Baker advocated loan program that amassed much of Iraq debt

Monday, January 12, 2004

WASHINGTON -- Now assigned the task of reducing Iraq's debt, presidential envoy James A. Baker III once gave crucial support for continuing a billion-dollar loan program to Saddam Hussein's government that accounts for most of the money Iraq still owes the United States.

As secretary of state in 1989, Baker urged the Agriculture Department to offer $1 billion in loan guarantees for Iraq to buy U.S. farm products after Iraq said it would reject a smaller deal.

"Documents indicate he intervened personally to make sure that Iraq continued to receive high levels of funding," said Joyce Battle, Middle East analyst for the National Security Archives, a foreign policy research center with a vast collection of declassified documents from the era.

Only half the guarantees were provided before the program was suspended amid allegations of improprieties and deterioration of relations with Iraq in the months before the August 1990 invasion of Kuwait.

The guarantees were an important part of the first President Bush's effort to improve relations with Iraq in hopes of boosting commercial ties and gaining leverage with a powerful and strategically important nation.

U.S. officials were well aware at the time that Saddam had used chemical weapons against Iran and Iraqi Kurds. Iraq also was believed to have biological and nuclear weapons programs and to be harboring terrorists -- reasons the current Bush administration has used to justify toppling the Iraqi leader.

But in 1989, Baker and other officials hoped incentives might change Saddam.

Not a bad approach

"That turned out to be unsuccessful, but I don't think it was necessarily a bad approach to try," said John H. Kelly, who led the State Department's Near Eastern Affairs bureau under Baker.

After invading Kuwait, Iraq defaulted on its debt to the United States; the debt has grown to more than $4 billion. That includes $1.9 billion in principal and $1.1 billion in interest on Agriculture Department-guaranteed loans.

"The Iraq loss was certainly a shock to the system because of the magnitude," Clayton Yeutter, agriculture secretary at the time, said in an interview. He said the Iraq experience taught officials to be careful about guaranteeing too much debt for a single nation.

The U.S. debt is a small part of Iraq's overall $120 billion debt. Baker is now traveling the world as Bush's envoy, seeking relief for Iraq.

The United States began providing loan guarantees to Iraq in the 1980s. Iraq was at war with Iran and the United States wanted to prevent advances by Iran's clerical government.

When the first President Bush took office in 1989, the Iraq-Iran war was over and Iraq was not a U.S. priority, Baker wrote in his 1995 memoirs, "The Politics of Diplomacy."

To the extent it was considered, however, there were reasons to seek better relations.

Iraq was a major oil supplier. It was the ninth largest customer of U.S. agricultural goods, with most purchases backed by U.S. loan guarantees. U.S. companies were competing with foreign rivals for postwar business opportunities. Iraq was then the most powerful Arab country, and the United States hoped it might help Middle East peace efforts.

Some U.S. officials and members of Congress opposed attempts to improve relations, given Iraq's record of gassing of Kurds and other abuses. The State Department's human rights bureau described Iraq's record as abysmal, and its director, Richard Schifter, argued against any assistance.

Signs of change

But some U.S. officials saw signs of change. Iraq appeared willing to discuss chemical weapons and human rights issues. Also, Iraq agreed in March 1989 to pay $27 million to the families of 37 sailors killed by a 1987 Iraqi missile attack on the USS Stark.

Bush spelled out his policy in a national security directive from Oct. 2, 1989: "The United States government should propose economic and political incentives for Iraq to moderate its behavior and to increase our influence with Iraq." The policy left open the possibility of punitive measures if incentives failed.

"We were under no illusions about Saddam's brutality toward his own people or his capacity for escalating tensions with his neighbors," Baker wrote. "We fully recognized at the time that it was entirely possible any carrots we offered him would fail to produce the desired result."

Baker tried to improve relations. In March 1989, he assured an Iraqi diplomat that he would take a personal interest in Iraq's request for expanded loan guarantees from the Export-Import Bank. Later, when Congress barred Iraq from participating in bank programs, the State Department drafted a waiver to override the sanctions. Bush signed the waiver in January 1990.

The big issue, however, was the agricultural loan guarantees, which provide producers and lenders with assurances that loans will be repaid. The guarantees helped Iraq obtain financing to buy U.S. farm products.

By 1989, Iraq had been receiving about $1 billion a year in guarantees. The Agriculture Department proposed reducing that to $400 million for 1990, with the possibility of more money later. Officials were concerned about Iraq's creditworthiness, about corruption in the Iraq loan program and about a brewing scandal involving unauthorized loans to Iraq by the Atlanta branch of Italy's Banca Nazionale del Lavoro.

Angered by the cut, Iraq said it would reject the guarantees. At an Oct. 6, 1989, meeting with Baker, Foreign Minister Tariq Aziz "made it clear this was not a sign that the U.S. wanted improvement in relations," a State Department cable said then.

If Iraq were cut off, some U.S. officials feared Saddam would default on the existing debt. Other officials, though, questioned expanding Iraq's already large foreign debt.

Kelly and Abraham Sofaer, the State Department counsel, proposed a $1 billion program for Iraq, divided in two parts, with safeguards to prevent misuse. Sofaer recalled that the Stark settlement was an important consideration.

"It wasn't a quid pro quo, but it was a positive reaction to a positive development," he said in a recent interview.

Baker supported the proposal and called Agriculture Secretary Yeutter, who agreed to back the plan. The $1 billion package was approved days later at an interagency meeting.

Baker then wrote to Aziz, saying the guarantees reflected "the importance we attach to our relationship with Iraq."

Iraq received the first $500 million, but never the rest. Relations quickly deteriorated. By April 1990, the United States was angered by Saddam's threat to use chemical weapons against Israel, his criticism of the U.S. role in the Gulf and other issues.

The multiagency group suspended the second part of the loan program in May 1990. Declassified documents do not cite the worsening relations, but rather allegations of abuses in the loan program.


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