Majority of Iraqi debt needs to be forgiven

Iraq’s external debt is clearly unsustainable and it is widely believed that creditors will need to grant reductions of almost 90%. Current estimates put the total amount owed to close to US$ 120 billion, with 10% of that lent by commercial banks and the rest by governments.
  If the debt were being serviced, interest payments alone would be equivalent to about 37% of Iraq’s GDP. Creditors in the Paris Club, the informal group that helps to resolve payment difficulties of debtor nations, are owed about US$ 42 billion. Iraq’s creditors include amongst others the UK, France, Germany, Italy and Russia. In our previous issue, we already indicated that recovery possibilities have become quite scarce.
  The Bush’s administration in the US had hoped that recovery of the billions that Saddam Hussein and his family supposedly squirreled away would help. But after almost a year, the hunt for money appears to have largely stalled.
  That makes Iraq finances even more dependent on oil revenues. Over the next three years, the money involved is projected to be about US$ 50 billion. However, even taking this revenue into account, substantial debt forgiveness will still be needed. Probably creditors will eventually have to agree to that. However, this will most likely last until the country is given sovereignty later this year. Economists expect that as much as 70 % of the total will eventually be forgiven. Many banks and companies have already classed their Iraq loans or unpaid bills as lost. That has brought speculators in, because as the repayments get smaller, there is more chance of the remaining debts being paid off. In contradiction to what we wrote some months ago, this speculators pop up sooner and in greater number than expected. Economists and traders argue that there are benefits to this attitude. By creating a viable debt market, Iraq will be able to improve its credit rating, raise money more cheaply to pay off earlier loans and put itself on a better economic footing. As interest rates fall, it will be easier for Iraqi companies and consumers to borrow, boosting growth.
  For some investors, especially in the US where the appetite for this type of product is highest, companies and countries which emerge from difficulties are often seen as safe investments. Their books have been scrutinised, debts restructured and the underlying business usually remains sound.
  In 1998, Russia defaulted on bonds sending markets into freefall. Since then it has persuaded creditors to write off about a third of its Soviet-era debts, restructured much of the rest and seen its economic growth surge. It’s hoped that Iraq, home to the world’s second-largest proven oil reserves, will follow a similar pattern. While there is no trading of government debt, defaulted loans owed to commercial banks are changing hands for a fraction of their original face value. Sellers reckon that something is better than nothing, while buyers are lured by the country’s prospects. Some investors also are betting that they will be able to swap their holdings for stakes in the newlyformed and profitable Iraqi companies.
  Demand as a result is picking up. Three years ago Iraqi debt was changing hands at less then 2 cents for every dollar of face value. Today it can sell higher, depending on the documentation of the claim and whether or not the claim is time barred.
  East-West Debt has brought the various buyers of Iraqi claims in map and guarantees as such its clients the highest price possible for their debts.
  It would, however, be misleading to think that the market is fully booming. Out of the US$ 120 billion outstanding, none of the government debt is traded. And only about US$ 2 billion of the US$ 12 billion in loans from commercial banks is saleable at present. There is no standard issue, or benchmark, making the market fragmented and complicated and ensuring wild swings in prices. And with a limited number of buyers and sellers a trade, tending to be between US$ 5 million and US$ 15 million, it can take weeks to complete.
  Further complicating matters is the need for clear documentation which proves that the money wasn’t used to purchase goods such as weapons. Still, for a handful of European companies, it is worth the trouble.
  We kindly invite creditors with Iraqi debts, guaranteed by the main Iraqi commercial banks, Rafidain and Rasheed Bank, as well as by the Central Bank of Iraq, to contact us to evaluate their claim and investigate sale possibilities at a decent percentage.
  East-West Debt