U.S. special envoy James Baker met with German Chancellor Gerhard Schröder in Berlin on Tuesday to discuss the issue of reducing Iraq’s foreign debt. The former U.S. Secretary of State is on a European tour to gain support for relieving Iraq's foreign debt and ease a transatlantic row over the awarding of reconstruction contracts in Iraq.

Ahead of the talks, the chancellor said Germany was ready to make a "substantial contribution" to rebuilding Iraq. "We will talk about what we should do with Iraq’s debt," Schröder told reporters before meeting Baker.

"Germany is ready to make a substantial contribution to help rebuilding a democratic and stable Iraq. That will be a subject of our talks today and I think that we will have an agreement within a foreseeable time," Schröder said.

German government spokesman Bela Anda told reporters "Germany and the United States are -- like France -- ready
not only to restructure the debt but also to engage in
substantial debt forgiveness."

Cordial meeting with Chirac

Earlier in the day Baker met with French President Jacques Chirac in Paris (photo). The two men appeared willing to lay aside differences over the Iraq war, as they agreed that international creditors must reach a deal to ease Iraq’s huge foreign debts in 2004.

"The French and the U.S. government want to reduce the debt burden on Iraq so that ist people can enjoy freedom and prosperity," Baker told reporters after meeting Chirac. "It is important to reduce the Iraqi debt burden within the Paris Club (of creditor states) in 2004 if possible," he said.

With claims of almost $3 billion (€2.4 billion) not including interest, France is one of the largest creditors to Iraq from the Paris Club, a grouping of nations set up in 1956 to deal collectively with indebted countries.

Germany is owed close to $5 billion, while Iraq’s total debts are estimated by the International Monetary Fund to be around $120 billion.

Full sovereignty to Iraq

However there was no mention at Tuesday’s meeting between Baker and Chirac of Washington reconsidering its decision to exclude war opponents Germany, France and Russia from bidding for Iraqi reconstruction contracts worth $18.6 billion.

On Monday, France reiterated its demand that a debt relief deal for Iraq would be conditional on Washington returning full sovereignty to Baghdad, and an internationally-approved reconstruction plan.

"This must be done under the auspices of the Paris Club after a deal with the international Monetary Fund and when a sovereign government is installed," French Foreign Minsiter Dominque de Villepin said. "For reconstruction to succeed, it’s clear that the entire international community must mobilize hand-in-hand with the United Nations to restore a state of law and secure a return to prosperity with an adequate degree of transparency," he added.

Pressure on Bush

Though Berlin has indicated in recent months that it is willing to consider some debt reduction towards Iraq, it is believed that Germany is not too enthusiastic on loosening strict Paris Club rules on debt relief.

Since the capture of former Iraqi leader Saddam Hussein, several countries, including Germany, have called on U.S. President Bush to revise his policy and allow Iraq’s reconstruction to happen on a broader, international basis.

"I was extremely pleased to hear of the capture of Saddam Hussein and I offer my congratulations on this successful operation," German Chancellor Gerhard Schröder said in an official letter to Bush. "I hope his arrest will aid the efforts of the international community in rebuilding and stabilizing Iraq."

Bush said he’s interested in cooperating with France and Germany, and that he didn’t think the transatlantic rift over his Iraq policy would be a lasting one.

But in an interview with Reuters, German Defence Minister Peter Struck said the U.S. decision to shut war opponents out of the reconstruction process had further damaged German - U.S. relations.

Struck said he hoped Baker's visit to Berlin would lead the U.S. to reconsider its policy on Iraq's reconstruction, but that he was not in favor of taking any legal action against the U.S.

"I don't think there's any sense in taking the U.S. to court over the question of reconstruction contract," Struck said. "I hope the talks that James Baker will conduct in Berlin will bring a change in the stance of the U.S. government," Struck added.

U.S. stays firm on reconstruction bids

For the moment, it seems that Bush’s idea of cooperation with France and Germany is limited to working out an agreement on Iraq’s debt. There’ve been no signals from Washington that the government plans to allow the two nations, or any of the other countries that opposed the war, to bid for reconstruction contracts.

Nor is there any sign that Bush intends to increase the involvement of the international community in peacekeeping activities in Iraq. Rather, Bush has stressed that the U.S. will be "staying the course" in Iraq, and that U.S. troops will remain on the ground until their job was done.

Meanwhile, the Pentagon announced that it had delayed the bidding conference for reconstruction contracts in Iraq until early January. Companies were supposed to begin entering their bids at the end of this week. There was no reason given for the delay.