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Why Did the West Lend So Much to Iraq?

December 19, 2003

WASHINGTON (AP) _ Iraq is swamped by more than $120 billion in debt that clouds its economic future. Where did it come from? Why did so many Western democracies, including the United States, lend so much money to President Saddam Hussein? What happens now?

A look at the situation:

Q: How much does Iraq owe?

A: That figure is not known precisely but generally is considered to be more than $120 billion, not counting an additional $200 billion in war reparations. Of the $120 billion, Iraq owes $40 billion to the 19-nation Paris Club, which includes the United States, France, Germany, Japan and Russia.

Q: How did Iraq accumulate such a large debt?

A: Most of the money went to the military. Saddam ordered the invasion of Iran in 1980, fought an eight-year war with Iraq’s neighbor and continued to amass his forces after the war ended in 1988. By the time of the 1991 Gulf War, Iraq was believed to have had the world’s fourth-largest military.

Q: Why would Western countries lend Saddam money to help build his army?

A: Before it invaded Kuwait to set off the 1991 Persian Gulf War, Iraq was not considered as much of an international pariah. It had good relations with the Soviet Union, and the United States and many other Western nations at least privately hoped Iraq would prevail against the theocrats who ruled Iran. The United States claimed neutrality, but it clearly wanted an Iraqi victory in the bloody conflict.

In addition, Iraq was a good client for private arms merchants. ``It was probably a pretty good moneymaking venture,″ said Bathsheba Crocker of the Center for Strategic and International Studies think tank in Washington.

Q: Was Saddam considered a good credit risk?

A: Yes. Iraq has the second-largest proven reserves of oil in the world. Before it invaded Kuwait, few could have imagined that it would fight a disastrous war against a U.S.-led coalition, undergo 12 years of ruinous international sanctions, then fight yet another U.S.-led war.

``I’ve never seen any concern about credit worthiness,″ said Justin Alexander of the London-based Jubilee Iraq, which advocates debt forgiveness.

Q: How much is the debt to the United States and how was it developed?

A: Iraq is believed to owe the United States about $4 billion, including interest. Most of the debt is thought to involve U.S. financing for Iraqi agriculture. Many close friends of the United States provided billions of dollars in military help to Iraq during the 1980s war, but little hard evidence has been published that the United States provided much more than technical military aid.

Q: How much is the Russian debt, and how was it incurred?

A: The debt is about $8 billion including interest. Much of it appears to have been accrued from military sales during the Soviet era.

Q: Saddam has been deposed and no longer runs Iraq. Are new governments expected to take on a toppled regime’s debt?

A: Traditionally, yes.

``The international financial community has felt and held very strongly that this norm needs to be maintained so as to ensure the stability of financial markets,″ said Joseph Siegle of the Council on Foreign Relations in Washington.

But there exists in international financial politics a doctrine of ``odious debt,″ contracted by a despotic regime to support itself instead of the needs of its people. Advocates of the odious debt principle, which began after the 1898 Spanish-American War when the United States argued that neither it nor Cuba should be accountable for debts accrued by the colonial rulers, say that refusing to recognize these debts could discourage nations from granting credit to tyrants.

Q: What is the Bush administration’s position on the debt now?

A: Administration officials argue that major debt relief is needed for Iraq’s economy to get back on its feet. The issue is also highly politicized with countries that opposed the war, such as Germany and France, initially expressing doubt about high levels of debt forgiveness. President Bush sent a special envoy, former Secretary of State James A. Baker III, to Europe and Russia last week to make his case, and France and Germany agreed that Iraq needs debt relief. Russia, the largest creditor, said it was willing to start negotiations.

Baker is expected to head to other countries soon, including Japan and Arab Gulf nations that Iraq also owes.

Q: Is Iraq’s entire debt likely to be forgiven? Or could Iraq’s successor governments be forced to pay back all the money Saddam’s Iraq owed?

A: Neither scenario is likely. For all its potential oil wealth, Iraq could not be expected to pay back its full debt. What’s more likely, analysts say, is that creditor nations will devise a formula in which a significant portion is forgiven and the rest is restructured with a realistic payment schedule based on Iraq’s economic prospects.

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On the Net:

Council on Foreign Relations information on debt: http://www.cfr.org/background/background(underscore)iraq(underscore)debt.php

Jubilee Iraq: http://www.jubileeiraq.org/

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