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.
