Posted on 12/17/2004 7:17:23 AM PST by Deo et Patria
US to forgive $5.4bn Iraq debt From correspondents in Washington December 17, 2004
THE administration of US President George W Bush will agree to write off the $US4.1 billion ($5.4 billion) worth of debt Iraq racked up during the regime of Saddam Hussein.
The debt write-off accord will be signed in Washington tomorrow by US Secretary of State Colin Powell, Treasury Secretary John Snow and Iraq's Finance Minister Adel Abdel Mahdi, according to a State Department statement today.
"The signing of the debt cancellation agreement is the bilateral agreement that implements the United States' part of the Paris Club debt-reduction agreement reached November 21, 2004," the statement said.
"In fact the United States will go beyond the 80 per cent reduction agreed at the Paris Club and forgive 100 per cent of the $US4.1 billion Iraq owes the United States from the Saddam era," it said.
In late November, the Paris Club of 19 creditor countries, including the United States, Japan, Russia and EU nations, said its members had agreed to wipe out 80 per cent of the money it is owed by Iraq over three years.
Iraq owes the Paris Club nations $US40 billion, about one-third of the country's foreign debt.
Agence France-Presse
According to the attached article, the U.S. has just forgiven the all debt that the Iraqi government owes to it, in the hopes of accelerating Iraq's economic recovery. With all of the money that the U.S. is putting into Iraq, what if the U.S. government purchased $7 Billion USD worth of Iraqi Dinar (IQD) at the prevailing exchange rate (1460 IQD/1 USD) and stored it away in the U.S.? We purchase other countries' currency all the time, why not Iraq's? That would get us 10.22 Trillion IQD. Then if it goes to parity with the Dollar someday in the future, we have "created" enough money to pay off our entire national debt (currently $7.529 trillion USD) plus a nice profit. (In this regard, the scenario would be like a venture capitalist investing in a startup.) Why wouldn't the U.S. do something like this, especially since our position in Iraqi currency would be a nice hedge against a future unfriendly government? My initial guesses:
(1) that's probably more IQD than the Iraqis have even printed, so it's probably not available. But why not do it on a smaller scale?
(2) any US attempt to redeem the IQD once it appreciates would completely crash and devalue the IQD. But why wouldn't we just hold it and sell a little bit at a time?
Any other responses? I know it's a dumb question, but I just thought that I'd ask. All responses are welcome, I'm just trying to learn something here.
Two good questions which I don't know the answer to.
But I can tell you that Iraqi Dinar is selling on EBay for closer to 1100IQD/$1.
Your idea is sounds reasonalbe enough. After a war a nations currency (especially the loser) is devalued. But it will take years or decades for the currency to rebound and may never rebound completely.
There are two reasons for this, neither of whcih is really economic:
Firstly, control of currency is essential to a sovereign nation. For the U.S. to simply buy up all the IQDs would mean it owns the entire economy. This would make a mockery of U.S goals for the country. Secondly, to control all that currency would mean the U.S. would have to institute and administer a monetary policy, which would require more resources, and embroil the U.S. in accusations of manipulation and back-door theft of Iraq's rescources.
From a purely economic and monetary standpoint, there's no reason it couldn't be done, but it's not desirable for the reasons above.
Why would the U.S. have to institute a monetary policy? Iraq already has an independent central bank in place that is run by very smart, Harvard-trained economists. Also, if political issues are such a concern, why wouldn't the U.S. do such a thing quietly, by merely buying the Dinar in country from local licensed banks? It would be a nice lever for exerting pressure on a future Iraqi government if they pull a "France" on us (i.e., "thanks for saving our country and building up our economy, but now we find it more expedient to be your adversary rather than your ally"). It might be nice to have that kind of leverage at that point.
Just some food for thought.
I appreciate the feedback, by the way. Keep it coming.
it would still be debt, you would only switch the currency.
The U.S. would have to have a monetary policy because they would control almost all the currency. This would neuter the Central Bank, as they would have no control over the currency flows into and out of the economy. The U.S. could use the CB as an instrument of that policy, but the CB would be dependant on the U.S. for providing or accepting Dinars, effectively eliminating them from the process.
Not exactly. Iraq's foriegn debt is about 120 billion and this agreement is for just the 4.1 billion "Iraq owes the United States from the Saddam era," and not debt held since or before Saddam, nor Saddam money held by US banks.
This deal helps Iraq become more financial sound and raises its credit rating-- and that raises the value of the remaining 116 billion of debt held buy the US, as well as that held by American banks, and foreigners, all who will shower us with gratitude in the future (hopefully).
Is that correct? My understanding is that the remaining portion of the $120 billion is held by other countries. The Paris Club, for example, held $40+ billion (including U.S. debt), and other countries like Kuwait and Saudi Arabia hold a lot of the debt as well. I don't think that the U.S. has any older debt from Iraq that it is still sitting on, though I stand ready to be corrected.
What we can say for sure is the article didn't say. Something else we know for sure is that Iraqi bonds sell on the open market and anyone can own them. Banks trade in foreign bonds all the time. Something else is that the feds do not have the authority to negotiate for private individuals for debt forgiveness. The feds could try and buy up the privately held bonds (so they could tear them up), but all they could do is make bids and see if the sellers accept the offers.
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