We all should have bought Iraqi debt, not G* debt ...
May 4, 2003
As Iraqi Dust Settles, Debt Is Getting a Lift
By CONRAD DE AENLLE
LONDON
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.
Copyright 2003 The New York Times Company. |
