MARGARET WARNER: Decades of conflict have left Iraq on its financial back. A country with the world's second-largest oil reserves is $120 billion in debt to foreign creditors. It also faces more than $100 billion in reparations claims from the Gulf War.
Now the United States, while occupying Iraq and running its reconstruction, is also trying to lighten Iraq's debt load. This week, President Bush sent a special envoy, former secretary of state James Baker, on a five-nation lobbying mission to win forgiveness for some of that debt.
His targets: Several European members of the Paris Club, an informal group of 19 industrialized countries that coordinates debt repayments. Club members hold about $40 billion, or one-third of Iraq's debt.
Baker met in Paris Tuesday with Jacques Chirac, the president of France, owed $3 billion by Iraq. A fierce critic of the Iraq war, France was excluded by the Pentagon from bidding on U.S.-funded Iraqi reconstruction contracts. Yet the Baker-Chirac meeting went remarkably well.
JAMES BAKER: We discussed the importance of reducing Iraq's debt in order to give the Iraqi people a chance at freedom and prosperity, and I think that we are agreed that it is important to reduce this debt within the Paris Club if at all possible in the year 2004.
MARGARET WARNER: Baker's next stop, war critic Germany, holding $2.5 billion of debt, also barred from reconstruction contracts. Yet German Chancellor Gerhard Schroeder also promised to support debt relief.
GERHARD SCRHEDER ( Translated ): Germany is ready to contribute substantially to the reconstruction of a Democratic and stable Iraq. That will be the main purpose of our meeting today, and I'm sure that we will find an agreement at some point.
MARGARET WARNER: That very day, the three governments released a common statement pledging to reduce Iraq's debt by an unspecified amount, and to urge other countries to help, too. Baker secured similar support from two war allies, Italy's Silvio Berlusconi and Britain's Tony Blair.
But late yesterday, Baker faced a tougher sell at the Kremlin. Russia, another war critic on the Pentagon's no-contracts list, is owed a hefty $8 billion. Russian President Vladimir Putin told Baker he would join the Paris Club negotiations. But he didn't pledge to forgive any debt, and said his negotiators would "take into account the economic interests of Russia, and Russian companies in Iraq."
MARGARET WARNER: We get two perspectives on Baker's mission and the job ahead from Peter Gottwald, deputy chief of mission at the German embassy in Washington, and Robert Hormats, a former assistant secretary of state, and longtime vice chairman of Goldman Sachs International.
Welcome to you both. Bob Hormats, give us a sense of how important it is for the future of Iraq and for the U.S. efforts there to have a lot of this debt eliminated.
ROBERT HORMATS: It's extremely important because Iraq now has a huge debt overhang, and if Iraqis are having to pay this money out in terms of it, it means that the money they would otherwise use for development to reconstruct the economy and for humanitarian purposes will be siphoned off into a repayment of debt which will cripple Iraqi reconstruction and make it much harder for the economy and the country to get back on its feet.
MARGARET WARNER: Why is Iraq's debt so big -- $120 billion? What was it for? Why do they owe all these foreign governments and companies?
ROBERT HORMATS: Well, they did a lot of borrowing, particularly during the war and after the war are Iran. They borrowed a lot of money from the West. They borrowed a lot from their Arab neighbors, and that has collectively, when you add interest, mounted to amounted to something like $120 billion which is a huge amount of money, just to put all this in perspective -- Iraq's obligations are ten times higher than Argentina's on a per capita basis and Argentina heretofore has been the largest debt problem of any problem country in the world.
If you go back to Germany after World War I, their obligations were double the size of GDP in Germany at that point. Iraq's are 15 times the size of Iraq GDP, so they have a huge debt overhang. It would be crippling if they had to pay it.
MARGARET WARNER: The memo from the Pentagon having Germany, France and Russia on the no contracts, why was Germany so amenable so quickly to participating in this to reducing Iraq's debt burden?
PETER GOTTWALD: Margaret, the point is that Germany is exactly seeing it as pointed out, that it is important for a huge surplus Iraq to be able to deal with its debt and Chancellor Schroeder months earlier in New York has indicated that Germany is willing to participate in a generous stop debt reduction in the Paris Club.
MARGARET WARNER: Was this essentially precooked? Baker got the deal with France and Germany and you all came out with the same statement in one day. Was this all preworked before the trip?
PETER GOTTWALD: I don't think so. This is actually a very important development that France, Germany and the United States were able to agree publicly on such an important element of billing Iraq, but the essential position of Germany of course was already established before the trip.
MARGARET WARNER: Bob Hormats, what would you add to that? Some of your assessments of the country that had tensions with the Bush administration were willing to come on board.
ROBERT HORMATS: For three reasons? They're not going to get paid all this money anyway. They're not going to get paid very much of it because Iraq doesn't have the money to repay the debt.
Second, it's extremely important I think for the West and for everyone to get Iraq back on its feet economically. If it's not on its feet economically, if it continues to deteriorate or they can't rebuild, then it will be a problem in terms of political instability, social instability, and it could cause instability throughout the Middle East and a very important oil producing area, and in the long run, a lot of these countries also want contracts there.
They want to produce oil there. They want to have contracts for rebuilding the country. So all these are reasons why they want to play a constructive role.
MARGARET WARNER: Mr. Gottwald, the German government on its statement in the meeting said Germany's position on the awarding of contracts for the reconstruction of Iraq was clearly expressed in the talks. Translate that for us.
PETER GOTTWALD: Well, that certainly means that the issue of awarding contracts on the basis of countries belonging to the coalition is not something we felt was very fortunate because we just -- was very unfortunate because we agreed it is time to look forward and not to look backwards, and therefore from a political point of view this, was an unfortunate statement. I don't see it that much as an economic statement.
MARGARET WARNER: But I mean did the chancellor raise it himself with Baker?
PETER GOTTWALD: This is rather sudden, yes.
MARGARET WARNER: So did Baker, in turn give your chancellor any assurances that if Germany helped and participated with the debt relief that in fact some German companies could get in on the action in Iraq?
PETER GOTTWALD: Margaret, I would not see that as in any way a direct link between the two questions. Obviously we were not very happy that this sort of statement came previously just so briefly before the mission, but as I just indicated, we are certainly committed to cooperate on getting a new situation for Iraq
MARGARET WARNER: Are you saying there was no commitment from Secretary Baker, no wink and nod on that subject?
PETER GOTTWALD: Well, I didn't say that. I said that obviously the two subjects were discussed and I think everybody sees that it makes sense to cooperate and so, in that sense, there is a context, but this is not a direct link anyway.
MARGARET WARNER: Bob Hormats, let's turn to Russia, because Putin's response, President Putin's response was a little less enthusiastic. And the quote was that yes, he would negotiate this but that the Russian negotiators would have Russia's economic interests in mind and the interests of Russian companies in Iraq. Translate that for us.
ROBERT HORMATS: Well, the Russians want several things. One, they would like to get repaid. They have a relatively large amount of money that they say they're owed; two -- Russian companies I think we should be aware, have been very active in Iraq quite recently.
They have gotten contracts that have been signed for the development of Iraq ... Iraqi oil facilities. Those are quite large, in the multibillion dollars. And they would like to have those honored by the new government and they're probably going to argue for that as a condition for their participating in any debt rescheduling or particularly a generous one.
And third, over the longer run, they would like to have their oil companies and other companies participate in the future development of Iraq. So what they're saying is they have a bargaining position that they're going to try to assert.
Whether they're going to succeed whether the new government of Iraq is going to honor those old contracts remains to be seen but certainly the Russians are going to be asking for that as a precondition for rescheduling.
MARGARET WARNER: Explain to us why Iraq's debt to Russia is so huge. It's the largest debt by some account. What was this had for? Were there weapons involved? What was it about?
ROBERT HORMATS: We really don't know at this point. The contracts were murky. We don't have all the details. Some of them were probably for military equipment. Perhaps some of that was before the last war, the war of the first Kuwait war.
So military is probably part of it. More recently, it's a lot of oil development contracts that simply are part of the process of the very close relationship between Saddam Hussein and the Russian government, and he was clearly trying to get Russia's support in a Security Council, and the Russians were major players in the oil for food program, both in selling oil and in getting contracts that were wet under that program, and they were quite lucrative, although many of them were honored. That's why the Russians would like to have the money and get them honored.
MARGARET WARNER: What does the German debt come from?
PETER GOTTWALD: The German debt comes from, we are talking about only the government portion here which is $2.4 billion. It comes from export credits and from commercial transactions.
MARGARET WARNER: No weapons?
PETER GOTTWALD: No weapons, no.
MARGARET WARNER: Jim Wolfenson, head of the World Bank said that for Iraq to get out from under, two-thirds of the debt has to be forgiven. Baker's mission left completely unspecified how much you all are talking about reducing the debt. Would Germany go so far as to forgive two-thirds of it?
PETER GOTTWALD: The statement which was made with the meeting with the chancellor and Secretary Baker was that Germany was willing to negotiate a substantial reduction and obviously what substantial means needs to be worked out of the Paris Club. I can't really perceive that.
MARGARET WARNER: Bob Hormats, final question to you, his next assignment he has to take on two-thirds of the debt, a lot of that owed to Arab countries. How complicated is that?
ROBERT HORMATS: It's extremely complicated. As you point out it is not only the debt, it is a lot of reparations that the Iraqis incurred as a result of invading Kuwait. And those are even larger.
And when you put this all together, it's going to be by far the biggest rescheduling in history, far bigger than Argentina which was the biggest to date and the most complicated because you have debt and you have reparations and probably the most politically contentious because there are a lot of political issues that surrounded the Iraq war and, as we see, they still exist.
So putting together a big process of negotiating is going to be very complicated. Jim Baker is a great guy to do this. He is very good at this. It is going to be very complicated and it will take a lot of time.
MARGARET WARNER: We have to end it there. Thank you both very much.