Cheney's $80 billion: The facts

Normally, this is a place for me to rant about stuff which I might care about, but can't really claim to be any kind of an expert on. I'm breaking with tradition here, however, to pick on Dick Cheney for one thing he said in tonight's vice-presidential debate. This from the transcript:

EDWARDS: You know, we've taken 90 percent of the coalition causalities. American taxpayers have borne 90 percent of the costs of the effort in Iraq.
And we see the result of there not being a coalition: The first Gulf war cost America $5 billion. We're at $200 billion and counting.
IFILL: Mr. Vice President, you have 90 seconds to respond.
CHENEY: Well, Gwen, the 90 percent figure is just dead wrong. When you include the Iraqi security forces that have suffered casualties, as well as the allies, they‘ve taken almost 50 percent of the casualties in operations in Iraq, which leaves the U.S. with 50 percent, not 90 percent.
With respect to the cost, it wasn't $200 billion. You probably weren't there to vote for that. But $120 billion is, in fact, what has been allocated to Iraq. The rest of it's for Afghanistan and the global war on terror.
The allies have stepped forward and agreed to reduce and forgive Iraqi debt to the tune of nearly $80 billion by one estimate. That, plus $14 billion they promised in terms of direct aid, puts the overall allied contribution financially at about $95 billion, not to the $120 billion we've got, but, you know, better than 40 percent. So your facts are just wrong, Senator.

Now it just so happens that the one thing I really do know about is Iraq's sovereign debt: I just wrote a 6,600-word cover story on the subject for the September issue of Euromoney. But before I get to the debt, let's just see what Cheney is doing here. When he says, for instance, that "The 90 percent figure is just dead wrong", he's simply lying. Quite clearly, according to the transcript, Edwards talked about "the coalition casualties". Only by including the Iraqi casualties can Cheney bring that number down – and, frankly, I'm surprised he wants to go there, given the enormous number of Iraqi civilian casualties that the US has caused.

Cheney then points out, correctly, that the cost of the war in Iraq so far is $120 billion, not $200 billion. On the other hand, the total projected cost of the war in Iraq has actually reached $200 billion. You pays yer billions and you takes yer choice, I suppose. Cheney then decides to compare the $120 billion figure with $95 billion that he says "the allies" are giving as their "overall contribution". And that's where he starts moving into the realm of complete and utter fantasy.

Cheney's $14 billion figure I have no idea about: it's not footnoted on the official Bush-Cheney debate facts page, and I haven't been able to Google it. Maybe it's true, maybe it isn't. But the $80 billion figure is just crazy. Here are the facts.

Firstly, "the allies", as that term is generally understood, can't possibly reduce Iraq's debt by "nearly $80 billion", because they don't even have that much in Iraqi debt. The US is owed about $4.4 billion, the UK is owed less than $2 billion, and all of eastern Europe combined is owed maybe $6 billion – mostly to countries like Bulgaria, who weren't part of the coalition in the first place.

Secondly, no one's "stepped forward and agreed" anything. Some of Iraq's major creditors, including France and Russia, have paid lip service to the principle of reducing Iraq's debt, promising a "substantial reduction" or suchlike when Iraq goes to the Paris Club of bilateral creditors later this year. In the world of debt restructuring, a "substantial reduction" can mean anything from 35% to 95%. Indeed, if there was any kind of agreement, Cheney wouldn't need to be citing estimates: he could just cite the agreement. But there is none.

Thirdly, there are certainly people out there who think that Iraq's debt will be reduced by $80 billion. But that's all in the future: it hasn't happened yet. Cheney's verb tense ("have agreed") is unambiguous: he's saying this has already happened. It hasn't. The talks haven't even started yet. Even if a Paris Club agreement is concluded by the end of this year (a very big if), the Paris Club in total accounts for less than $42 billion of Iraq's foreign debt. And it doesn't take a former CEO to know that you can't reduce $42 billion of debt by $80 billion.

More broadly, Cheney is comparing apples with oranges. Consider the hypothetical case of a French contractor who built a hospital in Iraq in the 1980s. Iraq was tardy on its payments, and eventually, after the invasion of Kuwait, stopped them entirely. Of the $20 million total cost, let's say only $10 million was paid. Because the contract was supported by French export credit guarantees, the French government took on the debt, paying the contractor itself. Today, with past-due interest, the $10 million that Iraq owed has grown to $20 million. If France agrees to write off 75% of that debt, then, by Cheney's calculus, it's contributing $15 million towards Iraq, $15 million which is entirely comparable (if you're Cheney) to $15 million in real US taxpayer dollars which is being spent by the US government on troops and munitions and reconstruction and the like.

Remember that the $15 million which France may or may not write off is basically little more than an accounting entry. It costs the French taxpayer nothing: it's simply a recognition of the fact, which has been obvious for years, that Iraq is never going to pay its creditors all that they are owed.

Look at it another way: let's say that back in 1984, when interest rates were high, I lent my uncle Ted $100, at 10% interest, for a period of time we both thought wouldn't be much more than a year. He then disappeared entirely: maybe he joined an ashram in India, or something. Whatever: he was impossible to contact, and I mentally gave up hope of ever getting my money back. But then, out of the blue, he turns up one day, saying that he's trying to rectify everything he's ever done in his life, and offering me a crisp $100 bill. By Cheney's calculation, accepting that bill in payment of his debts is functionally equivalent to giving him $573 in cash.

To be sure, the $100 loan has compounded so much over the past 20 years that Ted would need that much extra to pay me past-due interest. But there's no doubt that there's a huge difference between me accepting that $100 bill in payment of his debts, and my cousin Fred lending Ted $500 in brand-new cash. But if my cousin Fred was related to Cheney, he could say something like "well, I might have given Ted $500, but Felix has given him even more: Felix has given him $573". In reality, of course, I never gave Ted anything of the sort, and in fact I never even lent him that much to start with.

I can tell you where Cheney's $80 billion figure comes from. Iraq's total debts come to about $120 billion, the vast majority of which are bilateral. The general consensus among people who know about such things is that by the time everything is worked out, Iraq will receive at least two-thirds forgiveness of its debts – and two thirds of $120 billion is $80 billion.

But bear in mind, here, that somewhere between $55 billion and $70 billion of that $120 billion headline figure is owed to other Arab states, who helped to finance Iraq during the Iran-Iraq war. The degree to which that money was grants, rather than loans, has never really been formalised: these things are usually agreed verbally between ministers, and reliable records can be impossible to find. Never mind that these Gulf states certainly don't seem to count as "allies" for the purposes of Cheney's rhetoric: if they simply decide that the money they gave Iraq in the 1980s was, well, money they gave Iraq in the 1980s, and money they don't expect to be repaid, then suddenly "the overall allied contribution" has been bumped up by something north of $50 billion.

In other words, if the Kerry campaign tells you that the US is bearing 90% of the costs in Iraq, and the Bush campaign counters with anything along the lines of what Cheney said today, you can rest assured that the Kerry campaign is right and the Bush campaign is wrong. I'm sure the same is true on many other issues as well, but this is the one I really know about. Any questions about Iraq's sovereign debt – just ask. I'm your man.

Posted by Felix at 1:33 EST