Surge Working?

In September, Michael Greenstone, an economics professor at MIT, wrote a paper about judging the effect of the surge in Iraq. His conclusion, based on Iraqi bond prices, was no:

This paper shows how data from world financial markets can be used to shed light on the central question of whether the Surge has increased or diminished the prospect of today's Iraq surviving into the future. In particular, I examine the price of Iraqi state bonds, which the Iraqi government is currently servicing, on world financial markets. After the Surge, there is a sharp decline in the price of those bonds, relative to alternative bonds. The decline signaled a 40% increase in the market's expectation that Iraq will default. This finding suggests that to date the Surge is failing to pave the way toward a stable Iraq and may in fact be undermining it.

Mr. Greenstone may need to update his study:

Dec. 7 (Bloomberg) -- Holders of Iraqi bonds are giving President George W. Bush a vote of confidence.

The country's $2.7 billion of 5.8 percent bonds due in 2028 returned 15.2 percent since July, according to JPMorgan Chase & Co. index data. Only Ecuador's debt gained more, rising 18 percent. Iraq's securities yield 6.21 percentage points more than Treasuries, the most of any dollar-denominated government debt.

Who knows if the current conditions in Iraq will last, but it seems, at least for now, that things are getting better. Another factor may be that oil production is back up to 2.5 million barrels a day which is roughly comparable to what it was before the war. And a big drop in the price of oil could have a dramatic impact on the price of the bonds regardless of any military success. Cautious optimism would seem to be the appropriate stance.