Reuters, 18 January 2006
LONDON (Reuters) - Nearly three years after the U.S.-led invasion of Iraq, financial markets will soon have the opportunity to pass judgment on the country's rebuilding process.
On Thursday, Iraqi sovereign debt will begin formally trading in the global marketplace after $14 billion worth of commercial claims were restructured into $2.7 billion of bonds.
Ahead of their formal debut, investors have bid up the bonds in the 'when and if' gray market and now consider Iraq a safer bet with their money than putting it to work in Ecuador, for example.
Ecuador's comparable bond due 2030
Iraq's bond is trading 537 basis points over U.S. Treasuries in the gray market.
"It will be useful to the world at large in addition to the markets because that will give a feel for the first time about how, in general, the world thinks Iraq is going," said Richard Segal, chief strategist at the Argo fund management group in London.
Like all sovereign bonds, and perhaps more in the case of Iraq which is trying to rebuild its shattered economy and fight a violent insurgency, politics will be reflected in the price as much as economics.
"It will be the political situation as well as the oil price and the level of oil exports. But I suppose it will also force Iraq to become more transparent because the markets will want to see more transparency and if they don't see the figures some investors will dump the bonds," Segal said.
The bonds mature in 2028 and carry a coupon of 5.8 percent
The bonds began trading in the gray market around the 10.75 to 11 percent yield maturity range, but in the last week yields have dropped to the 9.87 percent area, indicating strong interest, trading sources said.
Iraq's Ministry of Finance has said a further $800 million worth of notes could be issued in exchange for other debt-eligible outstanding claims on the same terms.
GREY MARKET
Alex Garrard, portfolio manager at Peloton Partners, a hedge fund in London, who has traded and still holds some of the paper in the gray market, said there is a division between those who value the bonds as a credit in their own right and those trading it on momentum.
"I think possibly over the near-term the market has become overheated. It has basically done more in the way of price action in six days than most post-restructuring stories have done in six months," said Garrard.
Garrard said the Iraqi bonds were vulnerable to "big lumps of supply" coming into the market as commercial creditors who now hold the bonds can finally get back some of the money owed them by the former regime of Saddam Hussein.
"That said, it will continue to trade, what for a country that is such a mess, at yields seen as quite tight," he said.
"I certainly think that yields of around the 10 percent mark are likely here to stay even if over the near term the market is overheated."
BETTING ON OIL
Investors are betting that once Iraq's oil production is able to get to full capacity and take advantage of the world's third largest oil reserves, bond payments that don't begin until 2020 won't be difficult to service.
World oil prices have soared in the past two years.
Other political questions remain to be answered too.
Future federal government revenues will depend heavily on the kind of political structure that eventually falls into place after the results of December 15 elections are published on January 20.
Tensions between various sectarian and ethnic groups -- Shi'ite Islamists, Kurds and Sunni Arabs -- sharing power in the legislature still need to be worked out.
"The way the pieces are moving it is clearly heading toward a regionalized mode of a new Iraq," said James Denselow, analyst at the Royal Institute of International Affairs in London.
"It is whether this decentralization will work. Of course this precludes any argument within the new Iraqi body politic about the distribution of oil and who will control what slice of the pie. If this is a free market economy then these decisions are not made politically they are made in terms of investments."
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Citation: Daniel Bases. "Markets can soon pass judgment on Iraq's economy," Reuters, 18 January 2006.
Original URL: http://today.reuters.com/business/newsarticle.aspx?type=reutersEdge&storyID=2006-01-18T111708Z_01_L18473271_RTRUKOC_0_US-MARKETS-IRAQ-DEBT.xml
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