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Global Investing: New Iraqi Eurobond issue won't happen

Iraq has serious financial, political and even legal impediments to its first sovereign Eurobond new issue in almost a decade. The Standard and Poor's investment rating for Iraq is B-, six levels below investment grade, the same as Egypt. Yet the Egyptian state, unlike Iraq, is strong and allied to both Washington and regional financial superpowers Saudi Arabia, Kuwait and the UAE. The Iraq state is weak and fragmented, with Mosul under Daesh occupation, Anbar Province in a sectarian ferment, Basra (home to 95 per cent of Iraqi oil exports and its only oil ports on the Shatt Al Arab) dominated by rival Sadrist, Badr, Brigade and other pro-Iran militias.

The three Kurdish provinces are a de facto sovereign statelet, the legacy of President George H.W. Bush's humanitarian intervention in establishing the "no-fly zone" in the Kurdish northwest after Saddam Hussein's defeat in the first Gulf war. The KRG is in constant conflict with Baghdad, whose parliament is dominated by rival sectarian/ethnic political blocs. The malign shadow of Iran's Revolutionary Guards and the Mehdi Army prevents the emergence of a strong, credible, unitary Iraqi state, as proven by the recent mob storming of the Green Zone by the followers of Muqtada Al Sadr. President El Sisi rules Egypt. Prime Minister Abadi does not even rule southern Iraq, let alone Anbar, Mosul and the three Kurdish provinces. A single-B in Egypt does not equate to a single-B in Iraq in my geopolitical risk paradigm. Standard and Poor's sovereign credit analyst desperately need a crash course in the real world realities of the Middle East if they equate Egypt risk with Iraq.

Even though Iraq had selected, Citigroup, JPMorgan and Deutsche Bank to conduct the roadshows in New York, London, Paris and Zurich last autumn, institutional investors demand yields as high as 11-12 per cent in US dollars to invest in Iraqi debt. proves my point that financial markets are a far more subtle interpreter of sovereign risk than rating agencies. Pakistani Eurobonds are single-B but yield barely 6.3 per cent.

Iraq's financial metrics are truly horrific. The 2016 budget passed by a Parliament (so dysfunctional it makes the US Congress seem the epitome of harmony) projects a $25 billion deficit on a $100 billion spending base. This level of draconian state borrowing will "crowd out" the private sector and exacerbate the cash crunch in the local Iraqi dinar money market. In any case, the World Bank, the Iraqi central bank has $75 billion in hard currency reserves. Yet Iraq's financial metrics in 2016 are surreal.

The Iraqi state has a payroll of seven million, five times the payroll in the twilight of Saddam's Baathist rule in 2003. Salaries consume 70 per cent of public spending at a time the battles of Fallujah and Mosul rage against Daesh, oil and gas capex with foreign joint ventures is going to surge and Brent has plunged from $115 to $48. Life in Baghdad, Basra and Mosul is medieval in its Hobbesian brutality a decade after the execution of Saddam Hussein Al Tikriti. If the global loan syndications and Eurobond/sukuk markets do not finance Iraq, Baghdad has no choice but to go to the Bretton Woods twins in Washington, to become the latest Arab ward of the IMF and the World Bank.

A new issue market desperate to lend ten year money to Argentina at 7.5 per cent will not lend money to Iraq at even a loan shark's 12 per cent or 1,000 basis points above the Uncle Sam note. The geopolitical and fiscal risks, in my opinion, guarantee default and debt restructuring would be impossible if the Kurds do not hand over 550,000 barrels of crude to the Baghdad government in exchange for 17 per cent of state revenues, which they will not as smuggling via Turkish trucks/pipeline is more profitable for a near-bankrupt KRG in Erbil.

Even Finance Minister Hoshyar Zebari has conceded international investors will not finance Iraq since the Daish renegade "caliphate" and rule of terror in the northwest and eastern Syria has devastated Iraq's economic infrastructure and regional trade. Iraq cannot even export three million barrels of Basra Light due to its debt shocks and Oxy has requested Baghdad to divest from its concession in the Zubair elephant oilfield. Shell has slashed its Iraqi capex by $1 billion. The oilfields of Basra devastated by bombs, war, sanctions, sabotage, neglect and corruption since the 1980s "tanker war" with Iran are no longer Iraq's financial lifeline. Since I can predict neither the price or volume of Iraqi oil exports, I cannot price Iraqi country and balance of payments risk. An Iraqi Eurobond new issue, tragically, is just not credible and will not happen.

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