According to the International Monetary Fund, Iraq's debt is about $120.2 billion, the result of Saddam Hussein's ruinous wars and U.N.-imposed sanctions which restricted the country's oil revenues over the last decade. About $40 billion is owed to the 19 countries in the Paris Club, an informal group of creditors who try and find solutions for countries having a hard time repaying debt, and the remaining $80 billion is owed to Arab nations.
A clause in the agreement gives the Paris Club, whose members include the United States, Russia, Japan and nations in Europe, the option to suspend part of the debt reduction if it is not matched by Iraq's other major creditors -- led by Kuwait and Saudi Arabia. This puts pressure on Iraq's non-Paris Club creditors to forgive obligations.
Iraq stopped making payments on its debt after it invaded Kuwait in 1990.
Although this is the most generous debt forgiveness deal ever offered to an indebted country, without additional writeoffs from the Arab world, Iraq will still be left with a crippling burden.
"The Paris Club agreement represents a major international contribution to Iraq's continued political and economic reconstruction. I encourage non-Paris Club creditor nations to agree to comparable debt reduction for Iraq," said group Chairman Jean-Pierre Jouyet.
Iraq's Middle Eastern neighbors have agreed to negotiate debt reduction, but Kuwait continues to insist that Iraq pay reparations as required by the United Nations Security Council.
Without more debt relief, Iraq would be unable to attract foreign investment needed to put the oil industry back on its feet because foreign governments and private companies would be reluctant to invest in an economy whose revenues are going toward interest payments.
"In the 1970s and 1980s, Iraq was a donor country," Iraq's finance minister, Adel Mahdi, said. "Now Iraq needs the help of others."
The agreement, after a year of intense lobbying by the United States, was reached after Russia, the one country that still needed to sign on, gave its approval after weekend talks, officials said.
France, Germany and Russia had resisted American efforts to forgive so much debt, arguing that Iraq, with the second largest oil reserves after Saudi Arabia, had the capacity to repay if given time. Such debt writeoffs in the past have been reserved for poor, heavily indebted countries, mostly in aid-dependent Africa.
"How would you explain to these people that ... we are going to do more for Iraq than we have done in 10 years for the 37 poorest and most indebted countries in the world?" President Jacques Chirac of France, asked in June at a summit of the Group of Eight powers.
Jouyet said the debt reduction plan would work in three phases, with 30 percent of the debt being written off immediately. Another 30 percent will be cancelled when Iraq agrees on a reform program with the IMF expected in 2005. The final portion will be cancelled in 2008 once Iraq has completed its three-year IMF program.