Iraq's Odious Debts

Treasuries are out, Iraq debt is in

The portfolio manager of Templeton Global Bond Fund, Michael Hasenstab, says he’s investing in Iraqi bonds [PDF] rather than treasuries, U.K. gilts or Japanese bonds. He believes the massive amount of debt occurred by the U.S. and other governments over the past year will drive up inflation, weaken their currencies and hamper economic growth.

Iraq, on the other hand, is preparing to ramp up its production at the country’s oil reserves—currently the third largest in the world. It expects to double its oil output to 6 million barrels a day by 2015, far higher than the postwar peak of 2.49 million. The news pushed up the price of Iraq’s bonds to 67.7 cents on the dollar—their highest level since October. They currently yield 9.55 percent.

Hansenstab also remarked on what he calls a New World Order in the global economy. The United States government’s and the Federal Reserve’s willingness to take on a monumental level of debt—together they have spent, lent or committed $12.8 trillion, almost the value of everything produced in the country last year—will hamper the ability of the U.S. economy to be competitive globally, says Hansenstab.

As the U.S. government continues to sell treasuries to finance bailouts and other stimulus packages, investors are pushing up borrowing costs by demanding higher yields. And with the continuing thaw of global credit markets, many investors and governments are beginning to increase their appetite for risk. This means they’re shunning treasuries and looking towards other bonds and investments for a better return.

Hansenstab’s seemingly counter-intuitive take on global investments are echoed in an article by Dambisa Moyo in Foreign Policy. Moyo thinks Africa is on rise and may emerge from the global economic crisis stronger than many people think.

She points to Africa’s recent economic turnaround as the basis for the continent’s future development. “The continent’s inflation-adjusted GDP has roughly doubled from $130 billion in the 1980s to $300 billion in 2008,” she writes. “The continent has had 7 percent annual growth in the 2000s, coming on the heels of 2 percent growth in the 1990s. The commodities boom contributed, but other under-recognized factors played a role,” she adds.

And while the International Monetary Fund expects global growth to hover around 0.5 percent, it’s predicting a 3 percent growth rate across Africa—even with slumping commodity prices and decreased investment from China.

Moyo also points to the maturing and developing financial system taking root on the continent. In response to the stock market that opened in Kigali, Rwanda last January, she writes, “it is one of eight to open in the last decade; there are now 16 across Africa.”

This economic growth and strengthening financial system may lay the foundation for a more secure future for the African continent. Ironically, says Moyo, Africa may also benefit from the global economic downturn.

“For the past 50 years, African countries have relied heavily on foreign aid—arguably the single most important contributor to the continent’s inability to realize its potential,” she says. Foreign aid has allowed “African rulers to skirt accountability,” she argues.

Now, with the West shaken by its own economic problems, and the slashing of foreign aid budgets, “more African leaders will have to figure out how to govern without the inflow of easy money to backstop them. Necessity with force them to innovate.”

Further Reading:

Iraq plans to issue $5b in bonds to finance projects [PDFver here]

Private equity turns to Iraq

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