A small and rather select band of traders are looking to cash in on some very old Iraqi debt, assuming that Iraq soon moves into a post-Saddam era.

Amongst paper likely to hit the secondary debt market are letters of credit (L/Cs) issued before the first 1991-92 Gulf War.

Price hike

Secondary debt traders reckon the market price of two big Iraqi loans has doubled over recent weeks, and is now changing hands at around 19 cents on the dollar.

The scale of Iraq's debt is immense. Much of it was accumulated during the 1980s to finance Iraqi President Saddam Hussain's ambitious oil, infrastructure and engineering projects and to buy military hardware for the eight year Iran-Iraq war.

Write-off gamble

Identifying the debt is something of a forensic task, but it is thought to be worth around US$120 billion, a figure that includes around US$42 billion in interest.

An additional tranche of secondary debt will become available, namely unpaid reparations due to individuals, companies and countries that lost out financially in the 1990-91 Gulf War. The United Nations Compensation Commission manages these debts, and is expected to revalue them at around US$40 billion.

Market expectations are that Iraq will negotiate the write-off of between 70-90 per cent of the debt. Traders obviously hope to buy a debt at a higher percentage discount than the percentage by which it is trimmed.

Specialists

Few buyers have yet to enter the market, but some very big players are already showing an interest. For the moment, traders tend to be banks and specialists in emerging market debt's such as Omni Whittington of the Netherlands, the UK's Exotix and East-West Debt in Belgium.

Other Iraqi debt expected on the market if Baghdad's current leadership is toppled include L/Cs and other paper from the central bank, and two other banks, Rafidain Bank and Rashid Bank.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.