Citigroup and JP Morgan are acting as financial advisers to the Finance Ministry on the settlement of the $22,000 million-worth of commercial claims against it. Creditors owed less than $35 million were offered a cash settlement of 20 per cent, which was closed in two phases during 2005 (MEED 29:7:05).

Those owed more than $35 million were offered a debt-for-debt exchange, with a deadline of 21 December to respond. Creditors could subscribe either to a privately-placed dollar-denominated bond or a multi-currency syndicated loan. Both have a tenor of 22 years, to conform to the requirement of the Paris Club debt write-off agreement that commercial creditors be offered comparable terms.

The bond pays a coupon of 5.8 per cent while the loan carries a margin of 50 basis points over Libor. The majority of creditors subscribed to the bond, which ended up worth $2,700 million and is due to begin trading on 19 January. The loan will be worth $175 million. 'Some creditors were attracted by the option of a liquid tradeable instrument while others would have been tempted by the multi-currency option - the loan was offered in euros, yen and dollars,' says a banker involved in the deal.

The timing of the debt restructuring deal was closely linked to the stand-by arrangement with the IMF, which is designed to support Iraq's economic programme over the next 15 months. 'It sent a positive signal of policy rigour to the creditors,' says the banker.

The IMF agreement was also the precondition set by the Paris Club countries for forgiveness of a further 30 per cent of the $40,000 million owed to them. The group agreed in November 2004 to write off 80 per cent of Iraq's debt, 30 per cent of which was effective immediately. The final 20 per cent will be forgiven on completion of the IMF arrangement.

Baghdad has also concluded several bilateral deals with sovereign creditors. The total debt amassed by the previous regime is estimated at about $130,000 million. Ernst & Young is acting as overall adviser on the country's debt reconciliation programme.

www.meed.com/economy