Cry For Me, Baghdad

Back in the late 1970s, Iraq was on a short list of the world's most successful developing countries. Baghdad cafes were bustling with a well-educated professional class that presided over a thriving economy, which has since shrunk from $100 billion to (best guess) perhaps $25 billion. Now Iraq emerges from the war at the top of another list--that of the biggest emerging-market meltdowns ever. It has a debt-to-GDP ratio of 15 to 1, or several times that of Argentina or Brazil at the height of their troubles last year. Like Russia after the Soviet Union, Iraq faces the challenge of turning a corrupt dictatorship into a free-market economy. "Iraq's situation is very, very complicated," says Ian Bannon, head of conflict prevention and reconstruction at the World Bank. "We haven't seen anything quite like it."

In every recent emerging-market crisis, from Thailand to Argentina, the rescue has been hampered by issues of "transparency," which is banker jargon for the tendency of debtors to hide their assets and dodge their obligations. Next to Iraq, however, the other emerging markets are open books. Believable numbers on everything from wages to GDP are as hard to locate as Saddam himself. The World Bank stopped lending to Iraq in 1973, and the IMF did its last economic analysis of the country in 1983. Most nations that default scramble to renegotiate payments, and restore their credibility, in a matter of weeks or months; Saddam had not made a debt payment to creditors in 12 years. "The first thing to understand when talking about the Iraqi economy is that any numbers that are thrown out must be treated with caution," says Jan Randolph, head of economics at London's World Markets Research Centre. That said, the most credible current estimate of Iraqi government debts is $383 billion, dwarfing even Brazil's massive 2001 debt of $226 billion.

The $383 billion estimate comes from a recent report by the Center for International Strategic Studies, a Washington think tank. Coauthor Bathsheba Crocker says Iraq's debt burden is "off the charts. It's fair to say these financial obligations are the largest we've seen." Over half the total comes from Gulf War I reparations, and the rest represents loans from foreign governments, largely from Gulf states during Iraq's war with Iran, or unpaid bills from foreign contractors, mostly due to Russian energy and telecom contractors. In short, the characters in Iraqi debt negotiations will have a far wider range of profiles and motives than the usual lineup of international bankers, making reaching an agreement all the more difficult.

The Bush administration is urging creditors to forgive the debt--which is easy for Washington to ask, because Iraq has few U.S. creditors. One hurdle: world markets have a lingering tendency to see Iraq as an Arab Argentina--a regional trading power fallen on hard times--not as a postwar basket case. While crisis economies typically need to stabilize their currency before they can repay debts, Iraq will have to retire the worthless "Saddam dinar" and print a new currency--which makes it more like Afghanistan than Argentina. Arab states eager to contain the chaos may be willing to forgive. But the French and Germans show no such spirit, and the Russians, who had to pay Soviet debts, may see no reason to excuse Saddam's. Randolph says Russia could be moved to forgiveness by a shot at new contracts in Iraq: "Inevitably, there's going to be a lot of horse trading."

The Bush administration is perhaps too optimistic in hoping that Iraqi oil will cover a reconstruction bill of up to $100 billion. And that doesn't begin to address the full scope of Iraq's debt crisis, in which paying back creditors is only part of the challenge. While the IMF has leaned on postcrisis nations like Thailand, South Korea and Argentina to make sweeping free-market reforms of their financial systems--and has been vilified as an imperial tool of the United States for doing so--reforming other crisis-torn markets was nothing compared to the challenge in Iraq, which has to tear down and rebuild a system in which all laws and institutions bowed to the dictate of one man. This is no Argentina. Indeed, if Baghdad is in as little trouble as Buenos Aires in 10 or 15 years, it will be doing miraculously well.