Iraq's Odious Debts

As Iraqi Dust Settles, Debt Is Getting A Lift

Conrad de Aenlle
The New York Times
May 5, 2003

THE swift demise of Saddam Hussein’s government was cause for jubilation at financial institutions that hold Iraqi debt. After trading at less than 10 cents on the dollar before the war, it soared to 25 cents as the outcome became assured.

Investors in the debt, and some independent analysts, expect the price to keep rising if Americans, who have been forbidden by the Treasury Department to own the paper since Iraq invaded Kuwait in 1990, are allowed back into the market.

“It could go as high as 35 to 40 cents on the dollar,” said Richard Segal, research director at Exotix, a London broker specializing in emerging-markets debt. “We expect the embargo to be lifted fairly soon, probably in an executive order on sanctions generally. U.S. investors will probably try to pile in once it becomes legal for them.”

That was the case in 1999 after Slobodan Milosevic was deposed in Serbia. Serbian debt, which had traded as low as 7.5 cents on the dollar, rose to 24 cents after his government fell and lately has been trading at more than half its face value.

Iraqi debt, which like all embargoed debt trades infrequently and over-the-counter, shows a similar pattern, up to a point. It sold for 7.5 to 9 cents on the dollar in the run-up to the war, then started to rise as fighting became imminent, Mr. Segal said. In midconflict the debt reached 16 to 20 cents, and last week the price hit 25 to 29 cents.

Gains in Iraqi debt and other embargoed paper have bolstered the returns of the Aberdeen Exotic Debt fund, a specialist in politically iffy debt instruments. The offshore fund, which is not sold to Americans, rose 16.7 percent this year through April 29, according to Bloomberg Financial Markets, and was up 37.6 percent over the 12 months through April 29.

Most traders in Iraqi debt are no longer wondering whether the embargo will be lifted, but when and how.

“There is a strong sense that this could get restructured, maybe at a big discount, but there is a lot of room for the price to move higher once the situation is clarified,” one London fund manager said. “It’s still early days. We don’t know the extent to which sanctions will be coming off or when.”

The fund manager spoke on condition of anonymity for himself and his company. Political sensitivities, relating especially to the embargo, make holders of Iraqi debt reluctant to discuss their investment on the record. The manager of the Aberdeen fund declined to be interviewed.

Iraq’s foreign debt is huge — by some estimates, more than $300 billion, or $13,000 for every Iraqi citizen. A large chunk, so-called Paris Club debt, is from loans made to Iraq by foreign governments, much of it for military use.

The investable paper, known as London Club debt, comprises less than 1 percent of Iraq’s total indebtedness and originated in the 1980’s as commercial loans from banking syndicates. Many of the banks were French or Middle Eastern, but three American banks participated, Mr. Segal said: Irving Trust, now part of the Bank of New York; and Chase Manhattan and Manufacturers Hanover Trust, which have since been consolidated with other banks to form J. P. Morgan Chase.

Spokesmen for J. P. Morgan and the Bank of New York declined to comment on the loans. One argument against the bullish case for Iraqi debt is that the banks may unload their positions once trading restrictions end.

The small amount of London Club debt may be the least of Iraq’s credit worries, but it may also be the last of them, That is another reason for caution.

“Countries typically follow a sequence in a regime-change situation,” Mr. Segal explained. “Any debt to the United Nations is paid first, then the International Monetary Fund, followed quickly by the World Bank, then the Paris Club, then the London Club.”

If holders of the London Club debt must stand in line, they may be in for a long wait.

A widely held view in Washington is that loans made to the Hussein government amount to “odious debt” that the lenders should forgive. The fact that the United States is in charge in Iraq and that much of the money is owed to three vocal opponents of the war — France, Russia and Germany — does not augur well for a quick accord.

Mr. Segal added, though, that the order of repayment is “a rule of thumb, not a rule,” and that any new Iraqi government would be wise to work out a deal swiftly with London Club creditors.

“It’s easy to restructure it on generous terms because it won’t cost much in absolute terms, and it will facilitate new debt on favorable terms,” he said.

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