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Iraq update
A loyal MR reader sent me the following from Reuters:
Bombings and strife apart, Iraq is proving an oasis for investors battered by global financial turmoil, Citi argued in a research note on Thursday.
The cost of insuring country-region Iraq's bonds against default has fallen so sharply that they now costs less to insure than Venezuelan debt, said Citi economist David Lubin. "Judging from the performance of spreads in the market for sovereign credit risk, one could argue that Iraq has become something of a safe haven in recent months," he said.
Oil-exporter Iraq has benefited from an improvement in its foreign-exchange reserves. Iraqi five-year credit default swaps -- instruments which protect against debt default -- tightened to 520 basis points from around 635 bps at the start of the year. Similar instruments for Venezuela, whose President Hugo Chavez is leading a wave of takeovers to wrest companies from private and foreign ownership, are currently trading at 611 bps. Like their developed counterparts, emerging markets have been hit by a deepening in risk aversion in the wake of the credit crunch sparked by U.S. subprime mortgage defaults.
Lubin said chances of a further decline in Iraq risk premium were strong given the country's fiscal discipline but warned that the central government could face challenges from the rising influence of provincial rulers.
As I interpret the email from my source, he is not personally so bullish on Iraqi reconstruction; rather some people are rushing out of other assets and preferring Iraq for its (relative) safety. So you needn't read this in an optimistic light. Alternatively, you might view this as a bet on the U.S. Presidential race and the rising prospects of the Republicans.
Posted by Tyler Cowen on April 10, 2008 at 05:05 PM in Current Affairs | Permalink
Comments
Or they could just be assuming that the US will be propping up the Iraqi government -- and by extension, its government bonds -- for at least the next five years.
Posted by: Grant Gould at Apr 10, 2008 5:15:36 PM
It would have to be a change in the likelihood that the U.S. will continue to prop up the Iraqi government and it's debt. Most likely it's the combination of recent developments in Iraqi reconstruction, likelihood of Republican victory in November, the perceived success of the Surge, events in other risky developing nations, and many more smaller factors - factors that are not all moving in the same direction. Overall, I think it’s a good sign for sign for Iraq but not enough to make me, at least, bullish about the country.
Posted by: Joe at Apr 10, 2008 8:18:07 PM
Soooo. Corporate bonds in iraq are to be measured against those of a country with an active policy of nationalizing companies? That's absurd on face. Hmm. As I read that more I guess they are comparing sovereign debt rating. Well, I still think it is absurd as the infrastructure of venezuala is highly dependent on outside corporations involving themselves in a situation that might end in having their assets seized.
And I'm not one to question broadly the EMH but I don't think that investors comprehend fully the problem in trading on future expectations of Iraqi wealth and stability as they are based almost entirely on oil revenue. that revenue is dependent upon US protection of export routes for oil--both in existence and efficacy. I presume that markets can properly judge risks of future larger fluctuations in oil prices, so that isn't really a big deal (and is dealt with anyways by comparing iraq to another country at least nominally alike in exports).
Posted by: Adam Hyland at Apr 10, 2008 8:23:45 PM
Bloomberg mentions that the average spread on developing nation debt is 282 basis points. Venezuala is 611, but Brazil is at 145 bps.
http://www.bloomberg.com/apps/news?pid=20601086&sid=aGWC.S0WFKXU&refer=news
Posted by: Joe at Apr 10, 2008 11:45:28 PM
Riding off of US defense subsidies always help: see Europe and Asia - in the case of Iraq it was the US that was responsible for bringing Iraq to its current situation however from its somewhat more "stable" situation.
Posted by: g at Apr 11, 2008 4:24:53 AM
When markets go illiquid, the opportunities to rig them proliferate. Thsi looks like a honey.
Posted by: David Heigham at Apr 11, 2008 5:56:07 AM
latam countries have a long, proud history of defaulting on their sovereign
debt for almost any reason. add a leader who openly flirts with defaulting
and has nationalised several companies and you can see why vene debt is priced
accordingly.
Posted by: bank rafaidan at Apr 11, 2008 8:58:08 AM
Reminds me of the outfits who convince people in the military (and others) to 'invest' in Iraqi currency, so these troops bring home duffelbags full.
If I were going to do that kind of boneheaded speculation, I'd buy Venezuelan bolivars or Zimbabwean currency. Venezuela is more stable and has oil, while Zimbabwe been destroyed by an octogenarian, and the currency might well rise in value after a change of leadership. Neither of those countries are likely to be persistent targets of destabilizing Islamist asshattery.
Posted by: Jon H at Apr 11, 2008 12:50:25 PM
You might not have caught it, but recently Venezuela nationalized Ternium Sidor, the largest steel maker in Venezuela, as well as Cemex's Venezuelan cement operations. Also Venezuelan armed forces occupied 32 sugar plantations spanning 5,900 acres Thursday.
Plus Venezuela just put in place a windfall profits tax on private oil companies...50 percent of oil revenues above $70 per barrel and 60 percent of revenues above $100 per barrel.
Posted by: Mr. Econotarian at Apr 11, 2008 4:22:28 PM
Why does everybody presume that the presence of US troops helps stabilize Iraq or its economy?
Many of the insurgents, most notably al Qaeda in Iraq, as well as some of the Shi'i groups, get
their raison d'etre from fighting against the US presence. While al Qaeda in Iraq is on the
downswing since the Sunni sheikhs got pissed off after their sons started getting offed by these
idiots, they did not exist prior to the US invasion and very likely would disappear nearly instantly
if US troops were withdrawn.
As for Iran, the focus of the testimony of Petraeus, it was our invasion that strengthened them.
They are backing all the Shi'i groups, as Ahmadinejad's welcome by Maliki shows. Indeed, while
US spokespeople try to blame the Iranians for al-Sadr and the Mahdi army, in the past they were
the Shi'i group that was most nationalistic and anti-Iran.
Finally, the greatest danger to Iraqi national unity would be a Kurdish withdrawal. This would
be more likely with US troops out, but they are effectively de facto independent already, as
their signing of independent oil contracts pretty clearly indicates. Of course, Iraqi Kurdistan
is in much better shape than the rest of Iraq, although there remains the possibility of a really
nasty conflict if they try to grab Kirkuk or formally secede.
In any case, there is little reason to believe that a withdrawal of US troops would destabilize
the Iraqi government very much. Iran will not overthrow them, and our withdrawal would be the
death knell to al Qaeda in Iraq, although the older Ba'athist Sunni resistance might still
burble on, but they also draw on resisting the US presence for their recruiting and activities.
Posted by: Barkley Rosser at Apr 11, 2008 5:17:57 PM
