sexual liaisons.
His people are the ones who get the hotel kitchen food ... and he gets
half of what they get on a daily basis, said the letter, implying that Mr.
Al-Dilemi was running a food-smuggling racket.
It added: He already knows which the important floors are - such as
floors 8, 9, 10 and 13 - and also that most of the Governing Council people
live at the hotel.
Mr. Wolfowitz is reported to have been sleeping in a room on the 13th
floor when the rockets struck early yesterday.
The letter claims that members of the hotel management are in league
with Mr. Al-Dilemi. A hotel manager - named in the report - ensured Mr.
Al-Dilemi got the best contracts from the hotel during the Saddam era and is
still working there, the letter says.
Who knows what information is being passed to the [pro-Saddam
resistance] fighters? the informant said yesterday, suggesting that the
most recent attack might have been avoided if he had been taken seriously.
It's obvious that only an insider could have told the attackers that
Mr. Wolfowitz was in the hotel, and that he was on the 13th floor, the
informant concluded.
That was disputed by Brig. Gen. Martin E. Dempsey of the 1st Armored
Division, Baghdad's effective military commander.
He told reporters he believed the attack had been planned for two months
and that the rockets had missed their targets because of an inaccurate
propulsion system.