October 11, 2007: Iraq State Bonds Indicate Surge Is Failing, Says MIT Economist

Chart showing default rate since beginning of surge. [Source: Wall Street Journal]A Massachusetts Institute of Technology economist writes that according to economic indicators, the US military surge in Iraq is not working, and actually may be undermining US military efforts to bring order to that ravaged nation. Until now, few have tried to measure the success of the surge by using financial indicators, in part because of the lack of usable economic data available from Iraq, but Michael Greenstone of MIT’s economics department has made just such an attempt, using the long-term performance of Iraq state bonds to gauge how investors believe the prospects in Iraq are shaping up. Greenstone is not optimistic. “After the surge, there was a sharp decline in the price of those bonds, relative to alternative bonds,” Greenstone writes. He judges the performance of Iraq state bonds and credit default swaps against benchmark performers such as the Lehman Brothers emerging markets bond index, and against bonds issued in Qatar. Greenstone draws the conclusion that the global market is betting more and more on the likelihood that Iraq will default on its bonds, and concludes, “This finding suggests that, to date, the surge is failing to pave the way toward a stable Iraq and may in fact be undermining it.” [Wall Street Journal, 10/11/2007]