Brad Setser says, correctly, that New York Times reporter Craig Smith's puffing of the Iraq debt deal is silly. He's right. Does Craig Smith not understand the real issues? Or is he hoping that taking a dive to puff up his sources will get him better access in the future? We report, you decide:
Posted by DeLong at November 27, 2004 03:32 AM | TrackBackBrad Setser's Web Log: The Times is overselling the impact of the Iraq debt deal: [T]he Bush Administration wisely sought to work through the existing institutions for granting debt relief (the Paris Club), not to work around them. It based its case for debt relief on the grounds that Iraq has more debt than it can pay, not on the harder to win argument that all of Iraq's debt is illegitimate (If Saddam's debt is illegimate, why was Russia stuck with the Soviet Union's debt? Not an irrelevant question since Russia is an important creditor of Iraq). The Evian communique last year even laid the groundwork for a deal by calling for developing new Paris Club rules allowing greater flexibility for middle-income countries.
Good job, all around. You might even say the Bush administration decided to frame its cals for debt relief in a way that passed the global test.
What I have trouble swallowing is the hyperbole in Craig Smith's article, namely the idea that writing off a bunch of debt that was never going to be paid somehow is a crucial milestone in Iraq's reconstruction. Writing a large chunk of the debt off is a necessary thing to do at some stage, but it is not going to change anything on the ground right now. Statements like "Clearing the liabilities from Iraq's books is considered almost as important to its future as defeating the insurgency because the country cannot hope to attract investors while carrying the current amount of debt" are just ridiculous overstatements. US aid flows to Iraq have not been blocked by a debt overhang. Private investors won't suddenly flood Iraq, even into the oil industry: they don't want to invest long-term in a country whose future political structure is still so undefined. Any private long-term investment in the current climate would come with an extraordinarily high risk premium, and effectively require Iraq to sell its politically sensitive future oil production on the cheap.
Indeed, in a sense, nothing has changed with the debt deal. Before the debt deal, Iraq was paying nothing on its debt of $125 billion (using the IMF's estimate, not the estimate in the NYT article). After the deal, Iraq won't be paying anything for the first three years on a smaller debt load (interest on Iraq's debt is being deferred, as is principal). Most new aid to Iraq still should be in the form of grants, not new loans.
The real reason for the debt deal is laid out later in the article. It was something that everyone could do to help Iraq on the cheap...
We want Iraq's debt erased.
We are very deep in debt to much of the world.
Posted by: Elaine Supkis at November 27, 2004 05:08 AMWe want Iraq's debt erased.
We are very deep in debt to much of the world.
Posted by: Elaine Supkis at November 27, 2004 05:31 AMI have to say I don't understand the structuring of the debt deal. To my eye (and I actually know a bit about this sort of thing), the amount of debt forgiveness looks too big and the deferral period too short.
All the media comment seems to take it for granted that "Iraq could never pay back more than a tiny part of this debt". Well, why did anybody lend it then? In fact, Iraq could pay back nearly all of the face value of this debt, for the simple reason that it is a country which is sitting on top of a big reserve of a very valuable liquid.
What Iraq can't do is pay back anything at all right now, because its economy is not in a good enough state to make any use of its oil reserves. That is a problem which is unlikely to be solved at all in three years, probably not in five and still not fully in ten. I'd have liked to have seen a smaller amount of principal forgiveness and a longer deferall.
Posted by: dsquared at November 27, 2004 08:23 AMBecause the debt mainly exist because they were fighting a war against Iran and the lenders didn't want Iraq to loose.
Posted by: c at November 27, 2004 12:48 PMHow could debt forgiveness be looked at as anything but a good thing, but I wonder what was the real deal. Governments forgive debt in return for what? The forgiving countries must have gotten something in return. Was an agreement made allowing these governments to participate in the receonstruction of Iraq despite not having sent troops? American and foreign businesses still look at Iraq as an economic opportunity, although the likelihood diminishes every day because of the real problem, security. I doubt the deal is as altruistic as it appears at first glance and it fails to confront the the key issue in Iraq, i.e. security, if that is even possible.
Posted by: Bill Jensen at November 27, 2004 12:52 PMBill -- my two cents on what other governments are getting out of the deal: a) France and Germany preferred to forgive debt than to send troops -- they were able to do something to help maintain something of a relationship with the US/ the Bush admin at low cost to themselves; b) the chance of getting something paid back, same as with any debt deal -- Iraq wasn't going to pay $125 billion, it might pay $25 billion; c) some of the europeans tried to get the US to be more willing to forgive more debt (or to pay for the World bank to forgive debt) in Africa, both because of their ties to Africa and NGO pressure to do more; d) the Russians certainly seem interested in making sure their oil companies can invest in Iraq (they had some pre-existing contracts). Not sure what they got, though -- clearly Putin discussed it with Bush at Santiago.
dsquared. Perceptive comment. The Germans probably agree with you -- there is a hint that if Iraq does really, really well, the last 20% may not be forgiven. Not sure if that is just the German face saving spin or if there is something there. More generally, the Paris Club generally is the king of sequential debt deals. If Iraq cannot pay interest or principal once it starts coming due (after 08), they will do another deal and likely capitalize the interest/ defer any principal -- over time, that would produce a deal with less forgiveness and more deferal.
Posted by: brad at November 27, 2004 04:33 PMFrankly, I find it hard to have confidence in the opinions of a writer who uses "Bush administration" and "wisely" in the same sentence.
Posted by: Brian Boru at November 27, 2004 08:02 PMWe vote it is most likely to have been that taking a dive to puff up his sources thing.
Posted by: "Dan Okrent" at November 27, 2004 10:11 PM