Iraqi Debt: Baker's Tough Assignment

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Former secretary of state james a. Baker faces an unenviable task when he travels to Europe this week as President Bush's personal envoy. His mission is to defuse Iraq's $125 billion debt bomb. It is a laudable goal but ill timed, coming as it does after the release of a Pentagon memo that offended France, Germany and Russia—three of Iraq's major creditors—by barring them from winning contracts, underwritten by $18.6 billion in U.S. funds, for the reconstruction of Iraq.

But those are not the only nations that are of concern to Baker, who is currently chief counselor for the Carlyle Group, a global investment firm that does business with the Saudis. Luckily, Saudi Arabia, Kuwait and other Gulf states, which hold some 60% of Iraq's debt, seem to be in a more cooperative mood. Diplomatic sources tell Time that the Saudis have signaled that they are willing to forgive Iraqi debt but only in stages and over several years. Stretched-out debt cancellation, they say, would provide some leverage if an unfriendly regime takes over in Iraq, which will probably remain far too poor to repay any of its debt for years.

One hitch: the Saudis insist that all creditors have to agree to any plan that is negotiated, so that means France, Germany and Russia will need convincing. Baker will appeal to them to take the broad view: Iraq desperately needs debt relief to regain its economic footing, and it is in everybody's best interest to see the oil-rich nation stabilized. Fairness is an issue as well. If the Saudis and Kuwaitis alone do debt forgiving, they argue, they would effectively be footing the bill for restarting Iraq's economic engine, although all nations would benefit from the subsequent trade. But Baker has his work cut out for him—he has to make that argument fly with aggrieved Europeans and Russians.