Introduction

Thank you for the invitation to speak today. Our minds are of course on the current carnage in Iraq, but while we cry and pray and hope for an end to the killings on both sides, that should not prevent us considering less visible threats to Iraq’s future. I’m going to talk briefly about one of the most serious threats which could hamstring the economy and limit Iraqi freedom irrespective of the composition of the future government. But it is a threat which Iraqis can tackle now if they present a firm and united position to the outside world.

The threat I’m talking about is Saddam’s foreign debt and war reparations. I’m going to quickly outline the background, discuss the position of the US and then explain the problems with their approach from the perspective of Iraqis.

Background

When Saddam took control of the Presidency in 1979, Iraq had savings of $36bn. Within a decade this had been transformed into a debt of over $70bn. Today, after thirteen years of sanctions during which interest accumulated, and war reparations were awarded, Saddam’s total unpaid bills stand at something like $164bn, although no one knows the precise figure and it could be even higher.

When you or I run up debts we usually have corresponding assets. A house to balance against our mortgage, a degree to set against our student loan. Iraq however has nothing to balance against the world’s worst debt burden, since the loans and credit financed Saddam’s regime through the Iran-Iraq war, the Al-Anfal genocide and right up until the invasion of Kuwait. In fact just nine months before the invasion of Kuwait, US Secretary of State James Baker was in Baghdad promising Tariq Aziz an extra $1bn of American credit.

My friend Ahmed Jiyad, now a UN economist in Uganda but previously one of Iraq’s debt negotiators, warned in 1988 that Iraq was going to face an insurmountable financial crisis in 1991 because of debt maturities requiring the repayment of over $20bn that year. This rarely mentioned fact sheds light on Saddam’s demand in July 1990 that the Gulf countries drop their claims and help Iraq pay off debts to non-Arab countries.

Negotiations to this effect in Jeddah failed, and a few days later Iraqi tanks rolled into Kuwait. Other factors, such as the low oil price, were at play, but the debt was central to the financial crisis which motivated Saddam’s second foreign war. In short, the suffering of the Iraqi people over the last twenty five years - during which over 2 million have been killed, the infrastructure has been devastated and human development indicators have deteriorated below those of Bangladesh – this suffering is intimately related to the very debt which threatens Iraq today.

What’s happening?

So what is being done in the face of this debt crisis? For most of 2003 the answer was very little indeed. Whenever we pressed Coalition officials they were unaware of the issue or felt that it could be ignored for the time being. Finally in December Bush appointed James Baker to fly around the world – going almost everywhere except Iraq – talking about debt. Bad reporting suggested that Baker had achieved a dramatic breakthrough to the benefit of Iraq, but the truth is rather different.

Baker merely secured the agreement of countries to negotiate the debt in a forum called the Paris Club, which is a self-interest cartel of the wealthiest creditors. Even on it’s own terms the Paris Club has a dismal record of failure, and from the perspective of poor indebted countries it has served only to keep them poor, indebted and under the thumb.

Baker and the Paris Club members have stated very clearly that they expect Iraq to sign a legally binding debt agreement this year. So that’s after the transition of sovereignty but before the Iraqi people have had the chance to vote. We can predict what this agreement will look like.

Firstly it will reduce the paper value of the debt by a certain amount. How much is unclear. France and Germany have said 50%, Russia has mentioned 65% and the World Bank 66%. It would be very surprising if it were higher than this.

If the best case scenario of a two-thirds debt reduction happens, it will only directly apply to the $42bn claimed by Paris Club members. Iraq would have to negotiate similar terms with the other creditors, some of which, such as Bulgaria and Hyundai, have forcefully stated that they would not accept a large reduction. Even if every creditor agreed to this two thirds cut, the remaining debt would be massive.

Assuming that Iraq’s economy recovers strongly, in 2007 the debt and reparations would still be twice GDP and over 4 times oil revenues. That places Iraq way ahead of other countries in the region, and it is even worse than Argentina which is currently in the middle of a severe debt crisis. In terms of debt service, even on a low 5% interest rate and a 20 year rescheduling, Iraq will be required to pay around $4bn a year in addition to reparations. This compares to Iraq’s combined health and education budgets which are just $1.5bn this year (and I should note in passing that Iraq has paid a similar amount - $1.5bn - in reparations over the last year).

The second aspect of the Paris Club agreement is that it will ignore the origins of the debt and the culpability of the creditors. As the Economist Magazine has recently said, the deal will be “on the basis of what [the Paris Club] judge to be Iraq’s ability to pay - not on the rightness of its having to do so.” But Iraqis are well aware of the illegitimacy of most of the debt and the damaging effect it has had on their recent history. In October I visited Iraq and consulted with 30 different parties and organisations. I found a real unity in their views. The full report is on our website, but let me give you a few representative quotes:

• Waleed Al-Hilli of the Al Da’wa Party told me “The Iraqi people had no say in the debts. All the creditors knew that Saddam was an oppressive dictator – everyone knew that, everyone.”
• Perweez Mohammed of the PUK said “Saddam never spent money for the benefit of the Iraqi people, but just for himself and his followers, and the creditors cooperation enabled Saddam to preside over atrocities such as Halabja.”
• Hajim Al Hassani of the Iraqi Islamic Party concluded “Iraq is not responsible for any debts which supported the regime’s war machine. Rather it is the creditors who should be paying compensation to Iraq.”

As it happens there is a principle in international law which formalizes the views Iraqis expressed to me. The Doctrine of Odious Debt states that when a regime contracts debts without the consent of the people and spends them in a way which is not beneficial and when the creditors are well aware of the situation, then they are personal debts of the regime and do not pass on to the state once it is free.

This legal principle was formulated in the 1920s by Alexander Sack, a Russian legal expert working in exile in Paris. He disputed Soviet Russia’s repudiation of the debts of the Tsarist regime, and argued that in general debts must remain when governments change. However, he argued that there are exceptions when the conditions of odiousness were clearly met. The doctrine was applied a number of times in the last century, including in Cuba, Poland and Costa Rica. However, in the last fifty years when the Paris Club and the IMF have ruled the roost, many countries such as post-Apartheid South Africa have been bullied into paying odious debts.

This brings us onto the third and possibly most dangerous aspect of a Paris Club agreement. In return for debt relief the Paris Club requires countries to follow economic policies prescribed by the International Monetary Fund. The idea is that high levels of debt result from economic mistakes, and therefore debt relief should be dependent on correcting those mistakes.

This sounds fair in principle, however in practice IMF policies are often incredibly damaging, as has been the case in Argentina and across Africa. The Paris Club has made it clear that it wants the transitional government to sign up to an IMF program this Autumn as part of a deal on debt. The the debt relief “would be stretched out over three years with each years’ reduction linked to meeting performance targets under an IMF program.”
IMF economic conditions are likely to include the standard package of rapid privatisation, trade liberalisation and fiscal austerity which could be very damaging to Iraq, as they have been for post-Soviet Russia and many other countries. Dr Saleh Yasir of the Iraqi Communist Party warned me that “IMF conditions neglect the social consequences of economic policies. An IMF program would create more social tension which might destroy the transition to democracy.”

The IMF’s view of macroeconomics focuses on foreign investors and international markets and will take little consideration of Iraq’s huge social needs such as 50% unemployment. Furthermore, IMF conditions – whether good or bad - will restrict Iraqi independence, meaning key economic decisions will continue to be made in Washington not Iraq. Oil Minister Ibrahim Bahr Al-Uloum personally favours IMF-style policies but told me proudly: "We are Iraq! We were the cradle of civilization and should be the richest country in the Middle East, so I don’t want to see anyone controlling our economy by any means."

Alternative

So what is the alternative? Jubilee Iraq argues that the fairest way forward, both for Iraq and for legitimate creditors, is an arbitration tribunal. Imagine what it would be like if, as an indebted individual, a group of banks and credit card companies divided up your belongings and threw you in a debtor prison. Thankfully that doesn’t happen to individuals anymore because the law protects them from creditors, and even companies and local government are protected under insolvency laws. However, countries are still at the mercy of creditors, particularly the Paris Club.

An arbitration tribunal would redress the imbalance. Rather than creditors playing judge, jury and executioner, both Iraq and Saddam’s creditors would be able to argue their cases to a jointly agreed and independent panel of judges. A first stage in the process would be deciding which debts are legitimate, and even CPA economic advisor Marek Belka has admitted that “90% of Saddam’s debt is war related”. Repayment terms for the remaining non-odious debt - for example relating to productive infrastructure projects dating from the before Saddam came to power - could be repaid on terms which would not hamper Iraq’s economic recovery or diminish its freedom.

So why is the US not promoting this approach? A cynic might suspect that Washington is embarrassed about how Reagan and Bush senior backed Saddam until 1990. Perhaps the White House would rather not remind anyone of Baker’s $1 billion pledge to Tariq Aziz. The British government may also want to avoid discussion of Falluja 2, a chlorine plant which the CIA identified as a key component in Iraq's chemical weapons program and which Colin Powell mentioned in his speech to the UN in February last year. This factory was built secretly by a British company in 1985 underwritten by the Export Credit Guarantee Department and hence is part of Saddam’s debt to Britain.

A cynic might further surmise that an Iraq with a reduced, but nonetheless significant, burden of debt will remain dependent on foreign aid, presumably much of it from Washington. With his eye on US basing rights and control of oil fields, Bush may prefer a weak, indebted Iraq that it can control to a debt-free Iraq which could stand on its own two feet. To prove the cynics wrong, Bush and Baker will have to deliver much more than a poor Paris Club deal that reinforces the status quo.

If creditors refuse to place their claims under the light of an arbitration tribunal, then Iraq will be justified in repudiating those debts. Creditors might try to bully Iraq by claiming that repudiating odious debt would threaten future credit ratings. Yet the opposite is true, since a debt-free Iraq would be much more able to repay future loans, as a recent report by Fitch Ratings demonstrates. Even the editors of the Wall Street Journal concur. Not otherwise known for their forgiving attitude toward debtors, they wrote last year that: "We wouldn't blame Iraq’s leaders if they decided that some of those financial obligations are indeed odious. And given that this is such an extreme case, international lenders probably wouldn't hold it against them for long.”

To this end Jubilee Iraq is working for the elimination of the debt and the war reparations – since it is clearly unjust for Saddam’s victims in Iraq to pay reparations for his crimes outside Iraq. We are building international support and developing arguments to encourage and empower Iraq’s leaders to take a strong stand and not cave into the Paris Club, as so many countries have done in the past to their long term detriment.

I have faith in the resilience and courage of the Iraqi people to achieve peace, democracy and prosperity. But they have enough problems to tackle as it is, and should not have to pay Saddam’s bills as well.