Debt: Smell The Coffee

[Lux]

Debt has been the most overlooked topic on this board for quite some time. Considering the advancements made in Iraq since the beginning of the year, I would say it has been quite a natural occurrence. Our investment has probably grown a hundred fold in the progress made in Iraq (elections, gov’t, reconstruction, etc) though monetarily speaking this has yet to be quantified.

I thought it might be prudent to post these facts considering the wave of enthusiasm that has clouded this not-so-wonderful reality called "debt".

With that said, I think it is important that we re-visit this topic. Why? Because our investment depends heavily upon it.

Wasn’t 80-90% of Iraq’s debt already forgiven?
Far from it. It appears that some are under the false impression that the Paris Club debt ($42B) was the entirety of Iraq's debt. It represents about 1/3 of the debt recognized by the IMF (est. $125B) (http://www.jubileeiraq.org/blog/2004_10.html#000636).

There is additional $30B in UNCC reparations and another $65B that has yet to be resolved by the UNCC. The UNCC will meet at the end of this month (http://www.jubileeiraq.org/reperations.htm) and hopefully, they will give a favorable decision on the unresolved $65B.

Further out in left field and of much lesser concern are Iran's IMF claims (http://www.jubileeiraq.org/blog/2005_05.html#000823) (est. $97.2B) and the Iraqi-Jewish claims (http://www.jubileeiraq.org/blog/2004_04.html#000445) (up to $100B) for properties left behind when expelled in the 1950's.

Bleak? No.
Reality? Yes.
Impossible? No.

Iraq is seeking the reduction of GCC debt (http://www.jubileeiraq.org/blog/2005_05.html#000822), but this may take some time:
Vice-President, and former Finance Minister, Adil Abdal Mahdi, "hoped "that agreement will be reached during the coming 2 years on the issue of Iraq's debts and the ways of paying them after we prepare ourselves to agree with the IMF about the post-conflict emergency assistance programme."

Does anyone else rate this item as high priority?...
(http://www.jubileeiraq.org/blog/2005_05.html#000811)New Finance Minister Ali Allawi told Reuters in his first interview (http://www.jubileeiraq.org/blog/2005_05.html#000811): “The most important issue as far as outside financial policy is the debt. Much progress has been made but there is lot of work to be done especially as far as debt owed to Arab, especially Gulf, countries and other commercial debt."

The reality is that (aside of security issues) this mountain of debt remains as the greatest hurdle for a healthy dinar. Many facets are directly linked to this one issue, since it is money that Iraq needs to re-invest in itself (and a healthy "non oil dependent" economy). Failure to reduce debt could limit greatly needed foreign investment as companies shy away from such a handicapped economy.

I'm not trying to paint a bleak picture, just touching a very important subject that many here have dismissed as a non-issue or may be one that a few are not particularly aware of.

Our success in this investment is dependent on how well we fair against a multi-headed dragon. Debt is one of those heads, along with security, socio-political reform, economic reform, etc.

I believe the dragon will be slayed, but it won't happen in days or weeks, but maybe months and years.

I don't expect to see the dinar open UNTIL Iraq has a full knowledge of what it owes. At this point, this vital element has not been established.

Personally, I love the smell of coffee: It's an indicator that a new day awaits me, and all of it's challenges within.

[danpeg]

Great post sportslux.

Iraq's debt is indeed a major handicap to its economic recovery.

However, I would argue that everything comes down to security, and security alone. Any debt, be it personal credit card debt, company bonds, or government treasuries, can be eliminated if the entity in debt has a positive cash flow.

I would argue that it doesn't matter that Iraq owes billions of dollars to the rest of the world, so long Iraq can maintain oil income and does not need to borrow more to survive. If she is able to stand on her feet alone, and is able to export her precious oil, Iraq will be able to pay its debt. Yes, it would take decades but that doesn't mean Iraq would be a poor country.

Iraq is different than poor countries in Africa, for example. African nations have almost no assets, and consequently no cashflow. No cashflow forces these nations to amass more and more debt, which accrues interest and forces these nations to borrow more. A vicious cycle of poverty. This is not the case in Iraq. Iraq is a rich nation and could easily pay its debt if the payment terms are flexible and security improves.

Let's hope that creditor nations are flexible in their debt terms and that Iraq stabilizes as soon as possible. Only then will we see Iraq flourishing.

[botso]

Given the debt reduction already granted Iraq by the Paris Club, I contend that the near term rise of the Dinar from the ashes of the Saddam era will be directly proportional to the amount of Saddam era debt forgiven by Saudi Arabia and Kuwait.

Without meaningful intervention by these two nations, a significant portion of Iraq's oil revenue will go abroad. It will, therefore, take longer for Iraq's oil revenue to impact the day to day living standards of the average Iraqi. The longer this takes, the longer the insurgency lives which will, in turn, keep foreign investment, foreign. Without the financing and expertise of the rest of the world's oil producers, Iraq's journey will be longer and more difficult than it need be.

The quicker Iraq can focus on infrastructure improvement (roads, power, water, healthcare, education and oil), the better off the ENTIRE region is going to be. I believe Saudia Arabia, Kuwait and the rest of Iraq's neighbors stand to profit more from a vibrant Iraqi economy than they would from simple repayment of punitive debt incurred by a brutal, self-serving, dictator.

Kuwait and Saudi Arabia are open to debt reduction provided they can deal with a permanent goverment elected by the people of Iraq. Therefore, I don't think we will see a meaningful rise in the Dinar before the first 1/2 of 2006 as it will likely take that long for the new government to reach agreement with Kuwait and Saudi Arabia.

My magic 8 ball hasn't revealed if a float is going to happen between now and the elections. The speculator in me is hoping for a peg in the IQD .33+ TO $1 range if when it happens the day after I hit IQD 100,000,000. Given post war Japan, Germany and Kuwait, the history major in me thinks something in the IQD 500-1000 to $1 is a possibility (think slow growth).

I'm not an economist, so I cannot intelligently comment on the pros and cons of a peg, float, etc. In fact, this entire post might be proven hogwash given time. I've just done a lot of reading here and elsewhere and have formed a few ideas. For now, I'm content to increase my Dinar position just past the point of discomfort and see how things will unfold.

Thanks for reading. This forum is great...

(And no, I'm not taking an IQD 100,000,000 position... At least not yet... As far as you know...)

[lordrazor1]

Iraq can be waiting to see how much debt is forgiven before they raise the NID. Once they have a balance of how much they do owe, they could then peg it at a certain rate which will help pay off the debts owed quicker instead of the rate it is at now.

[Kevmo]

I recall reading or hearing something about a month ago that stated that they were reluctant to allow the NID to increase in value for the reason that creditor nations will not forgive Iraqs debts and would try to attach to Iraqs assets.

Also, what is the status of the U.N. sanctions against Iraq? I believe they are still in place.

[arh777]

I recall reading or hearing something about a month ago that stated that they were reluctant to allow the NID to increase in value for the reason that creditor nations will not forgive Iraqs debts and would try to attach to Iraqs assets.

Also, what is the status of the U.N. sanctions against Iraq? I believe they are still in place.


UN sanctions were lifted in 2003.

UN lifts sanctions against Iraq
Last Updated Thu, 22 May 2003 18:23:30
NEW YORK - The United Nations Security Council agreed Thursday to lift economic sanctions against Iraq and give the United States and Britain control of the country until a democratic government is formed.

http://www.cbc.ca/stories/2003/05/22/UN_sanctions030522

[arh777]

Iraq's debts will be cancelled in three stages - 30% immediately, another 30% in 2005 and 20% in 2008.

The deal, however, depends on Baghdad's successful completion of an International Monetary Fund economic programme.

Iraq owes about $38.9bn in debt and interest repayments to the Paris Club of creditor nations, which includes the US, Russia, Japan and European nations.

http://news.bbc.co.uk/1/hi/business/4029905.stm


This is the paris Club only.

[botso]

Iraq can be waiting to see how much debt is forgiven before they raise the NID. Once they have a balance of how much they do owe, they could then peg it at a certain rate which will help pay off the debts owed quicker instead of the rate it is at now.

Great point. I'd pay to be a fly on the wall of the CBI!

[Lux]

Great post sportslux.

Iraq's debt is indeed a major handicap to its economic recovery.

However, I would argue that everything comes down to security, and security alone. Any debt, be it personal credit card debt, company bonds, or government treasuries, can be eliminated if the entity in debt has a positive cash flow.

I would argue that it doesn't matter that Iraq owes billions of dollars to the rest of the world, so long Iraq can maintain oil income and does not need to borrow more to survive. If she is able to stand on her feet alone, and is able to export her precious oil, Iraq will be able to pay its debt. Yes, it would take decades but that doesn't mean Iraq would be a poor country.

Iraq is different than poor countries in Africa, for example. African nations have almost no assets, and consequently no cashflow. No cashflow forces these nations to amass more and more debt, which accrues interest and forces these nations to borrow more. A vicious cycle of poverty. This is not the case in Iraq. Iraq is a rich nation and could easily pay its debt if the payment terms are flexible and security improves.

Let's hope that creditor nations are flexible in their debt terms and that Iraq stabilizes as soon as possible. Only then will we see Iraq flourishing.
Hey Dan,

Great to see you on the board

I can't agree with you more about the importance of security. In fact, it's really the one element that can totally break us.

Iraq's debt standing will not cripple this investment since we can experience decent gains, even if the dinar were to never rise above a few pennies in value.

Certainly, there are countries so impoverished that they would never be able to meet the minimum demands of their people, let alone rise above the economic water line necessary to pay off debt. Iraq has a very unique opportunity due to it great wealth of natural resources.

Even so, without debt relief, Iraq would spend decades siphoning off their own wealth just to pay it's debts. Cash flow would be positive, but a major portion would be used to meet it's creditors demands. A mega leap as an economic power within the world would be deferred for quite some time as Iraq attempts to maintain a positive credit standing in the world by meeting enormous debt payments laden with interest.

Major debt relief (debt reduction, low interest, scheduling fleibility) would go a long way in expanding the ceiling of this investment. For us to the experience the enormous gains we are all betting on, I believe Iraq will need to develop non-oil sectors within their economy. They will need billions of dollars to develop these non-oil sectors and bring about more rapid development. Of course, this is all under the assumption that security issues have been addressed.

In all, I don't see Iraq failing without major debt relief, but I do see a much longer journey if they challenged to pay back a large portion.

The difference between a penny and a dollar could lie heavily on this single issue.

[botso]

The difference between a penny and a dollar could lie heavily on this single issue.

Great point!

I wonder how difficult the transition to a more secure Iraq would be if the US Military wasn't here.

Of course, one could argue that the insurgents wouldn't have a reason to attack if the US were gone.

Given the unrest in Iran bombing two days ago, I don't think that's an issue (http://www.contracostatimes.com/mld/cctimes/news/11890115.htm).

[arh777]

The total debt is expected to be about 58 billion by 2007.

[Aunt Gwennie]

These are the posts I remember when I first joined the forum almost a year ago.

Informative! Factual! and Relevant to our investment!!

Outstanding thread SL!!

AG

[Goalie Interference]

Great posts people. I couldn't agree with you more Sportslux. Until the debt situation is resolved, I don't see much movement in the value of dinar. Nor, do I see much economic growth without significant improvements in the security issue DanPeg. Both are critical, watershed issues. You guys are both right on target. I think the two are very much intertwined. As Iraq gains control of security, I believe other nations will be more inclined to forgive more debt, in the belief the government is engaging in practices that will make the country stronger and more economically viable. If the security situation remains a problem, the economic growth will also be problematic, therefore it could be viewed a waste of money to write off debt to a corrupt, inept government.
I believe these issues are being addressed aggressively, and will be resolved. I just don't think this endeavor will fail.

[arh777]

There is a 6 year grace period for repayments of the debt with repayment of the remaining debt stock over a 23 year period begining in 2011.

[arh777]

All other countries are expected to follow this type of plan.

Source: BMI

[lordrazor1]

There is a 6 year grace period for repayments of the debt with repayment of the remaining debt stock over a 23 year period begining in 2011.


This is good news as long as the 6 year grace period is intrest free. This should give the Iraqi's time to implement economic plans and hopefully deal with the insurgents and security problems. Personally I think some of those countries should have reduced the amount of debt more, since some of them are implemented in the Oil for Food program.

[Lux]

I recall reading or hearing something about a month ago that stated that they were reluctant to allow the NID to increase in value for the reason that creditor nations will not forgive Iraqs debts and would try to attach to Iraqs assets.

Also, what is the status of the U.N. sanctions against Iraq? I believe they are still in place.

Sanction have long been lifted, but reparations to the tune $30B are still on the board. $65B has yet to be resolved.

A strong currency doesn't favor debt reduction, but some countries will be looking for quid pro quo deals that will allow them to benefit in the rise of Iraq.


Kuwait and Saudi Arabia are open to debt reduction provided they can deal with a permanent goverment elected by the people of Iraq. Therefore, I don't think we will see a meaningful rise in the Dinar before the first 1/2 of 2006 as it will likely take that long for the new government to reach agreement with Kuwait and Saudi Arabia.


Perfect example to my point above. Both countries could have very strong vested interest in the progress of Iraq.

I'm sure Jerry could chime in with GCC ramifications that we may not be considering.

[lance]

It is not only the a high priority it is the key. Lance

[Hollywood]

These are the posts I remember when I first joined the forum almost a year ago.

Informative! Factual! and Relevant to our investment!!

Outstanding thread SL!!

AG
Yes this is like it was and should still be on the forum.
Nice to see the BOSS posting as well.
Hollywood

[BrerRabbit]

The UNCC stated they will be finalizing the reparations by the end of this month.

The Iraqi government had a deadline of May 15 '05 for the paperwork to be submitted for consideration of outstanding loans. They have had time to review and possibly negotiate these loans. There has been nothing in the news about this.

I think they have or are very close to the point y'all are talking about, knowing the extent of the total debt plus reparations.

I also think that the revaluation will be prior to the announcement of these two. They have to keep the NID low for negotiations but if they announce the conclusion of these talks before the reevaluation it would cause an even more speculative atmosphere relating to the NID. The revalue also has to preceed the ISX going international. All this points to between now and Sept 1. The sooner the better for the Iraqis (and us).

[arh777]

Iraq to hold more talks on debts write offs

ECO-IRAQ-DEBT-CANCELING
Iraq to hold more talks on debts write offs

BAGHDAD, June 14 (KUNA) -- Iraqi Vice President Dr. Adel Abdulmahdi said on Tuesday that Iraq will send a special delegation to the donor countries to cancel more Iraqi debts.

http://www.kuna.net.kw/home/Story.aspx?Language=en&DSNO=742825

[Lux]

Iraq to hold more talks on debts write offs

ECO-IRAQ-DEBT-CANCELING
Iraq to hold more talks on debts write offs

BAGHDAD, June 14 (KUNA) -- Iraqi Vice President Dr. Adel Abdulmahdi said on Tuesday that Iraq will send a special delegation to the donor countries to cancel more Iraqi debts.

http://www.kuna.net.kw/home/Story.aspx?Language=en&DSNO=742825

Nice job arh! Keep the debt info flowing!

[Mon]

Nice job arh! Keep the debt info flowing!

I posted this link in another thread. I think it is more relevant here:

http://vitw.org/archives/909
Geneva Fast for Economic Justice in Iraq. June 15th to June 30th

[DrCashflow]

Debt has been the most overlooked topic on this board for quite some time. Considering the advancements made in Iraq since the beginning of the year, I would say it has been quite a natural occurrence. Our investment has probably grown a hundred fold in the progress made in Iraq (elections, gov’t, reconstruction, etc) though monetarily speaking this has yet to be quantified.

I thought it might be prudent to post these facts considering the wave of enthusiasm that has clouded this not-so-wonderful reality called "debt".

With that said, I think it is important that we re-visit this topic. Why? Because our investment depends heavily upon it.

Wasn’t 80-90% of Iraq’s debt already forgiven?
Far from it. It appears that some are under the false impression that the Paris Club debt ($42B) was the entirety of Iraq's debt. It represents about 1/3 of the debt recognized by the IMF (est. $125B) (http://www.jubileeiraq.org/blog/2004_10.html#000636).

There is additional $30B in UNCC reparations and another $65B that has yet to be resolved by the UNCC. The UNCC will meet at the end of this month (http://www.jubileeiraq.org/reperations.htm) and hopefully, they will give a favorable decision on the unresolved $65B.

Further out in left field and of much lesser concern are Iran's IMF claims (http://www.jubileeiraq.org/blog/2005_05.html#000823) (est. $97.2B) and the Iraqi-Jewish claims (http://www.jubileeiraq.org/blog/2004_04.html#000445) (up to $100B) for properties left behind when expelled in the 1950's.

Bleak? No.
Reality? Yes.
Impossible? No.

Iraq is seeking the reduction of GCC debt (http://www.jubileeiraq.org/blog/2005_05.html#000822), but this may take some time:
Vice-President, and former Finance Minister, Adil Abdal Mahdi, "hoped "that agreement will be reached during the coming 2 years on the issue of Iraq's debts and the ways of paying them after we prepare ourselves to agree with the IMF about the post-conflict emergency assistance programme."

Does anyone else rate this item as high priority?...
(http://www.jubileeiraq.org/blog/2005_05.html#000811)New Finance Minister Ali Allawi told Reuters in his first interview (http://www.jubileeiraq.org/blog/2005_05.html#000811): “The most important issue as far as outside financial policy is the debt. Much progress has been made but there is lot of work to be done especially as far as debt owed to Arab, especially Gulf, countries and other commercial debt."

The reality is that (aside of security issues) this mountain of debt remains as the greatest hurdle for a healthy dinar. Many facets are directly linked to this one issue, since it is money that Iraq needs to re-invest in itself (and a healthy "non oil dependent" economy). Failure to reduce debt could limit greatly needed foreign investment as companies shy away from such a handicapped economy.

I'm not trying to paint a bleak picture, just touching a very important subject that many here have dismissed as a non-issue or may be one that a few are not particularly aware of.

Our success in this investment is dependent on how well we fair against a multi-headed dragon. Debt is one of those heads, along with security, socio-political reform, economic reform, etc.

I believe the dragon will be slayed, but it won't happen in days or weeks, but maybe months and years.

I don't expect to see the dinar open UNTIL Iraq has a full knowledge of what it owes. At this point, this vital element has not been established.

Personally, I love the smell of coffee: It's an indicator that a new day awaits me, and all of it's challenges within.


At the insistence of one of the forum's main contributors, I'd like to add some insight into Iraq's debt negotiations. The Paris Club agreement has a provision that no other external creditors, including non Paris Club members and commercial enterprises, can receive a better net recovery than Paris Club members. If Iraq violates this provision, the Paris Club can rescind its consent in forgiving 80% of the debt Iraq owes to its members. The provision is a "comparability of treatment" clause to "agreed minutes" which stipulates the debt level and rescheduling. So, unless Iraq wants to violate this agreement and have all Paris Club debt reinstated, the max recovery for all other creditors is 20%.

It's summarily referenced at http://www.clubdeparis.org/en/presentation/presentation.php?BATCH=B01WP06 and http://www.clubdeparis.org/en/presentation/presentation.php?BATCH=B01WP04.

Note: The actual agreement is far more specific. No, I don't have a link to the contract. Even if I did, I couldn't post it.

[Tyreds Tale]

...The Paris Club agreement has a provision that no other external creditors, including non Paris Club members and commercial enterprises, can receive a better net recovery than Paris Club members. ...

So that means Iraq can not repay any other debts to more than the Paris club, or else it will have to pay the Paris Club back in full? That seems to be an all or none situation. All being aout 80% of all debts are forgiven, none being they have to repay most all of their debts.

If they cant convince the GCC and others to forgive them, then they have to pay the Paris Club also.. that sucks, but puts more pressure on the GCC to go ahead and forgive. Am I reading this right?

[H2OLover]

Ok i am a bit confused also ..

[DrCashflow]

So that means Iraq can not repay any other debts to more than the Paris club, or else it will have to pay the Paris Club back in full? That seems to be an all or none situation. All being aout 80% of all debts are forgiven, none being they have to repay most all of their debts.

If they cant convince the GCC and others to forgive them, then they have to pay the Paris Club also.. that sucks, but puts more pressure on the GCC to go ahead and forgive. Am I reading this right?

The clause is to protect the Paris Club members against recovery disparities, especially since it was the first formal organization to consent to debt forgiveness for Iraq. 80% was the min guideline established for Paris Club members. Remember, some Paris Club members actually increased their respective write-offs to 90% or even total. If Iraq reneges, then the agreement becomes null and void.

It's in the best interest of all creditors to negotiate and "not trip over dollars to make pennies." The GCC and other external creditors have a vested interest in Iraq's prosperity, because only through Iraq's improvement can they recover funds. It's analogous to creditors negotiating settlements with debtors, during debt restructuring or bankruptcy proceedings, with the expectation of offsetting short-term losses with gains from long-term supplier and trade relations as the debtor's financial performance improves. The 80% guideline sets a precedent for negotiations with other creditors.

[Lux]

The clause is to protect the Paris Club members against recovery disparities, especially since it was the first formal organization to consent to debt forgiveness for Iraq. 80% was the min guideline established for Paris Club members. Remember, some Paris Club members actually increased their respective write-offs to 90% or even total. If Iraq reneges, then the agreement becomes null and void.

It's in the best interest of all creditors to negotiate and "not trip over dollars to make pennies." The GCC and other external creditors have a vested interest in Iraq's prosperity, because only through Iraq's improvement can they recover funds. It's analogous to creditors negotiating settlements with debtors, during debt restructuring or bankruptcy proceedings, with the expectation of offsetting short-term losses with gains from long-term supplier and trade relations as the debtor's financial performance improves. The 80% guideline sets a precedent for negotiations with other creditors.

Very insightful and informative posts (both) Dr. Cashflow.

It appears that Iraq has a good chance of reducing the $125B debt down to less than $25B. Of course, this puts Iraq behind the 8-ball when negotiating with GCC countries. Though they have a highly invested interest in the stabilty of Iraq and it's prosperity, they will be looking to squeeze every last bit of oil out of this well. I expect some tough negotiations.

I don't believe the UNCC reparations would fall under this umbrella, since these claims are war reparations that are not related to IMF. If so, the additional $30B appears to be stuck in the books no matter what, while the $65B that may be resolved this month, looms large.

Please correct me if I am wrong in this assessment.

Also, thanks to that main contributor who insisted on your contribution. We are very appreciative of both of your efforts.

[SOMF]

Thanks to all for the great info!

[stargazer1968]

for debt write-offs
http://www.menafn.com/qn_news_story_s.asp?storyid=95960

[Tyreds Tale]

Pay Iraq wheat debt in 2011: committee
Jun 17 2005 AAP

Wheat growers would get payments for crops sent to Iraq in the early 1990s 17 years earlier under a newly released proposal from a Senate committee.

The Senate's Rural and Regional Affairs Committee said payments for outstanding debts caused by bans on Iraq brought about by the first Gulf War should be repaid in 2011.

At present it could be 2028 before farmers see some of the money owed them. Between 1987 and 1990, Iraq defaulted on payments that are now, with interest, worth more than $1 billion....

Under an agreement between Iraq and the Paris Club group of creditor nations struck last year, 80 per cent of Iraq's total debt of $US39 billion ($A50.68 billion) will be written off.

Iraq will start repaying 20 per cent of its unforgiven debt from 2011. AWB will be entitled to 20 per cent of this figure, which will be worth $US1.2 million a year for 17 years.

http://news.ninemsn.com.au/article.aspx?id=3185