International diplomats, financial analysts, Iraqi economists and international nongovernmental groups met in Berlin in March to seek out a solution to one of the most pressing issues facing Iraq: the vast debts and war reparations accumulated by Saddam Hussein.

The list of participants was impressive, but contained one notable omission: President Bush's Special Envoy on Iraqi Debt, James Baker III, declined the invitation to attend. It may have been the title of the conference that scared him away: "Iraq And Debt Relief: A Case for Implementing the Odious Debt Doctrine?"

"Odious debt" is an international legal doctrine that refers to loans that were used, with the knowledge of the lenders, against the needs of a nation. Under the legal doctrine, these debts are deemed illegitimate and not requiring repayment.

Although Iraq sits on the second largest oil reserves in the Gulf, the deposed Saddam Hussein regime built a mountain of debt, probably more than $160 billion. Loans from many countries financed the regime during its bloody and expensive war against Iran from 1980-1988, through the genocidal Anfal campaign against the Kurds and right up until Saddam invaded Kuwait in 1990. As hundreds of thousands of Iraqis were killed, Iraq's once vibrant economy went into a tailspin.

Sinan Al Shabibi, now Governor of Iraq's Central Bank, calculates that military spending constituted up to three quarters of Iraq's GDP, sustaining the war for eight years and claiming a million lives. In the first period of the war, from 1981 to 1985, oil revenues were just $48.4 billion, while military spending was two and half times higher at $120 billion, according to Wajeeh Elali, an Iraqi economist teaching at McGill University in Canada.

The economic crisis that followed the Iran-Iraq war, including $3 billion annual debt service, spurred Saddam's invasion of Kuwait. Then followed 13 years of economic sanctions, during which the debt increased through interest to its current level of around $130 billion. The UN ceasefire resolution after the 1991 Gulf War added war reparations to the financial burden, of which $18 billion have been paid and a further $30 billion have been awarded so far.

"About 90 percent of Iraq's debt is war-related," estimates Marek Belka, the former Polish Finance Minister who organized the Madrid donor conference for Iraq last October.

With the country now struggling to recover from the decimation of more than two decades of war and sanctions, plus the infrastructure devastation from the 2003 U.S. bombing and invasion, and the subsequent widespread looting, few believe Iraq can pay its accumulated debt burden. A growing number of Iraqis and others are asking whether the country should even try.

Loans to support Saddam, they say, were used to oppress the Iraqi people, as well as to fund the dictator's wars -- as the creditors knew. Such debts, they contend, should simply be cancelled.

"Saddam's regime was judged to be unacceptable by the international community in 1991," notes Mohammed Kamil of the Iraqi Prospect Organization. "How can the Iraqi people be required to pay for the support countries gave in building up that regime? When Saddam executed people, he used to charge their families for the bullets used -- this is precisely what the creditor countries who financed Saddam are asking of Iraqis today."

But this is a logic that the United States, in particular, is reluctant to embrace. At the same time, the U.S. government acknowledges that Iraq cannot afford to pay its debt. So U.S. officials are pursuing an alternative approach of negotiated debt reduction. This proposal is based on voluntary reduction by creditors, in exchange for promises that Iraq will pay the most it can over time, and that the country adopt extremist, International Monetary Fund (IMF)-style free market economic reforms.

The Paris Club Ploy
Between December 16, 2003 and January 22, 2004, former Secretary of State Baker went on a whistlestop tour of world leaders, visiting 10 of the former Iraqi regime's major creditors in Europe, Asia and the Gulf. He appeared to receive a universally positive reception, and was given a further boost by Saddam's capture a few days before his first meetings with French President Jacques Chirac and German Chancellor Gerhard Schroeder. Those meetings produced a joint statement to the effect that "France, Germany and the United States agree that there should be substantial debt reduction for Iraq in the Paris Club in 2004." Similar statements favoring a standard Paris Club deal followed in Italy, Britain and Russia, and later from Japan, which had been the most resistant of Iraq's creditors to a Paris Club deal.

Baker arrived in the Gulf on January 20 and secured commitments from Qatar and the United Arab Emirates to write off "most of" the debt incurred by the former Iraqi regime with their treasuries, according to statements from their respective state news agencies. Commitments at least to negotiate the issue followed from Kuwait and Saudi Arabia.

But the countries did not agree to write off Saddam's debt. Baker has merely secured agreements to negotiate in the Paris Club. Through the Club, major governmental creditors attempt to salvage as much as they can from a country in danger of defaulting on debt payments. Saddam's debt is so vast that the technically correct service payments would exceed Iraq's entire annual revenue. The only way the creditors can hope to retrieve anything is by substantially reducing the size and changing the schedule of their claims.

Baker has been careful not to give a figure for the amount of debt reduction he expects, but the consensus appears to be about two thirds, although this is far from a certainty. The Paris Club only holds about a third of the debt claims being made of Iraq. Although the Club requires debtor countries to seek comparable relief terms on all its debt, it has no legal authority to require other creditors to comply. Some creditors, such as Bulgaria and Korean company Hyundai, are adamant that they will not. In the best-case Paris Club scenario, the debt might be reduced to about $45 billion. This reduction may seem significant, but on top of it must be added $30 billion and climbing of reparations, as well as new loans Iraq will be contracting to fund the huge reconstruction operation.

The Washington, D.C.-based Center for Strategic & International Studies has argued that "any plan that does not include reparations, and that results in Iraq owing more than $35 billion overall, is unwise." A Congressional Budget Office study emphasized that debt service cannibalizes funds need for reconstruction, and Fitch Ratings has estimated that even if the debt were reduced to just $14 billion Iraq would still have a weak credit rating on par with Ghana.

Debt relief as designed by the Paris Club is not based on consideration of the needs of the indebted country, but on the goal of maximizing debt service revenues for the creditors over the long term. There is no way for Iraq to begin to service $130 billion of debt; without debt relief, it will default and the creditors will receive nothing. But after a reduction to $45 billion, Iraq would be making regular payments of up to $5 billion a year. Such so-called "sustainable" debt payments would divert a quarter or more of government revenues away from essential social spending and reconstruction.

Iraq's ratio of debt (and reparations) to export earnings ($12 billion expected in 2004) makes it the world's most heavily indebted country by a wide margin. Moreover, it is a country with urgent relief and reconstruction needs (estimates range from $100 billion to $600 billion).

Although the loan debt is not yet being serviced, ongoing reparation payments are currently diverting critical funds from humanitarian relief.

On April 8, 2003, the very day that Kofi Annan received a mandate to use the Oil for Food fund to meet emergency needs, and as the UN launched a flash appeal to fund relief, $870 million was transferred in reparations payments to Kuwait, the United States and others. In total, $1.45 billion has been paid in reparations since Saddam fell.

In 2005, debt service payments are likely to begin, which debt brokerage Exotix estimates will be -- after consummation of the Paris Club debt deal that Baker is orchestrating -- about $2.25 billion in interest alone, and increasing to $5 billion when principal repayments are included. This compares to Iraq's budget for health of just $947 million and education of $544 million. And even this very minimal social spending will be seriously squeezed by debt service, since the budget only includes a provision of $200 million for debt service.

Illegitimacy and Conditionality
Aside from falling short in financial terms, a Paris Club deal will ignore the issue of whether the claims are legitimate in the first place, and will require Iraq to follow the dictates of the International Monetary Fund.

In conversations, Iraqi ministers, politicians and religious and civil society groups unanimously argue that most of the debt is illegitimate.

"Iraq is not responsible for any debts which supported the regime's war machine," says Hajim Al Hassani of the Iraqi Islamic Party.

"The Ba'ath Party did not ask the people of Iraq, and certainly not the women of Iraq, about borrowing the money or how it should be spent," says Layla Mohammed of the Women's Freedom Organization. "It is not our responsibility; rather it is the responsibility of those countries that financed Saddam -- they created the problem."

This is a sentiment repeated throughout Iraqi society, and understandably strong among Kurds. Perweez Mohammed of the Patriotic Union of Kurdistan says, "The creditors' cooperation enabled Saddam to rule -- presiding over atrocities such as Halabja and mass graves. Saddam never spent money for the benefit of the Iraqi people, but just for himself and his followers. The creditors should cancel the debt to cancel some of their sins."

Paris Club debt relief is conditional on the acquiescence of debtor countries to IMF-recommended "structural adjustment" programs.

Lex Rieffel from the Brookings Institution predicts that after initial rescheduling until 2005-2006, debt reduction "would be stretched out over three years, with each year's reduction linked to meeting performance targets under a new IMF program."

Iraqi economists are aware of the experience of countries such as Argentina, where such IMF programs have been disastrous.

Dr. Saleh Yasir of the Iraqi Communist Party insists that he "definitely would not accept IMF conditions because they neglect the social consequences of economic policies. The experience of the Soviet Union shows that the transformation costs were immense, and Iraqis could not bear these social costs in their miserable condition. An IMF structural adjustment program would create more social tension and cause a social explosion which might destroy the transition to democracy."

Many in Iraq fear the IMF's toolkit of rapid privatization, trade and capital flow liberalization could exacerbate unemployment and poverty. This could contribute to political instability and create a new class of corrupt oligarchs, as was the case when Russia's economy was overhauled in great haste. There is an enormous body of literature documenting the IMF's failures [see Multinational Monitor, September 2002 and Multinational Monitor, September 2003]. The agency's support for sudden and widespread free market reforms in countries around the globe has increased poverty, unemployment and income inequality, while simultaneously undermining national economic capacity.

As one recent UN study concluded, "The more recent evidence from liberalization episodes in sub-Saharan Africa as well as Latin America suggests that they have often been accompanied by an increase in unemployment."

Even the interim oil minister, Ibrahim Bahr al-Uloum, who admits to favoring IMF policies, insists that their coercive imposition would rob Iraq of an important aspect of sovereignty: "We are Iraq! We were the cradle of civilization, and I don't want to see anyone controlling our economy."

TheOodious Debt Alternative
Leading Iraqis argue unanimously that the fairest way forward would be a transparent international arbitration -- an "odious debt" tribunal -- to determine which loans benefited the Iraqi people and which merely underwrote the wars and domestic repression of Saddam Hussein's regime.

Careful review of foreign loans will show, they say, that even loans that look innocuous at first were in fact part of Saddam's war effort. Finance Minister Kamil Al-Gailani explains that, for example, the Saudis gave Saddam many cars, which he distributed as patronage to senior members of the military, and rations for the army fighting in Iran were structured as export credit debt for food.

Iraqis emphasize the importance of a legitimate and disinterested tribunal.

"In the Paris Club process, the enemy is the judge," says Sheikh Mauyad of Abu Hanifa Mosque, one of Iraq's leading Sunni clerics. "This cannot be fair. An arbitration tribunal would be the best solution."

Why is the United States not promoting this approach? Critics suspect that Washington is embarrassed about its support for Saddam until 1990, including Baker's last visit to Baghdad, nine months before the invasion of Kuwait, when he pledged to increase U.S. loans to $1 billion a year. With his eye on U.S. basing rights and corporate interests, President Bush may prefer a weak, indebted Iraq that can be controlled to a debt-free Iraq which could stand on its own two feet. To prove the cynics wrong, Bush and Baker will have to deliver much more than a Paris Club deal that reinforces the status quo.

If they fail to take the initiative, others countries may do so, and with it the moral high ground and the goodwill of the Iraqi people. The March conference boycotted by Baker was hosted by the Friedrich Ebert Foundation, a $100 million-a-year philanthropic organization linked to Gerhard Schroeder's Social Democrats. The German parliament, alone among major creditor countries, has voted in favor of fair and transparent arbitration on debt, though it has yet to implement this policy.

But if none of the creditors are willing to budge, Iraq may well take a stand itself. This is what Amjad Ghadur of the Iraqi Workers Communist Party recommends: "The first thing a sovereign Iraqi government should do is reject the debts -- all reasonable people in the world would agree with us."

The Paris Club will solemnly warn that such action would have a disastrous impact on Iraq's reputation.

However, even the editors of the Wall Street Journal -- not known for their generous attitude to debtors -- have endorsed this approach, writing in April last year: "We wouldn't blame [Iraq's] leaders if they decided that some of those financial obligations are indeed odious. And given that this is such an extreme case, international lenders probably wouldn't hold it against them for long."

The Economist, another indicator of the financial world's viewpoint, put it even more strongly in October: "There is an overwhelming case, both in terms of economic expediency and justice, for writing off most of Iraq's debts, and doing so fast. The Paris Club will no doubt belatedly negotiate some sort of rescheduling � almost certainly on the basis of what lenders judge to be Iraq's ability to pay -- which will no doubt be on the high side -- not on the rightness of its having to do so. That is not good enough."

Hajim Al Hassani of the Iraqi Islamic Party turns the question of debt back on the creditors: "They are asking us to pay for the knives they gave Saddam to slaughter us. Really it is the creditors who should be paying compensation to Iraq."

Justin Alexander is the founder of Jubilee Iraq and a longtime international debt campaigner.