Germany, France and the United States said on Tuesday they were prepared to offer substantial debt relief to Iraq after a visit to the two main opponents of the war in Iraq by U.S. special envoy James Baker.  

"Debt reduction is critical if the Iraqi people are to have any chance to build a free and prosperous Iraq," U.S. President Bush, French President Jacques Chirac and German Chancellor Gerhard Schroeder said in a joint statement.

German Chancellor Gerhard Schroeder, right, meets James A. Baker, U.S. President Bush's envoy, Tuesday, Dec.16, 2003 in the Chancellery in Berlin. Baker is on a European tour to win support for Iraq's reconstruction from some of the staunchest opponents of the Iraq war.  [AP]

"Therefore, France, Germany and the United States agree that there should be substantial debt reduction for Iraq in the Paris Club in 2004, and will work closely with each other and with other countries to achieve this objective."

The size of reduction in Iraq's $120 billion in debt will be agreed later.

Baker is on a European trip to win support for a debt relief deal and to ease a transatlantic row over contracts to rebuild Iraq.

In Washington, White House spokesman Scott McClellan said Bush had spoken to Baker about his meetings with Chirac and Schroeder.

"We appreciate the commitments they made on the need to restructure and reduce the debt burden," he said.

Washington has barred opponents of the U.S.-led invasion of Iraq, including France and Germany, from bidding for contracts worth about $18.6 billion.

READY TO TALK ABOUT IRAQ CONTRACTS

The International Monetary Fund puts Iraq's debts at about $120 billion, of which about $40 billion is debt and arrears to the 19 countries in the Paris Club.

Two days after the capture of former Iraqi President Saddam Hussein, it appeared a good start for Baker on a trip which also includes meetings in Russia, another war opponent which stands to miss out on the reconstruction contracts.

However, French Foreign Minister Dominique de Villepin said there would have to be a transfer of power to a sovereign Iraqi government before a debt deal could be signed, and that all should be included in reconstruction.

U.S. officials said Baker wanted to put across the message that France, Germany and Russia still have an opportunity to secure lucrative sub-contracts and the White House said it did not want to close off discussion of the issue.

"We welcome the opportunity to discuss our decision with others if they want to talk about that. The president has made it very clear that those lines of communication would be open," McClellan said.

Baker also faces questions over Washington's Iraq policies, despite efforts to rebuild relations damaged by the war. France, for example, wants a bigger role for the United Nations in Iraq.

Officials said in private that countries such as Germany and Japan were less keen than others about adding a heavy dose of flexibility to strict Paris Club rules on debt relief.

Earlier in Paris, after meeting Baker, Iraqi central bank governor Sinan al-Shabibi said he was encouraged by the level of unity among countries on the need to reduce Iraq's debts, adding he sensed "a high level of support" for debt relief.

Meanwhile German newspaper Handelsblatt said German firms were concerned that forgiving a large part of Iraq's sovereign debt may lessen chances of getting back their corporate loans.

Handelsblatt said Iraq owed German businesses $1.4 billion, mainly from work done in Iraq in the 1970s and 1980s.

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