Comments on: Iraqi government bonds

By: David

David — Wed, 19 Sep 2007 03:10:43 +0000

Parallel may be that going into Iraq as the US did was not unlike some of the common subprime mortgage arrangements that were being made by homebuyers or home refinancers at about the same time—easily affordable payments early on, maybe even with some negative amortization for the first couple of years. It’s tempting during that early period to rub hands gleefully, open a bottle, and say, “mission accomplished.” But eventually the piper comes calling to be paid, the payments begin to adjust, and reality sets in.

By: John Quiggin

John Quiggin — Tue, 18 Sep 2007 21:43:55 +0000

Whether or not this particular application is valid, the general point that the market value of government bonds is likely to decline when the government looks likely to fall is neither new nor controversial. Obviously markets are going to react to publicly available information like this, whether or not they do so optimally.

The silly claim to which this stuff was linked is that, therefore, markets in events like terrorism futures, where most of the relevant info is private, are going to do well.

By: Felix

Felix — Tue, 18 Sep 2007 21:19:06 +0000

D—
You may or may not be aware that what he’s using IS restructured debt: the US govt basically imposed a whopping great big haircut on all Iraq’s Saddam-era creditors, and the bonds now floating around the capital markets are the end result of that restructuring. At no time since the 2003 invasion has Iraq been anywhere near the point at which it could actually issue new bonds. And frankly if the secondary-market price of a bond is not equal to the price at which that credit can issue new paper, then a lot of the assumptions which go into these kind of papers have to get thrown out the window.

By: bi

bi — Tue, 18 Sep 2007 20:30:46 +0000

s/mujahidin/mujahid/

By: bi

bi — Tue, 18 Sep 2007 20:23:27 +0000

MattF, Warren Terra:

Of course, the plural has to be… “datae”! :B :B :B :B :B :B :B :B

Well, certainly the plural of “virus” is not “viri”. Or “virii”. (Maybe “vīrūs” or “vīrora”, though I’ll stick with “viruses”. But “virus” is a mass noun in Latin and a countable noun in English, the opposite situation of that for ‘singular’ “data”.)

And for frig’s sake, a bloke who participates in a jihad is not a “jihadi”. Why people can’t just say “jihadist” or “mujahidin” just boggles my mind.

By: MattF

MattF — Tue, 18 Sep 2007 20:15:27 +0000

Yes, it’s humor—although I did take the precaution of googling ‘dati’ just to make sure that it’s not a word.

By: Justin

Justin — Tue, 18 Sep 2007 20:08:04 +0000

Nevermind on my previous post – I skipped too many paragraphs when I made the jump.

By: Justin

Justin — Tue, 18 Sep 2007 20:06:40 +0000

I think the mistake you make here is that you make the assumption that markets work, and then deconstruct from there. But markets are hardly perfect – the price indicates the market’s aggregate beliefs. And the idea that the market’s aggregate belief would be that Iraqi bonds are worth more under a functioning Iraq than a dysfunctional one seems reasonable.

The real question is that these are the market’s beliefs – they can be led by “experts” and followed by the crowd ,or they can be random guesses. But there doesn’t seem to be any reason to believe that the experts could peg this one any better than the rest of us – so their prediction via bond prices isn’t worth much – and that’s the real criticism against using bond prices.

By: Warren Terra

Warren Terra — Tue, 18 Sep 2007 19:59:50 +0000

I’ve always thought that the plural of ‘data’ is ‘dati’.

Please clarify whether this is intended as humor?

(In a related vein, I’ve always thought that ‘the plural form of anecdote is data’ was cute, if untrue).

By: MattF

MattF — Tue, 18 Sep 2007 18:24:56 +0000

I’ve always thought that the plural of ‘data’ is ‘dati’.

By: aaron

aaron — Tue, 18 Sep 2007 17:01:16 +0000

Popular opinion overseas and US politics are also likely factors.

So are rising interest rates in general (are they, I haven’t looked), since it makes it more likely that the US would be less willing finance using debt and a tax hike beyond expiration of previous cuts probably isn’t likely. When the war started, people were practically lending money for free, taking it was a no brainer.

By: dsquared

dsquared — Tue, 18 Sep 2007 15:35:25 +0000

RWB: no. It can’t be simply asserted that the relationship between the value of the bonds and Iraqi government success has a stable and known sign. As I noted above, one can argue just as convincingly that bondholders benefit from continuing chaos which keeps the Americans there and suffer from improvement which might lead to the Iraqi government having enough stability to declare a moratorium. Also, there are plenty of risk factors in Iraqi bond prices which aren’t related to risk on the Iraqi economy and which I do not think the Lehman EMBI (which is mainly an index of Latam and Central European bonds) proxies for terribly well.

You can actually see from the charts at the end of the piece that apparently, the financial market suddenly decided the surge wasn’t working over the space of about a week around the 15th of July, which week superimposes more or less perfectly on your favourite chart of the subprime mortgage crisis.

By: matt wilbert

matt wilbert — Tue, 18 Sep 2007 15:16:27 +0000

He does use controls, but they are (in my view) prima-facie inappropriate to control for the market conditions of the past two months because they are all significantly higher quality (as judged by their yields which are 3.5-8% lower prior to the surge) so not as subject to the recent issues in the market for lesser credits. The spike in the spreads in the July-August timeframe is very similar to the spike in high-yield spreads generally.

It is clear from the paper (pg 19) that even with knowledge of the unusual market conditions Greenstone thinks his chosen controls are appropriate, but I can’t understand why he thinks that—he doesn’t explain why he thinks so, he just asserts it.

By: abb1

abb1 — Tue, 18 Sep 2007 15:10:34 +0000

…extrapolation from “Iraqi government bond prices have fallen” to “therefore things are going worse in Iraq”

Maybe it should be “therefore things will be going worse”. Because typically when your interest rates are going up fast it’s not likely that you are on the path to great stability and prosperity.

By: aaron

aaron — Tue, 18 Sep 2007 14:47:48 +0000

Problem is that it’s not likely and indicator of the effectiveness of the surge, it’s an indicator of the effectiveness of the Iraqi government. Two very different things.

If Iraqs current governement tanks, is that necessarily a bad thing. I personally wouldn’t mind seeing them give that whole constitution thing another go.