Getting agreement from the Paris Club creditors to write off 80% (in stages) of the $40 billion or so that Iraq owes them is no doubt a good thing — not the least because it lets the US (and Iraq) press the gulf states and private creditors who are owed another $85 billion or so to do a comparable deal. 80% debt relief across the board would cut Iraq’s debt to about $25 billion, or around 100% of its current — depressed — GDP. Iraq also still owes about $30 billion in war reparations.

I even accept the Bush Administration’s spin that this is a sign of the health of the Atlantic alliance — the Bush Administration wisely sought to work through the existing institutions for granting debt relief (the Paris Club), not to work around them. It based its case for debt relief on the grounds that Iraq has more debt than it can pay, not on the harder to win argument that all of Iraq’s debt is illegitimate (If Saddam’s debt is illegimate, why was Russia stuck with the Soviet Union’s debt? Not an irrelevant question since Russia is an important creditor of Iraq). The Evian communique last year even laid the groundwork for a deal by calling for developing new Paris Club rules allowing greater flexibility for middle-income countries.

Good job, all around. You might even say the Bush administration decided to frame its calls for debt relief in a way that passed the global test.

What I have trouble swallowing is the hyperbole in Craig Smith’s article, namely the idea that writing off a bunch of debt that was never going to be paid somehow is a crucial milestone in Iraq’s reconstruction. Writing a large chunk of the debt off is a necessary thing to do at some stage, but it is not going to change anything on the ground right now. Statements like “Clearing the liabilities from Iraq’s books is considered almost as important to its future as defeating the insurgency because the country cannot hope to attract investors while carrying the current amount of debt” are just ridiculous overstatements. US aid flows to Iraq have not been blocked by a debt overhang. Private investors won’t suddenly flood Iraq, even into the oil industry: they don’t want to invest long-term in a country whose future political structure is still so undefined. Any private long-term investment in the current climate would come with an extraordinarily high risk premium, and effectively require Iraq to sell its politically sensitive future oil production on the cheap.

Indeed, in a sense, nothing has changed with the debt deal. Before the debt deal, Iraq was paying nothing on its debt of $125 billion (using the IMF’s estimate, not the estimate in the NYT article). After the deal, Iraq won’t be paying anything for the first three years on a smaller debt load (interest on Iraq’s debt is being deferred, as is principal). Most new aid to Iraq still should be in the form of grants, not new loans.

The real reason for the debt deal is laid out later in the article. It was something that everyone could do to help Iraq on the cheap.

“France and Germany, owed about $3 billion and $2.5 billion respectively, have been eager to find some way to take part in Iraq’s reconstruction without committing troops … Writing off debt that may not be repaid in any case is one of the few politically palatable alternatives they have for showing support to the American-led effort.” May not be repaid is an understatement; will not be repaid unless it is written down is the reality.

Let me suggest five steps that would have a much bigger immediate economic impact:

1) Spending the $18 billion US aid package passed last summer more rapidly. The IMF estimated that the US would only spend a pathetic $2 billion in 2004. There is no shortage of cash in the pipeline for reconstruction; there has been an inexplicable inability to get the funds out the door.

2) Cutting the roughly $800 million Iraq is now paying in reparations to Kuwait. With oil at close to $50, Kuwait is doing quite well — why should they be getting 5% of Iraq’s estimated $16 billion in oil revenues too?

3) Getting a few more refineries up and running so Iraq does not have to spend $2.1 billion a year importing refined gasoline. (data from IMF staff report)

4) Keeping the electricity on more consistently

5) Keeping the road from the airport open, and reducing the costs of security for businesses — both local and foreign contractors — operating in Iraq.