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WORTHLESS CASH: Chay Sophon (left), then director-general of the SPK, now the Khmer Press Agency (AKP), stands with members of an East German delegation amid worthless Lon Nol era banknotes in the strongroom of the abandoned National Bank building in early 1979.

In a television broadcast on April 30, 1970, then-US President Richard Nixon explained

his decision to dispatch American soldiers and aid to Cambodia.

"To protect our men who are in Vietnam and to guarantee the continued success

of our withdrawal and Vietnamization programs, I have concluded that the time has

come for action," he said.

In truth the US had begun a secret campaign against suspected communist base camps

the previous year. Suspected NVA/VC staging areas in eastern Cambodia were carpet

bombed by US B-52s killing an untold number of civilians. The planes had dropped

around half a million tons of bombs on the countryside, using various targeting procedures,

by the time Congress halted them in August 1973.

Lon Nol's coup d'etat against then-Prince Norodom Sihanouk in March 1970 triggered

nearly 30 years of war in the country. While some assert the coup was backed by the

CIA, there is no clear evidence of that claim. However almost as soon as he took

over, Lon Nol needed US help to survive.

Government soldiers lost ground to communist troops, Phnom Penh became flooded with

refugees, and the country lost most of its ability to grow food. Lon Nol became so

unpopular he was forced to rig a national election to beat liberal politician In

Tam. The economy and war effort became entirely reliant on American aid.

By the time Phnom Penh fell to the Khmer Rouge in 1975, the US had poured $1.9 billion

into propping up the Lon Nol government. Although Nixon once called aid to Cambodia

"the best foreign policy investment the United States has made in my lifetime",

much of it was squandered.

The wife of Lon Non, who was the notoriously corrupt head of the army and brother

of Lon Nol, was reportedly stopped by French airport officials on a trip to Paris.

A toy dog carried by one of her children was impounded after authorities found $170,000

in cash stuffed inside.

Corrupt officials often sold US supplies - military equipment, medicines and rice

- directly to the Khmer Rouge.

Journalist Elizabeth Becker writes that rice riots began as early as 1972 and the

food situation was so desperate by 1973 that the US Embassy cabled to Washington

weekly reports on rice stocks in Phnom Penh. By 1974 malnutrition was common among

children in the city.

With the Lon Nol regime now long gone, some people are surprised the US government

has demanded to be repaid the nearly $300 million in loans it made to the country

during that time.

In Cambodia the records of the loans were destroyed after the Khmer Rouge came to

power. A recent report from the International Monetary Fund (IMF) notes, however,

that in December 2001 the US government sent official copies of loan documents to

Phnom Penh detailing five loans made between 1972-74.

The IMF says the loans were made in the form of commodities under the US Department

of Agriculture's PL-480 program. In that program, food is lent on concessionary terms

to a government which repays in local currency that is then spent in the host economy.

Although Cambodia's Minister of Economy and Finance, Keat Chhon, did not respond

to a written request for an interview, the Post has learned that the MEF is now reviewing

those documents.

One MEF official sifting through the "big pile" of loan documents to ensure

they support the claim, says he thinks it is likely the government will repay a negotiated

portion of the debt.

"We have volunteered to solve the problem," he says. "We recognize

the state heritage, so it doesn't matter that it was borrowed in a different regime."

The US Embassy's economic and commercial officer Michael Keller says the two governments

are currently working out the issue.

"The US government isn't looking to bankrupt the Cambodian government,"

he says.

Both Keller and MEF staff were coy about giving specific details on the loans because

they have yet to reach an agreement. However the Organization for Economic Cooperation

and Development (OECD), a grouping of the 30 wealthiest nations that deals with development

issues, says the US Department of Agriculture committed loans in commodities to Cambodia

totaling at least $278 million from 1972 to 1975.

Cambodia has another even more sizable debt from its Cold War past. The IMF report

says the Russian Federation claims $1.3 billion in loans for supporting the country

during the 1980s.

Discussions between Cambodian and Russian delegations have intensified over the past

year, and it is likely a repayment schedule with a 70 percent discount will soon

be worked out through the Paris Club, a group of creditors that helps debtor nations

find solutions.

In 1995 the US tried to seek a treatment through the Paris Club for $248 million

in loans with 58 percent waived, but the Cambodian government refused the terms.

And even though the US and some MEF staff think the American debt claim is not tenuous,

Cambodian government spokesman Khieu Khanarith says his government is being pressured

in a situation it cannot resolve.

"We are in a difficult position because the National Assembly declared the Lon

Nol coup illegal," says Khanarith. "We have to recognize the Lon Nol government

to recognize the loans."

Some of the debt from the Lon Nol era has been taken care of, but that money was

not repaid by Cambodia. Shortly before the Kingdom was re-established in 1993, Japan

and France agreed to assume a $52 million debt to the IMF, thereby allowing Cambodia

to rejoin the Fund.

Attorney-General Dr Kao Bunhong has been given the job of negotiating the legality

of the US claim. He says he has yet to discuss the issue with any US representatives.

The problem, he says, is complicated, but he essentially believes the US backed the

wrong horse in the 1970s.

"I don't understand why America wants the Cambodian government to repay the

debt," says Dr Bunhong. "[The Lon Nol government] used the money for war

and also put it in their pockets."

Oxfam, the international NGO that advocates debt relief for developing countries,

says it has no position on the US loans to Cambodia.

As part of the Millennium Development goals, sizable debts were written off for many

highly indebted poor countries, but Cambodia does not fall under that classification.

Another factor is that PL-480 loans were not included in the initiative.

The US Embassy's Keller says Cambodia is serious about solving the issue. When asked

if the US is considering forgiving the debt, he answered: "I don't know if the

US government ever does that."

Attorney general Dr Bunhong says the US government should send a representative to

discuss the issue. High profile meetings with US officials were planned for last

year, but they were canceled because of increased security concerns stemming from

the attacks on September 11.

Dr Bunhong believes the negotiations will probably happen soon after Phnom Penh hosts

the ASEAN summit in early November, but does not see how a solution can be reached.

"We cannot find the money to pay them back," he says. "How can we

pay them back? The Cambodian economy hasn't developed."

Some observers believe Cam-bodia's mounting overall debt - which the Post recently

calculated stands at around 100 percent of gross domestic product - could prove difficult

to repay. Keller maintains the negotiations over this portion are a "non-issue",

and says the US is not in a position to forgive the debt.

"In a perfect world, all would be forgiven," says Keller.

The legacy

Lon Nol era loan commitments from the US: Total $278m.

1972: Loan 720001: "Food aid." Commitment = $4 million.

1973: Loan 730013: "Food aid, tobacco, cotton." Commitment = $171 million.

1974: Loan 730013 (increase of previous commitment): "Edible oil, rice, feedgrains."

Commitment = $12 million. Loan 740008: "Rice." Commitment = $75 million.

1975: Loan 740008 (increase of previous commitment): "Rice, wheat, wheat flour."

Commitment = $16 million.

- Source: OECD