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    Greater China
     Jun 18, 2011

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China plays long game on Congo copper
By Peter Lee

With the exception of the United Kingdom - which passed a law limiting vulture fund recovery from Highly Indebted Poor Countries (HIPC) governments to the 90% haircut accepted by multilateral and bilateral lenders - the governments of the world have professed themselves helpless to deal with the issue of sovereign commercial debt - the sustenance of the vulture funds.

In New York state, for instance, vulture funds successfully lobbied to eliminate a common law protection, quaintly known as champerty, against Shylockian purchase of debt for the purpose of filing a lawsuit.

When the Democratic Republic of Congo, after a protracted and onerous process, finally obtained debt relief in 2010, a press release from the Paris Club grouping of European and North

American government debtholders placed the onus on the country to somehow impose on unwilling creditors the same deal it got from the Paris Club and the multilaterals:
The case of the Democratic Republic of Congo raised the issue of non-cooperative behavior from some litigating creditors.

The government committed to seek from all its remaining external creditors a treatment comparable to HIPC debt relief. [5]
The Democratic Republic of Congo's sovereign debt headaches - and China's developing world challenges - are not limited to the depredations of the vulture funds.

Sovereign states, unlike corporations or individuals, cannot seek bankruptcy protection. A new regime is liable for the obligations for the debts of its predecessor. An impoverished regime - especially during a recession - cannot finance its energy imports and other critical needs, let alone service its debt.

Therefore, it needs access to an international lending facility.

That creates a sizable role for the determinedly free-market advocacy of the socialism/state-sector averse International Monetary Fund (IMF) in the impoverished and indebted countries that China is often attempting to woo.

The $30 million in defaulted Zaire obligations purchased by FGH is only a tiny fraction of the $10 billion in rotten sovereign debt incurred by the Mobutu Sese Seko regime - debt which the Democratic Republic of Congo terms "odious".

The debt was owed to a salad bowl of multilateral institutions (African Development Bank, the IMF, etc), a host of national governments, and commercial debtors (like FG Hemisphere). Most of the Democratic Republic of Congo bilateral (government-to-government) debt was in the hands of members of the "Paris Club" of European and North American lenders.

The World Bank and the IMF midwifed negotiations with the Paris Club and the multilaterals to retire and restructure multilateral and bilateral debt under the HIPC initiative.

With great fanfare, most of the multilateral and bilateral debt was written off in 2010.

The great event was meant to occur in time for the 50th anniversary independence jubilee. However, thanks to churlishness by Paris Club members Canada (which was aggrieved by perceived mistreatment of a Canadian mining company, First Quantum, by the Democratic Republic of Congo government) and Switzerland, the announcement had to be delayed until after the celebration.

Genuine debt relief did occur as part of the HIPC initiative.

However, it should be remarked that the very raison d'etre of the HIPC initiative was to assist poor countries that already would not - and could not - service their debt.

The financial impact is probably less than the news reports such as "$12.3 billion in Democratic Republic of Congo debt relief" might imply. [6]

The BBC estimated that, at the time of the 2010 debt relief, the Democratic Republic of Congo was paying a not inconsiderable but certainly not massive $300 million a year in debt service. The principal - the $10 billion - has gone bye-bye. The Democratic Republic of Congo could only pay a fraction of the interest each year at present, and for the foreseeable future.

In actuality, therefore, France, as an example, was not writing off $2 billion dollars in debt so much as it was sacrificing a yearly cash flow of several tens of millions - out of a total foreign aid budget of $5 billion.

The HIPC workout, therefore, was not conceived as a panacea for the Democratic Republic of Congo's previous debt problems.

For the international community, for the Democratic Republic of Congo - and for China - the HIPC initiative is significant in what it demands today, and in the future.

In order to qualify for the HIPC, the Democratic Republic of Congo had to meet extensive requirements for good governance, transparency, and privatization. Funds made available by debt relief were to be funneled into virtuous poverty reduction programs, implying that the Democratic Republic of Congo had swapped financial indebtedness for moral indebtedness.

Once it qualified for the HIPC, the Democratic Republic of Congo gained access to IMF loans, which it needed to cope with the global recession.

To date, the Democratic Republic of Congo has borrowed $320 million, with the capacity to borrow another $200 million from the IMF's extended credit facility. The loan is interest free but, after a 5-1/2 year grace period, the loan has to be paid back in 10 years. If the Democratic Republic of Congo takes the full $520 million, it looks like it will face debt repayment to the IMF at a rate of $100 million per year in the latter half of the decade. [7]

In other words, it has swapped "odious" debt it was rather cavalier about paying, for IMF debt it has to pay back.

The Democratic Republic of Congo has also committed to a lot of social, regulatory, fiscal and financial reform demands that the IMF believes would lead the war-shattered, impoverished, and corrupted nation into the promised land of sustained growth fueled by private investment.

For reasons of institutional as well as pro-Western bias, therefore, the IMF would be hostile to the Chinese copper-for-infrastructure barter deal.

First of all, the Sicomines deal is government-to-government, and does not conform to the free-market/private sector makeover the IMF envisages for the Democratic Republic of Congo. The Western nations have little interest in solving the vulture fund conundrum or seeing the Democratic Republic of Congo exacerbate its sovereign debt problems by encumbering the government with new obligations.

For reasons of convenience as well as ideology, the IMF would like to see the Democratic Republic of Congo government avoid business operations - and their opportunities for corruption, mismanagement, and market distortions - altogether.

Also, if the Democratic Republic of Congo successfully executed the barter arrangement with China, it might extend the model to other infrastructure deals, thereby undercutting the private enterprise model that the IMF is so eager to promote - and decreasing Western leverage over the country by making it less dependent on the IMF's good offices to attract capital.

It is likely these reasons, and not the dubious claim that Democratic Republic of Congo government guarantees to China represented an unacceptable increase in sovereign indebtedness, were behind the IMF's demand that the Sino-Congo lese copper deal be scaled back from $9 billion to $6 billion, thereby sacrificing half of the infrastructure component. [8]

The IMF's lack of enthusiasm for government-to-government wheeling and dealing in the Democratic Republic of Congo can be seen in its 2011 country report. In the extractive sector, the main area of Chinese interest, it declares:
16. Concerning structural policies, staff, jointly with the World Bank, focused discussions heavily on measures to enhance governance and transparency in extractive industries (forestry, mining, oil). A few high-profile disputes in these industries, lack of transparency in transactions, and concerns over the relatively low level of returns to the state from the exploitation of natural resources have highlighted deficiencies in the policy framework. Although the authorities did not feel these issues signaled deterioration in the business climate, they did agree that better management of natural resources is essential to the Democratic Republic of Congo 's long-term development.

17. The authorities agreed to pursue a broad range of reforms in extractive industries, developed in close collaboration with the World Bank. These reforms aim, inter alia, to ensure the sanctity of contracts and private property rights and enhance the transparency of transactions in these industries. The authorities also indicated an interest in taking the necessary steps to accede to the 1958 New York Convention on the Recognition and Enforcement of Arbitral Awards. [9]
It is open to question whether the Democratic Republic of Congo, for practical as well as self-interested reasons, shares the IMF's whole-hearted free market orientation.

As the FG Hemisphere case demonstrates, for instance, the Democratic Republic of Congo government is actively resisting the imposition of an arbitral award in the Hong Kong courts.

There are also strong indications that the Democratic Republic of Congo, despite its pledge of allegiance to the IMF, also continues to relish the opportunity to engage in the kind of opportunistic contract renegotiations that private sector partners find particularly infuriating but owners of commodities with high price volatility find irresistible.

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