It's interesting to learn that investors seem to be rushing to buy Iraqi debt and the risk premium is declining even though "the central government could face challenges from the rising influence of provincial rulers." Certainly I look forward to when rescuing holders of Iraqi bonds from default becomes the rationale for why we can't leave Iraq.
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Opportunity of a Lifetime
11 Apr 2008 11:41 am
Comments (16)
Um, doesn't Sharia proscribe the charging of interest? Or are these "Islamic" bonds? The reason I ask is that I can see a more religiously-minded government deciding to just write off any interest payments as not legitimate under that pretext.
Hmm. Why do I forsee a situation where Congress is asked to back that very same Iraqi debt, as compensation for our botched invasion/withdrawal/maintenance of permanent bases.
How do I buy some of this stuff?
jamie,
Until there's some indication that, say, once the Iraqi economy bounces back to X% of pre-war levels, we'll leave, issues like that are merely distractions. What constitutes "success" in the Iraq War apparently will never be defined. In fact, the issue has already been framed so that we can never leave: our presence there is required to prevent some future disaster.
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.
Eerily reminiscent of the "merchants of death" argument from World War I. I.E., the U.S. got in the war to ensure that J.P.Morgan would have its loans to the allied powers repaid.
It probably is partly a reflection that conditions are somewhat less horrible than a year or two ago.
But I wouldn't take it any farther than that. Markets have been consistently horrible at predicting geopolitical shocks, so I can't believe there's some 'magic of the markets' hidden knowledge about Iraq's rosy future there.
... and just to be clear, I mean 'somewhat less horrible' in the most narrow and literal way possible. Living conditions are still terrible, and the political situation still seems irretrievably FUBAR. So I don't think I'll be picking up Iraqi bonds any time soon.
If these bonds are locally-denominated, this is partly a play on the appreciation of Iraq's currency. But that of course, also indicates confidence by investors in Iraq's future prospects. Prior to the first Gulf War, Iraq's currency was maybe a thousand times higher than its current value.
Regarding Jamie's comment, someone at MIT made that argument last year, and a commenter brought it up on Matt's blog last September.
As for Jon H's comment: Zimbabwe will be a basket case for years, regardless of how old Mugabe is. Most of the white farmers who made it the breadbasket of Africa are gone and I doubt they'll be coming back anytime soon.
Venezuela is a more interesting case. Chavez's constant threats of nationalization and expropriation have caused Venezuela's stock market to trade at valuations not seen in this country in decades. If memory serves, the last time I saw the numbers in the FT (a few months ago), Venezuelan stocks were trading at something like an average P/E of 8 and an average dividend yield of 7. A more enterprising investor than me might consider buying a basket of stocks of companies whose smaller size or tangential role in the Venezuelan economy makes them unlikely to be nationalized, and hold them and wait for (and hope for) the Chavez era to end.
Investors bought up mortgage-based CDOs based on the idea that said instruments were low risk. Investors aren't always the best judge of what's going to happen in the future.
"Investors bought up mortgage-based CDOs based on the idea that said instruments were low risk."
A lot of investors had that idea because the top tranches of those CDOs were given triple-A credit ratings by the government-certified oligopoly of rating agencies. That's not the case with Iraqi debt.
I get the feeling that Fred's harboring the illusion that he's a libertarian of some kind.
To Fred:
Investors that buy off of rating agencies are idiots. They are a crude guide useful to the media, but more complex derivatives do a much better job of quantifying risk.
I'm a libertarian, but it's pretty clear that this was a failure of the market. Trying to dig up obscure conspiracy theories to pin the blame on government just makes the rest of us look silly.
To everyone else, a counter-perspective:
Iraq's continuing civil-war indicates that the government in charge will be purchasing weapons for a very long time.
Because of this, the Iraqi government in charge(Who ever it is), will not want to jeopardize interest rates by refusing to pay past debt.
So it's quite plausible that a changing market expectation toward more violence would push up bond values.
David Shor:
"Investors that buy off of rating agencies are idiots. They are a crude guide useful to the media, but more complex derivatives do a much better job of quantifying risk.
I'm a libertarian, but it's pretty clear that this was a failure of the market. Trying to dig up obscure conspiracy theories to pin the blame on government just makes the rest of us look silly."
I'm neither a libertarian nor am I making up an obscure conspiracy theory to "pin the blame on government". I simply stated a fact: the government limited the number of "Nationally-Recognized Statistical Rating Organizations" (NRSROs) to a small oligopoly, and many institutional investors relied (perhaps to an unreasonable extent) on those rating agencies' ratings. There were more skeptical rating agencies (e.g., Egan-Jones), but regulations at most pension funds required them to go by NRSRO ratings. Egan-Jones, incidentally, was just recently given NRSRO designation by the feds -- a good thing, and the first time I can remember a new rating agency being allowed into the NRSRO club.
"more complex derivatives do a much better job of quantifying risk."
Yeah, I'd say they did a bang-up job of that...
What was Bear Stearns idea of "risk"?
From the "Mogambo Guru" at Asia Times:
"To get a "feel" for how crazy things got, Ambrose Evans-Pritchard at The Telegraph in London reports that "Bear Stearns had total positions of US$13.4 trillion. This is greater than the US national income, or equal to a quarter of world GDP - at least in 'notional terms'."
If you are like me, you gulped in horror at the revelation that this one bunch of people had made that kind of a huge, humongous, staggering load of unimaginable, unpayable commitments! More than the total income of everybody in the country!
More than the total income of everybody in the country!
So you can see how big commitments like this are dangerous, but Mr Evans-Pritchard ignores me and my penetrating, poignant analogy, and says that the problem at Bear Stearns was that through using "swaps", "swaptions", "caps", "collars", and "floors", they were able to float $13.4 trillion of this weird financial derivatives crap, and that "this heady edifice of newfangled instruments was built on an asset base of $80 billion at best".
$13,400 billion was what was leveraged on a measly $80 billion? Leveraged 167 times? Bear Stearns had less than 1% in the pot? Hahahaha!"
Yeah, that's "risk assessment", all right.
I believe there is a bit of obvious irrationality here. Markets do particularly poorly (worse than simple polling even) when the participants are misinformed in a biased manner. Given the political leanings of many of these investors, the correlation between those leanings and sources of information, and the active spread of misinformation (or at best highly selective coverage) from those sources... Well despite putting it into as dispassionate terminology as possible, it still boils down to:
A lot of 'investors' are GOP loyal conservatives who read the WSJ and watch Faux News... the fact that they are displaying what appears to be excessive confidence in the Iraqi government and economy hardly seems coincidental.
Comments closed April 25, 2008.
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Heads in the Sand
hm, considering that many opponents of current Iraq policy (maybe including matt, I forget) argued that the lack of foreign investment in Iraq portended ill for the chances of US success there, i would hope that the reverse would at least lead you to consider (if only to refute) the argument that the investors may know what they're doing.
Posted by jamie | April 11, 2008 12:13 PM