Iraqi Debt

Tyler Cowen posts a reader email today pointing out the recent rally of Iraqi government debt. At a time where developing nation debt has been hurt by increasing risk aversion, Iraqi five-year credit default swaps have fallen to 520 basis points from around 635 bps at the start of the year.

Here are some other developing nation swaps for comparison from Bloomberg:
282 bps - Average developing nation debt
145 bps - Brazil
611 bps - Venezuela
520 bps - Iraq

This is partially a statement of how bad things are looking for holders of Venezuelan debt, which is trading much worse that Mexican, Peruvian, Panamanian, and other comparable debt. The sad situation in Venezuala asside, Cowen points out that Iraqi debt may be improving due to rising Republican prospects in the Presidential election; Republicans being more likely to continue a large troop presense in Iraq and (if you're optomist) create a stable country that five years from now will be able to pay off it's debt. Intrade shows evedence that could support this view. The odds of a Republican winning the 2008 election have increased from low 30s to about 41% this year.


Debt prices are, of course, affected by many factors. Most likely this price reflects 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 addition smaller factors - factors that are not all moving in the same direction. Overall, I think it’s a good sign for Iraq but not enough to make me, at least, bullish about the country.