The Paris Club of creditor nations has agreed a new system to allow negotiation of tailor-made debt relief accords, in a move towards greater flexibility that could apply to war-ravaged but oil-rich Iraq.
The change announced in a Paris Club statement clears the way for negotiating debt write-off and rescheduling deals with what are regarded as "middle-income" states without sticking rigidly to pre-scripted formulae that have applied for years.
"Debt reduction will continue to be considered only in exceptional cases and when the need is clearly demonstrated. Different types of flexible instruments would be used within the debt treatment in order to facilitate its tailoring over time," said the statement issued on Wednesday.
There was no explicit reference to Iraq in the statement but experts say it could be one of the first countries dealt with under the rule change which was requested by the so-called G8 economic powers at a June summit in Evian, France.
The Paris Club, created in an emergency in 1956 to tackle a debt crisis in Argentina, has already had to innovate to play a role in cancelling outright the debt of what are known as HIPC nations (Highly Indebted Poor Countries), totally impoverished nations that are mainly in Africa.
The latest change would concern countries which are higher up the wealth ladder but still in trouble repaying debts or interest on debts.
Among other key details, experts say the changes could allow creditors to negotiate a deal where a debtor country gets a partial debt writeoff after a trial period where it has to prove willing and able to introduce economic reforms in return.
Deals of this kind, which could also include rescheduling of debt and debt service payments, have not generally been possible in any systematic way up until now for middle-income countries. Iraq's debts to the Paris Club are estimated by the Paris Club itself at around $21.018 billion. Add the interest arrears on those debts and the sum nearly doubles, officials say.
Genuine Paris Club negotiations with Iraq are not expected to begin until the diplomatic impasse between the pro-war camp led by the United States and anti-war states like France and Germany ends, and some sort of deal is struck on sovereignty of the country.
A donor conference in Madrid last week was marred by continuing disagreement over who is willing to put money into the reconstruction of Iraq - with a ballpark estimate of aid needs put at about $56 billion - while the country is still largely under U.S.-led occupying forces. The Madrid conference, where France and Germany refused to announce any new aid beyond their share of a pan-European Union contribution, ended with a rough tally of some $33 billion in aid pledges including the $20 billion promised by Washington.
Ultimately, the reconstruction aid and debt relief talks will be linked, not least because part of the reconstruction aid is set to be loans and also because reconstruction of the oil industry will affect how well and how fast Iraq can honour old and new debts.
The idea for the latest change in the way the Paris Club works was first aired publicly by finance ministers of the G7 countries - the United States, Japan, Germany, Canada, France, Italy and Britain - in Deauville, France in May. The move was endorsed by the Evian summit, which included Russia.