Iraq's Debt Bomb

By Adam Zagorin

Allied troops are still searching for Saddam's weapons of mass destruction, but the Iraqi debt bomb may be getting set to explode. Before the war, Bush Administration officials frequently insisted that the reconstruction of Iraq would be paid for by the country's oil revenues. But between debts, money owed on signed contracts and reparations from the first Gulf War, Baghdad owes $200 billion to $300 billion. That means the country is in much tougher shape than international financial basket cases like Argentina. And its oil sales, subject to U.N. approval, amount to only about $15 billion annually.

So getting Iraq back on its feet financially will necessitate the largest debt rescheduling in history. The U.S. is already trying to persuade France, Russia and Germany, along with moderate Arab states, which hold most of Iraq's debt, to ease the country's titanic foreign financial obligations. Hard-line Deputy Defense Secretary Paul Wolfowitz has called for reduction or elimination of Iraqi debt, and over the weekend the U.S. put that demand to the Group of Seven finance ministers meeting in Washington.

But will Europeans and moderate Arabs want to help out, considering that they objected to the U.S.-led war? And if they do agree, what will they want in return? "In exchange for debt relief, France, Germany, Russia and others are very likely to ask for contracts to rebuild the country and sell Iraqi oil, as well as a voice in economic policy," points out Robert Hormats, vice chairman of Goldman Sachs International and a former State Department official in the Carter Administration. So far, the billions of dollars in contracts to rebuild Iraq are going to U.S. companies. And at least initially, U.S. officials are planning to make all decisions about Iraq's economy, with help from local advisers. If that doesn't change, debt relief may be a hard sell with the Europeans--and U.S. taxpayers will end up paying the price. --By Adam Zagorin