Spare a moment to read this Forbes article about Iraqi debt (sent to me by my friend and Tulip partner Dan Butler, who knows more about these things than I). It's estimated that Iraq owes a whopping $120 billion to various lenders. A relatively "small" amount -- that is, about $2.6 billion -- of that is traded. (People buy and sell debt, sort of like this: My broke friend Bob owes me $5; I don't think I'm ever going to see any of it, but my other friend Sinbad thinks he can convince Broke Bob to pay, so I'm willing to sell the debt to Sinbad for $3.50. I'm happy getting $3.50 rather than nothing. Sinbad goes to Bob and says, "Bob, remember that $5 you owed Scott? You now owe it to me. But I know you're broke, so if you just give me $4, we'll forget about the whole thing." Bob agrees. Voila. Sinbad made a 50 cents.)

In this case, J.P. Morgan, Bank of New York, BNP Paribas, and a bunch of their Middle Eastern friend all got together and lent Saddam Hussein $500 million in 1983. The banks have written the debt off, assuming they're never going to get the money, but the debt is now traded, by people who enjoy exotic financial risks, at around 18 to 20 cents for every original dollar loaned; that's how little faith people have that it will ever be paid back. But compare what is was trading at between 1997 and 2000 -- about half that. So in the last 3-6 years, the market's optimism that somebody's gonna back that debt back will has doubled! Now markets are usually, though not always, pretty smart; they represent the collective thinking of a large bunch of people who think real hard about stuff that few people bother to think about.

But think about this for a second. Why should anybody assume that the new rulers of Iraq will pay off Saddam Hussein's debt, which he used to oppress his own people, finance two disasterous wars and buy gold-plated AK-47's? Morally, why should these banks see any of that money? If you ask me, they shouldn't. They didn't lend that money to Iraq. They lent it to a ruthless dictator, and they (like most Western governments, and Russia, who supported Saddam) should be ashamed of themselves.

To be sure, the banks have already written off that debt, so they're not expecting to get anything back. It would go to whomever's holding these promissory notes today. But imagine what kind of effect it would have if the new Iraqi government simply declared that the previous government was illegitimate, so forget about those loans. (I believe Czechoslovakia did that after 1948, and it didn't go over too well.) In this extraordinary case, investors would probably buy the argument; it's unlikely, for instance, that new lenders would be scared away simply because the new government reneged on Saddam's debts. In fact, the overall effect would probably be to make the cost of borrowing skyrocket for dictators -- and that's a good thing. Is anybody's going to lend Robert Mugabe money at a decent interest rate if they know that if and when Zimbabwe has a truly democratic government, they can kiss the money goodbye? Doubt it.