The War in Iraq Revisited

I noted before that the best and most objective means to consider if President Bush’s troop surge is to look at how the market is viewing Iraqi war bonds. If Iraqi government bond prices go up, it means the market (which is motivated by something higher than ideological sentiment and politics — money) believes that the surge is working and, hence, the Iraqi government stands a greater chance of paying off its debt to investors. If the bond prices go down, it means the market is losing faith in the Iraqi government’s ability to pay off its debt and is thus an objective sign that the war in Iraq is going poorly.

My previous post cited a paper by Michael Greenstone who noted that Iraqi bond prices fell ~40% following the surge, suggesting that the surge wasn’t working.

In recent days, however, those bond prices have gone up (source: Bloomberg’s):

While the war in Iraq has dragged Bush’s approval ratings lower, his policies in Iraq have turned around investor opinion on Iraqi debentures. The addition of 28,000 troops in the first half of the year has reduced terrorist attacks in the country by 55 percent, the U.S. embassy in Iraq said on Nov. 18.

“We’ve had a shift in sentiment,” said Gorky Urquieta, who oversees $14 billion of emerging-market debt at ING Investment Management in The Hague. ING started buying the securities last month, and is now among the biggest holders along with San Mateo, California-based Franklin Templeton Investments and Baltimore- based T. Rowe Price Group Inc., data compiled by Bloomberg show. “There’s optimism the surge is starting to pay off,” he said.

Greater security from the troop surge, a promise by Moqtada al Sadr to cease attacks, and a rise in oil prices seems to all be promising signs for the future of Iraq.

On the other hand, we all need to remember that bond prices aren’t just driven by the ability to pay, but also by the return on other investments — in recent days given the widespread belief that the global economy will enter a recession, its not surprising that investors view Iraq as relatively less unstable — it doesn’t necessarily mean they think its stable.