Iraq's Odious Debts

Street seeks to advise Iraq

Sandra Lea Abrams
The Investment Dealers’ Digest
August 2, 2004

The violence in Iraq may be a long ways from over, but already the first barely distinguishable signs of a financial market are starting to emerge, shaped in part by Wall Street firms, which are quietly seeking to advise Iraqi officials on several fronts while laying the groundwork for future relationships.

On July 18, the Iraq Stock Exchange opened for business, such as it is. The country’s bond market also took its first baby step in July with a Iraqi treasury bill issue that raised more than $90 million. Meanwhile, Wall Street firms are also conducting tutorials on financing-both on an individual basis, as a few of the more adventurous firms have sent executives accompanied by bodyguards quietly into Iraq, and on a more collective basis, such as hosting a week-long series of seminars on the basics of the financing markets for an Iraqi delegation this past spring.

“What Wall Street can do to be constructive are things like training and giving them advice on setting up a banking system,” said Robert Hormats, vice chairman at Goldman Sachs. He added that Goldman has offered to take some Iraqis from the central bank or finance ministry for training, but so far there has been no response. “[The Street can] also give them advice on debt rescheduling, pro bono, because they cannot pay for it. This is likely to be the biggest rescheduling ever, due to the size of the debt and reparation claims against Iraq and will probably also be the most complicated ever due to the difficulty of sorting out the claims and Iraq-related policy differences among creditors.”

The cost of reconstruction from 2004 to 2007 was estimated at $36 billion in a joint assessment by the United Nations and the World Bank. Gross external debt is about $120 billion, according to a February 2004 report from Fitch Ratings.

Goldman is hardly the only Street firm with hopes for a role in rebuilding Iraq, though a half-dozen other Street firms, from Morgan Stanley to Citigroup, declined to comment on this issue. Commented one official from a bulge-bracket firm, who requested anonymity: “Wall Street firms are secretly sending over executives with bodyguards to access opportunities there. They are not only advising, but also looking at what infrastructure needs to be built, and what the market can handle. Once Iraq gets back in shape, you’ve got a fully functioning country with no outside banking relationships.”

There are more open avenues to learning, as well. This spring, a number of financial firms hosted in New York a delegation from Iraq’s finance ministry. “They met with key Wall Street executives and learned about financial markets and how financings work on Wall Street and globally,” said one source with knowledge of the event. The seminars occurred over a week and covered such topics as the current state of the markets and who would be interested in investing in Iraq’s sovereign bonds.

On another front, the Trade Bank of Iraq, formed by a group of major international banks led by J.P. Morgan Chase to help Iraq import equipment and supplies and re-enter the global economy, opened for business last November. In January, it announced that it had secured a total of $2.4 billion in export guarantees for firms seeking to take part in deals to rebuild a postwar Iraq. A spokesman for J.P. Morgan confirmed its selection but declined to comment further.

But the capital markets events of last month have drawn most of the attention. After its opening bell on July 18, the Iraq Stock Exchange handled trades for about 1.4 billion shares, even though only 27 companies are listed, according to reports. The other hopeful sign was the government’s sale of $91 million of debt to Iraq’s commercial banks. The treasury bills have a 91-day maturity period and a yield of between 5% and 8%.

“It seems clear that the Iraq bond market is likely to remain in its infant stage for quite some time,” said Anthony Crescenzi, chief bond market strategist at Miller Tabak & Co. LLC in New York. “The lack of security and information with respect to government cash flows will keep liquidity low for a while.” He points out that the interest rate level that Iraq is paying on its debt, with a yield of less than 8%, would be low for even a more developed emerging market, especially given the level of uncertainty. “This no doubt reflects the fact that Iraq has the strong backing of the U.S.,” said Crescenzi.

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