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Iraq’s Finance Ministry is to auction Id150bn (US$10mn) of treasury bills on July 18 in a move to establish a bond market and kickstart Iraq’s domestic capital markets.

“It’s a way to recover the economy,” says Adel Mahdi, Iraq’s finance minister. “We are issuing new treasury bills, not only to finance the repayment of treasury bills (outstanding from the former regime), but to regulate the market and determine interest rates.”

The T-bill issue will be used to repay outstanding debt issued by the previous regime of Saddam Hussein, Id1,300bn of which is estimated to be held by Iraqi domestic banks. That is seen as a way to bring funds back into Iraq’s banking sector, much of which would otherwise face bankruptcy.

“The ministry had to find a way to pay local banks back,” says George Gianaris, a US Treasury Department official in Baghdad advising on Iraqi debt. “If it didn’t roll over the debts the banking system would not be solvent.”

For the government, borrowing money is seen as a last resort, but the US-led coalition has been slow to disburse Id18bn in promised aid, and Iraqi oil revenues have come under threat from insurgents’ attacks on pipeline infrastructure.

The minister says he expects the T-Bills, which will have a 91-day maturity, to yield between 5-8% annual interest – quite optimistic compared with other emerging debt markets.

But Iraqi bankers are hardened to continuing violence, and more importantly, they say they are desperate for secure investments for their cash. Bankers have complained they were deprived of local interest-bearing funds to invest.

“There’s so much liquidity in the Iraqi economy at the moment earning 0%, the auction seems a good investment,” says a local banker.

Under Saddam Hussein, banks received fixed interest payments of 6% for treasury bills, but many feared bankruptcy after the regime collapsed, leaving them saddled with Id1,300bn outstanding of debt, say US officials.

Iraq’s domestic debt is less than 1% of an external debt the finance minister valued at between Id120bn-130bn, prior to any debt-forgiveness, but nevertheless is considered by advisers as vital to restoring confidence.