Iraq's private debts

Ever since the US invasion of Iraq in 2003 Iraq has faced violence. The White House would not use the word civil war, but with more deaths by violence after the cease-fire than during the war, it can hardly be called a peaceful country.

Yet abroad, pressed by the US, Iraq has quietly negotiated a restructuring of a large part of its foreign debt. In 2006 the country scheduled to make its first interest payment to private creditors – of $87m – after more than 15 years. In doing so, it is trying to shake off one small part of Hussein's dire legacy.

Yet the decision to make debt restructuring a priority was not in the first place an Iraqi one. First James A. Baker III had been tasked by President Bush “to oversee the job of getting Iraq out from under its crushing $125 billion debt.” As the President’s special envoy Baker took contact with the world’s governments, international organisations and with the Iraqi’s to restructure and reduce Iraq’s official debt. Secondly the Coalition Provisional Authority (CPA), which managed the US occupation, had set things in motion by the time Iraqis took back sovereignty in June 2004. The CPA had already set out a lot of policies. The new Iraqi Government just had to continue.

It was not cheap either. By February 2006 the Iraqi government had already spent $120m-$150m in fees, with about $65m going to Citigroup and JPMorgan of the US, according to Iraqi officials. The US had also taken big decisions on the broad approach to debt restructuring, including the appointment of Cleary Gottlieb Steen & Hamilton as overall legal adviser and Ernst & Young as auditor and reconciliation agent.

The debt was divided into four categories, three of which needed separate financial advisers:

- Citigroup and JPMorgan for commercial debt;

- Lazard Frères for bilateral debt owed to the Paris Club of government creditors;

- Houlihan Lokey Howard & Zukin for non-Paris Club bilateral debt, such as that owed to Serbia for arms supplied to Iraq by the then Yugoslavia.

Debt owed to China and Turkey was to be tackled at the political level.

The CPA first approached the Paris Club. The representatives of the member countries of the Paris Club met from 17-21 November and agreed on 21 November 2004 with the representatives of the Republic of Iraq on a comprehensive debt treatment of the public external debt owed to them providing a total amount of debt reduction of 80%. On a voluntary basis, each creditor country may also undertake debt swaps.

The Republic of Iraq has committed to seek comparable treatment from its other external creditors. One condition of Paris Club agreements is that debtor countries could not offer others a better deal than that given to government creditors. That in effect set a ceiling on the price Iraq could offer others, including holders of $22.4bn in commercial debt. This was put in practice during the Reconciliation procedures with the Ernst & Young Iraqi Debt Reconciliation Office in Amman (IDRO).

Ernst & Young had been appointed as the government's reconciliation agent to produce an agreed list of exactly what is owed to whom. The Iraqi ministry of finance posted several Requests for information (“RFI”) inviting the registration of commercial claims against certain Iraqi obligors outstanding as of 6 August 1990, including claims against Rafidain Bank and Rasheed Bank. The first press releases for the first round of invitations date back from July 2005. The last invitation dates from February 2006. After this last possibility to tender it was

By 2006 most of the outstanding debts, eligible for submission under the IDRO system, would have been time barred anyway (15 year from due date). Except for those who were able to stop the time limitation or got a judgment, few options were left to ever receive payment from their claims.

However, the lingering provisional liquidation procedure against the Rafidain Bank in London was soon to bring change in Iraq’s attitude towards its non-governmental creditors. Back in 1991 the Bank of England issued a winding-up petition in respect of the Rafidain Bank in order to implement the UN embargo rules against Iraq. The bank was placed under provisional liquidation. The appointed Provisional Liquidators were unable to really do their work due to the sanctions imposed on the Republic of Iraq. Only after the US invasion and the lifting of the old embargo, new initiatives could be taken to finalize the liquidation, which only concerned the London branch.

As the (provisional) liquidation of the Rafidain’s London branch was revived and a Scheme Arrangement was discussed amongst the creditors, the Iraqi’s must have thought to use this to finish off once and for all its outstanding non-government commercial debts.

In all haste a last invitation to tender claims for cash purchase was made public by the end of January 2008. The text of the invitation was not yet known at that moment. But little was the aimed creditor to know that such was to squeeze out the last claims against Iraqi entities. Amongst these die hard creditors, there may have been some ‘odious debts’, but strangely enough all claims we have encountered were of creditors who for a very long time kept believing that Iraq would pay them and reward them for their good behaviour and patience with Iraq. But it seems that this did not cross the minds of the advisors of Iraq.

What was aimed with the new reconciliation process was to clean out all existing non-governmental commercial debts, more in particular the claims on the Rafidain claims, as they could be used to influence the outcome of Rafidain’s Scheme Arrangement in progress in London. On itself this is a rational goal considering Iraq’s financial situation, but the method used and the treatment received by the creditors has been far from fair.

As was the case with the previous reconciliation processes, it was Iraq’s objective to have all submitted claim cancelled or assigned to Iraq. In doing so Iraq paid an agreed a purchase price, under similar conditions to those of the Paris Club deal in 2004. So far so good, but the conditions of this last reconciliation process, was a bit “odious”. On several points the conditions were drafted up so much in favour of Iraq, that one could ask if such was possible and not contrary to our sense of equity.

In the Tender invitation it was literately written: “A disallowed claim that is a Rafidain Claim shall be assigned to Iraq on the Closing Date.” This meant that even if Iraq did not pay the purchase price for part or the whole of the claim (because pursuant to the IDRO or Iraq’s arbitrator it was not a proven claim), the claim would be entirely assigned to Iraq in any event. How can a not proven — read non existing — claim be assigned?

In total neglect of international business practices, Iraq also asked for the originals of the underlying instruments of the contract, knowing that for some instruments (such as letter or credits) the originals were send to Iraq. This odd condition was at first only mentioned in a footnote in the invitation to tender. Only after creditors have tendered their claim this footnote was put in the forefront of Iraq’s argumentation. By that moment is was too late for any creditor to argue that he never intended to accept such conditions.

Whilst reading the text of the invitation, many points can be interpreted differently. The interpretation of all such points only became clear after having tendered and therefore accepted the tender and arbitration conditions. If a dispute arose this was to be put to arbitration, only for the creditor to hear that such arbitrator received clear instructions from Iraq to handle the case in strict compliance with the arbitration rules — and interpretation — as set out by Iraq. The arbitrator was chosen by a chairman, which had been appointed by Iraq and seemed to have acted as an advisor to Iraq in the past. How can you expect any reasonable and objective decision? We cannot help thinking that the Iraqi government — directed by the US — used this tender and arbitration procedure to give whatever decision they wished for an official stamp. The outcome was already set out before the arbitration took place. It served only and most definitely Iraq’s unilateral objectives: squeeze out and trap the last existing claims into a legal oubliette.

Whatever the cause may be — rebuilding Iraq — such attitude does not justify the means. There are still some essential rules, such as the right on an honest trail, with an honest arbitrator, using honest rules of process, that at all times must prevail.

It is our conviction that the last IDRO process has many flaws that could lead to a successful vacation or annulment procedure before a competent court against the arbitration awards rendered under the arbitration rules, set out in the Tender. If a competent court is found in a common law country, a class action could indeed give relieve to the many-trapped creditors, who — unaware of any covered trap — participated in the last Invitation to Tender Claims for Cash Purchase of 2008.