By John Dizard

LONDON,— One of the most annoying aspects of the Greece/ Grexit story over the past several months is the pretentious use of military metaphors by a collection of soft-handed politicians and commentators.

Attending meetings in Brussels is a “war”. Facing television cameras is a “battle”. Just to be clear: issuing a disagreeable statement is not the same thing as killing a person with a rifle, and being the object of parliamentary derision is not the same as being hit by a bullet or a bomb blast.

Sometimes, though, financial operations are part of a real war. Take the reconnaissance operation, or roadshow, undertaken last month in London by Deutsche Bank and Goldman Sachs to prepare international bond investors for a note issue by the Kurdistan region of Iraq. The two banks were listed as joint lead managers in a 109 page “preliminary private placement memorandum”.

The coupon, the bankers indicated orally, was intended to be around 11 to 12 per cent, and the initial offering would be between $500m and $1bn. That interest rate would be 300 to 400 basis points more than the 8 per cent level where the Republic of Iraq’s existing $2.7bn bond due in 2028 has been trading. Ordinarily this would be a smallish international issue by a sub-sovereign borrower that was priced to sell in a yield-hungry market.

The Kurdistan deal, and the managers’ handling of it, though, provoked anger in the Iraqi central government in Baghdad and a seething fury among those who have been preparing the Iraqi government’s own forthcoming multibillion-dollar bond issue.

As one of them said: “We were trying to do a real deal for the republic, and then [the managers] come along like a garbage can full of beer bottles.”

What makes this different from the usual commercial differences of opinion is that the central government of the Republic of Iraq and the Kurdish region are fighting a war to the death with Isis. Both are short of ready money.

It is inarguably a real problem for the rest of the world if they cannot pay for their operations and Isis gains ground. So any international financing operations here should be done in a professional manner.

Even some of those who were involved in the Kurdistan deal now concede that there were problems in how it was handled. In one participant’s words: “We stand behind the narrative of what was in the document . . . of course since then the narrative has shifted. We have no interest in getting into something that will cause major conflicts between Baghdad and the Kurdistan Regional Government.”

But they did. The “narrative” that supposedly “shifted” right in the middle of the roadshow was the Kurdistan government’s open reporting of international oil sales that did not go through the central government’s State Oil Marketing Organisation.

The KRG asserts that it has the right to export oil from fields that have been developed by companies with whom it has production-sharing agreements.

The Baghdad government says the regional government does not have that right, and that all receipts for oil produced within Iraq’s boundaries must be paid into accounts it has approved. Kurdistan retorts that the central government has an obligation under the Iraqi constitution to pay it 17 per cent of the entire country’s oil receipts and that it has not done so. That is true.

This dispute has led, in turn, to Kurdistan exporting some oil without Baghdad’s approval, and Baghdad sending lawyers to seize that oil, or the receipts from the oil. Kurdistan has been able to get paid for some oil exported through Turkey or, perhaps, Iran, albeit circuitously, at steep discounts and in smaller amounts than it needs.

There can be different opinions on which government is morally in the right, or which one would ultimately prevail after years of litigation. From the point of view of shy, passive bondholders, it would seem that too many foreign courts or potential foreign oil customers have tended to defer to Baghdad’s sovereignty.

For now, at least, the US government is taking Baghdad’s side, and they control the dollar clearing system. Think Argentina versus holdout creditors, and add a war.

That is the fundamental problem with bond issues by Kurdistan that do not have the explicit support of Baghdad. Absent a reliable way to export oil under international law, Kurdistan is fully dependent on the central government, and therefore cannot offer international investors a credible source of repayment.

One could excuse the Kurdish government for being too aggressive on its timing and documentation. They are, after all, fighting for their survival against bloodthirsty terrorists. However, these are the just the sort of points that international financiers should explain to their clients, even if it means losing some business.

Baghdad and Kurdistan must come to terms. They probably will, after Ramadan and the summer market pause.
The Republic of Iraq, whatever its other problems, has very little foreign debt, rising oil production and no significant international legal disputes. It has parliamentary authorisation to issue international bonds. Baghdad needs to make a long-term financial arrangement with Kurdistan. The minister of finance of the republic, Hoshyar Zebari, is a Kurd.

There are deals to be done here. Just not the deal proposed by Deutsche Bank and Goldman Sachs.
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