| One more step in Iraq's recovery, and a big one. |
The pact gives Iraq an important shot at rebuilding credibility in global financial markets at a time when the U.S. is expected to begin trimming its aid for the Iraqi economy. The securities, which will have a coupon of 5.8% per year, should start trading Jan. 19. They're expected to be in demand, in part because they're backed by the world's second-largest oil reserves.
The bond issue is just Iraq's most recent move to shore up its finances. When Saddam Hussein was ousted in early 2003, Iraqis were left with an estimated $130 billion in debt. Iraqi officials have been hacking away at it ever since the U.S. led coalition handed power over to a local government in 2004. Early on, they cut a deal with government creditors such as France, Italy, and the U.S. to reschedule some $40 billion.
Under the terms of this deal, 80% or more of the debt is likely to be written off if Iraq continues economic reforms. Iraq doesn't want to continue in "a financial twilight zone," Allawi says. It also pays 5% of its oil revenues, budgeted at $30 billion for 2006, to pay off reparations to Kuwait and other entities damaged by the 1990 invasion.
Though numbers are smaller, restructuring Iraq's private-sector debt is even more critical for restoring its reputation in the international business community. At first glance, private companies balked at the prospect of getting no more than 20 cents on the dollar for the money owed them. But nearly all of them have knuckled under, concluding it was likely the best deal they would ever get.
How the new Iraqi notes trade will be an important indicator of the country's world standing. The companies that receive the securities are expected to begin selling them to financial players, including emerging-markets funds and hedge funds. Market participants think they'll find takers, especially since the notes will probably trade at a discount and thus yield 10% or so. "We expect a lot of interest from Arab funds, Europe, and the U.S.," says Mike Noone, head of sovereign research at Exotix, a London brokerage.
The risks are substantial. No amount of restructuring will make much difference unless Iraq's political turmoil stabilizes and the violence calms down. Still, unless Iraq collapses completely, its financial leaders should be able to keep edging the country's finances in the right direction.