Iraq's Odious Debts

Baghdad action triggers rally in traded debt

P—çivi Munter
Financial Times
April 8, 2003

The prospect of a regime change in Baghdad that could pave the way for debt restructuring talks between a new government and the country’s long-suffering creditors, has triggered a rally in Iraq’s traded debt.

Iraq is estimated to owe more than $100bn (–Ç90bn, –à64bn) in international loans, and has paid no interest for some 15 years. The country also faces other claims in the hundreds of millions.

“There is going to be good will among western creditors to reach a settlement soon, and they are likely to be realistic about how much the government can pay,” said Richard Segal, director of research at Exotix, the broker specialising in illiquid emerging market debt.

Prices for Iraq’s traded commercial loans more than doubled in the weeks when war began to look inevitable and analysts say there is scope for more gains once a new administration is in place. The market now expects holders of the benchmark Iraqi $500m syndicated loans, issued in the 1980s, will get back about 20 cents for each dollar they lent. According to Exotix, this may increase to about 29 cents in the next 6-12 months.

In an environment of globally low interest rates, such potential improvements in rates of return draw interest from some specialist emerging markets. However, the market remains highly illiquid, given Iraq’s long isolation from the international financial system. US investors are not allowed to trade in Iraqi debt.

In the absence of official statistics, estimates of Iraq’s obligations vary widely. According to Exotix, they total between $103bn and $129bn, including interest arrears.

The biggest of the international creditor groups is the Paris Club of sovereign lenders, which is owed $25bn. Among the Club’s members, Russia and France are both due $8bn.

Iraq also has $2.6bn commercial debt outstanding to the London Club of creditors and $1.1bn to multilateral lenders, such as the International Monetary Fund and World Bank.

Baghdad received $30bn-$35bn from other Gulf states, but while Iraq regards these sums as grants, the counterparties consider them loans.

Finally, the new administration will have to grapple with reparation claims, deriving from the first Gulf war. So, far the United Nations Compensation Commission (UNCC) has recorded $200bn of these claims, $44bn of which have been awarded and $17bn of which have been paid.

Not even future revenues from Iraq’s oil exports, estimated at $25bn a year, would allow the country to repay all its debts. Analysts expect the government to receive a debt write-off of up to 90 per cent.

“Western governments will be inclined to accept a substantial write-off . . . as part of their contribution to the rebuilding of the regime,” said Jan Mekenkamp at Omni Whittington, the Dutch company specialising in debt recovery from pariah states.

But before debt restructuring talks can begin, Iraq’s new rulers will need a viable economic programme, probably sponsored by the IMF, says Mr Segal of Exotix.

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