VZCZCXRO5368
PP RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #0423/01 0491316
ZNR UUUUU ZZH
P 181316Z FEB 09
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC PRIORITY 1767
INFO RUCNRAQ/IRAQ COLLECTIVE

UNCLAS SECTION 01 OF 02 BAGHDAD 000423 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON IZ
SUBJECT: MINISTRY OF FINANCE CONSIDERS USD 5 BILLION BOND 
ISSUANCE 
 
REF: A. BAGHDAD 244 
     ¶B. 08 BAGHDAD 3417 
 
¶1. (SBU) Summary: Iraq's Ministry of Finance (MoF) is 
considering a new bond issue worth USD 5 billion in order to 
better manage its cash-flow in the face of reduced oil export 
revenue.  Demand for the T-bills offered at price-capped 
auctions is "variable," with two state-owned banks accounting 
for most purchases.  There is no secondary market for the 
GOI's dinar T-bills, though the MoF would like to see one 
develop.  End summary. 
 
State-Owned Banks Hold Majority of T-Bills Issued 
--------------------------------------------- ---- 
 
¶2. (SBU) According to Ministry of Finance Director General 
for Debt Management Mowafak Taha Izzedin, the MoF currently 
issues dinar-denominated T-bills through the Central Bank of 
Iraq (CBI), twice a month.  Auctions are announced by the CBI 
one week in advance.  Any bank registered in Iraq is 
permitted to participate in these auctions.  Given the size 
of their assets and orders from the MoF, Iraq's two largest 
state-owned banks, Rafidain and Rasheed, are the two main 
purchasers of these T-bills.  According to Mowafak, they have 
purchased roughly 65 percent of all T-bills sold. 
State-owned banks are not obligated to purchase T-bills, but 
they are "encouraged" to do so.  The Agriculture and Real 
Estate banks, also state-owned, make their bond purchases 
through Rasheed or Rafidain.  Treasatt, Econoff, and Treasury 
OTA Advisors met with on Mowafak on February 5, in response 
to a Minister of Finance request (ref A) to assist the GOI's 
efforts to expand its government bond markets. 
 
¶3. (SBU) The Minister of Finance has announced that the MoF 
would like to issue up to USD 5 billion in new dinar T-bills 
to diversify the sources of funds available for government 
expenditure.  However, Mowafak noted that there might not be 
enough demand, or sufficient liquidity in the private banks, 
to meet increased supply.  He did allow that private 
customers, including non-residents, could open bank accounts 
and direct the bank to invest its funds in the T-bill market. 
 (Comment: Were the MoF to allow bond yields to move with 
market conditions, demand would meet supply as private banks, 
such as al-Warka (ref B), seek more deposits.  End comment.) 
 
 
No Secondary Market for T-Bills 
------------------------------- 
 
¶4. (SBU) Mowafak said that demand for MoF T-Bills is 
"variable."  On occasions the offer is oversubscribed.  At 
other times, the MoF may only sell 30-75 percent of an 
offering.  Interest offered on these T-Bills during the 
auction has ranged from 14 to 21 percent.  If the MoF 
determines that the interest rate is too high, it has the 
right, which it has exercised, to cancel the auctions.  Both 
the Rasheed and Rafidain Banks have complained that the 
CBI-imposed 75 percent reserve requirement ratio on funds 
deposited by the government for GOI spending means that they 
have fewer funds to purchase T-bills.  (Note: Earnings on 
these deposits are an important source of revenue for the 
state-owned banks.  Both CBI and MoF officials point out, 
however, that the bulk of the deposits in state-owned banks 
(57 percent) belong to the GOI and are ill-suited for 
investment purposes.  End Note.) 
 
¶5. (SBU) Only banks are allowed, under Iraqi law, to purchase 
government T-bills.  Banks may sell T-bills to another Iraqi 
bank, but beyond the banks there is no secondary market.  The 
MoF is open to the idea of allowing private individuals or 
entities to purchase government T-bills, but it has 
encountered resistance from Rasheed and Rafidian Banks. 
These banks argue that their customers would move funds out 
QThese banks argue that their customers would move funds out 
of their savings deposits to the detriment of the banks. 
Ministry of Finance T-Bills have a 91-day maturity.  The MoF 
is considering longer-term bills, up to 183-days, but is 
concerned that these would be "too expensive," said Mowafak. 
 
¶6. (SBU) On November 17, 2008, a Bearing Point-designed 
Government Security Registration System was implemented 
allowing the banks and MoF to handle the auction 
electronically.  Prior to this automation, bond auctions were 
conducted in person at the CBI and were sometimes cancelled 
or postponed due to security issues. 
 
Comment 
------- 
 
¶7. (SBU) The basic laws and mechanisms are in place for a 
T-bill market but, as this conversation confirmed, the market 
is far from functional.  A T-bill market should advertise 
 
BAGHDAD 00000423  002 OF 002 
 
 
regular auctions well in advance, and the auctions should 
clear at market prices.  Such a market is attractive to 
investors.  The MoF has been reluctant to develop the T-bill 
market since they have not needed money.  However, later this 
year or, more likely, in 2010 they likely will need to tap 
other resources to mitigate a sharp downturn in revenues. 
The key is to develop a well-functioning T-bill market in 
advance so when they do need it, the market and investors 
will be ready. 
BUTENIS