Germany and France agree to help cut Iraqi debt

France and Germany laid aside their differences with the US yesterday as the two anti-war countries agreed to work with America to relieve Iraq's crushing burden of debt.

President Jacques Chirac and James Baker, the US special envoy, agreed on the need to reduce Iraq's total debt of $120bn (£68.4bn) by working through the Paris Club of donor countries. Mr Baker, a close friend of President Bush and a former secretary of state, said after meeting M. Chirac in Paris: "The French and the US government want to reduce the debt burden on Iraq so that its people can enjoy freedom and prosperity."

Iraq has owed France between $3bn to $5bn since before the first Gulf War. The Bush administration has not concealed its suspicion that France's anti-war stance was dictated by the outstanding debt, something French officials deny.

Mr Baker is also on a broader, fence-mending mission to the countries dubbed the "axis of weasels" - France, Germany and Russia - by the US tabloid press for their opposition to the US invasion. In a surprise announcement last week, the Bush administration barred countries opposed to the war from bidding for $18.6bn-worth of contracts.

Mr Baker made no reference to the issue, but a spokesman for M. Chirac said that both sides had agreed "on the importance of working together in the reconstruction of Iraq". Dominique de Villepin, the French foreign minister, pointedly said there would have to be a transfer of power to a sovereign Iraqi government before a deal on debt could be signed, and that all should be included in reconstruction.

The American envoy then flew to Berlin, where Gerhard Schröder, the German Chancellor, made clear the government's displeasure at being excluded from the lucrative post-war contracts. Bela Anda, a government spokesman, said: "Germany's position on the awarding of reconstruction contracts in Iraq was clearly expressed in the talks." But there was no announcement of a shift in the American position.

Mr Baker won agreement from the German government, which is owed more than $4bn by Iraq, on the debt issue. Mr Anda said: "Germany and the United States are, like France, ready not only to restructure the debt but also to engage in substantial debt forgiveness" through the international creditors.

Mr Baker's trickiest talks could be in Moscow. Russian government officials responded furiously to the Pentagon's announcement that the anti-war camp would be barred from competing for contracts.

Sergei Ivanov, the defence minister, said: "Iraq's debt to the Russia Federation comes to $8bn and, as far as the Russian government's position on this, it is not planning any kind of a write-off of that debt. Iraq is not a poor country."

Mr Baker will also hold talks today in Italy, a staunch ally of America in the war, during his tour of European capitals.