Iraq is, technically, deep in debt, and has been for decades. Now Iraq is asking the UN to stop taking five percent of Iraqi oil income and distributing it to Kuwait, and thousands of individuals, who are owed reparations for damage done during Iraq's 1990 invasion of Kuwait. So far, the reparations fund has paid out $29 billion, mostly to Kuwait.
Three years ago, Iraq began asking nations to cancel over $50 billion in debts, incurred during Saddam Hussein's rule. The implication here is that, if the debts are not cancelled, Iraq would simply renounce the debts as being those of dictator Saddam Hussein and his henchmen, and not an obligation of a democratic Iraq. That would put Iraq's international financial status at risk for years, as lawyers battled it out and banks retaliated. Most foreigners feel that Iraq should pay, if only because the country sits atop over a trillion dollars worth of oil, and that most of the money went to pay for a war with Iran, a war started when Saddam invaded in an attempt to steal Iran's oil fields.
While Iraq paid cash for billions of dollars in weapons and ammo during their war with Iran in the 1980s, they defaulted on over $30 billion in loans from Arab neighbors. In the last decade of Saddam's rule, he burned up what little fiscal credibility Iraq still had. When Saddam was overthrown in 2003, Iraq was not only broke, but possessed one of the lowest credit ratings on the planet. Saddam screwed everyone, and the international banks have a long memory for that sort of thing.
Iraq borrowed nearly $60 billion over the three decades of Saddam's rule, most of it used to pay for the 1980s war with Iran. After the initial 1980 invasion failed, Iran struck back. It was only because of generous gifts and loans from other Arab states, and generous credit terms, from Russia and China, for weapons purchases, that Saddam was able to survive.
The largest creditor was Saudi Arabia, which was owed $17 billion. Saudi officials were willing to forgive 80 per cent of the debt. Saudi Arabia sees Iraq as its main defense against Iranian aggression, and wants to develop good relations with the new Iraqi government.
Kuwait was owed $15 billion. Because of the 1990 Iraq invasion (partly in an attempt to cancel that debt), the Kuwaitis refuse to cancel the debt. Kuwaiti elected officials dare not risk offending their constituents by showing any willingness to forgive the Iraq debt. Part of this animosity is due to the savagery of the Iraqis when they occupied (and looted) Kuwait in the second half of 1990. But Kuwaitis are also upset at the fact that Iraq still claims Kuwait as part of Iraq (the "19th province.") So there's little good will towards Iraq in Kuwait.
Russia was owed $13 billion, and was willing to forgive the debt, in return for guarantees that new business will be forthcoming. Russia has worked out similar deals with other Arab nations that bought lots of weapons from the Soviet Union, and then were unable, or unwilling, to pay. These days, Russia is much stricter when it comes to getting paid for weapons. China was owed $8 billion, has said little, but was believed to want whatever deal Russia gets. The rest was owed to a collection of Western and Moslem states, all of whom wanted Iraq to survive its war with Iran in the 1980s.