THEME: IRAQI INFLATION SOURCE
Iraqi debt has an implicit US guarantee. That is why the T-bills will trade as low as 5%! This has to be a source of inflation as essentially the Fed is expanding its money supply overseas to cover all of these dead dinars. At the same time, the US wants to kill off the existing Iraqi external debt. The net effect is like injecting dollars into every Iraqi's pockets. Inflation is here to stay.

Iraq's Finance Ministry is to auction 150bn dinars ($10m, ?8m, £5.4m) 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," said Adel Mahdi, Iraq's finance minister, in an interview with the FT. "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, 1,300bn dinars 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 minister said he expected the T-Bills, which will have a 91-day maturity, to yield between 5 and 8 per cent 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 zero per cent, the auction seems a good investment," said a local banker.

Under Saddam Hussein, banks received fixed interest payments of 6 per cent for treasury bills, but many feared bankruptcy after the regime collapsed, leaving them saddled with 1,300bn dinars outstanding of debt, say US officials.

Iraq's domestic debt is less than 1 per cent of an external debt the finance minister valued at between 120bn-130bn dinars, prior to any debt-forgiveness, but nevertheless is considered by advisers as vital to restoring confidence.