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Kurdistan and $5 Billion international loan dilemma
February 9, 2015
Rizgar Khoshnaw — Special to Ekurd.net
In the past few months, the Kurdistan Regional Government (the KRG) has been seriously considering taking out an international loan in order to take care of “certain” expenses that they desperately need to cover. Few months ago, I wrote an article on [You must be registered and logged in to see this link.] web site detailing the problems that the KRG will face trying to put this deal together.
In my previous article, I had mentioned that the KRG will likely use this potential borrowed money to pay their civil servants and other government expenses. But in the past few days, I have been reading/hearing that the KRG is coming out publicly and saying that they will not use this money in order to pay back salaries of the government employees which is a very good move. If so, then what will this money be used for? Will this borrowed money be used to pay the oil companies, such a Exxon? Will this money be used in order to pay for the “contractors” that are trying to complete their projects?? No matter who gets paid with this borrowed money, Kurdistan will pay a very hefty price for this loan, if it is not does properly.
Lets talk about Exxon and their “expenses” in Kurdistan that they are trying to collect from the KRG. How in the world can Exxon claim, as I have been reading, that the have accrued hundreds of millions of dollars in expense in “working in Kurdistan? I think Kurdistan parliament should look into Exxon and their expense before paying them one dollar.
Personally, I have studied and research oil extracting business in Kurdistan, and other countries, and found out that it is extremely inexpensive to work and extract oil in Kurdistan comparing to other nations. The labor cost in Kurdistan is very cheap, the land is given for free and there are very few employees that Exxon is using in Kurdistan. Furthermore, the cost to set up an oil rig, no matter where in this world, is no more than $50 million- and that is a one time expense! And it cost an average $1 a barrel to extract oil from Kurdistan comparing to $40 in the US. Then why and how Exxon is claiming to have hundreds of millions in expense in Kurdistan every year??
Now, lets talk about the loan itself. Having been in business, and I have personally taken out a business loan over 20 years ago, I am very qualified to discuss this subject. I have dealt with American banks for more than 30 years in total and I have borrowed money on more than a dozen occasions. The KRG is in talks with American lending institutions and the formula these banks/institutions use is the same for every loan they award/approve.
Since Kurdistan does not have collateral, outside of oil that Baghdad objects to using, to use as an “insurance” against this possible loan, the primary banks will not directly talk with the KRG. The KRG is now forced to negotiate with a secondary source, which is the “middle-man” in this case. By doing so, the KRG will pay very high interest rate and the loan will not be very favorable to Kurdistan.
I am not part of the team that is negotiating on behalf of the KRG, but I am going to use my experience and knowledge to analyze and predict what will happen with this transaction. Since I said that there will be a “middle-man” involved in this deal, he/she will make out like a bandit- in tune of a couple of billions of dollars!! The only people that would benefit greatly from this loan will be: Some contractors in Kurdistan, the middle-man that is “negotiating” this loan, and the banks that are lending this money, but mostly, the middle-man will benefit. As far as who will lose in this transaction? It will be the Kurdish citizens in general.
We have only two scenarios for such loan and they are: Payment with interest and principle OR interest payment with a final Balloon, one-time payment, and the end of the loan term. Here are the two examples:
1- Interest plus principle scenarios. Such loan will be structured in a way that will have a high interest rate and will have a short life- such as ten years. Most likely, and since the KRG is using neither collateral nor credit, this loan will most likely have an interest rate of 10-12% range.
If this loan has a 10% interest, using the lower figure, and for a standard loan period of 10 years, then the interest (amortized loan) paid on this loan will be $7.93 Billion. This means that the KRG will pay a total of $2.93 Billion in interest alone- interest and principle payments combined. Such action will have a huge burden on the KRG budget and I do not see how they will be able to make such huge annual interests payments?? This $5 billion loan will not be able to generate enough income in order to make the interest payment of this loan.
Normally, such huge loan will have an interest rate of around 4% (that is prime rate plus .5% or .75%) and not 10% such as in this case. As I said earlier, the KRG will not be able to talk directly with international banks and get such low rate of interest. But, for the sake of argument, lets assume that the KRG can get the loan for 4%. The total interest plus principle payment will be $6.1 Billion. This means that the interest in this loan will only be $1 billion which is very manageable and reasonable. If I was advising the KRG, I would say that this is the only way that I would agree to take out this huge international loan.
2- Interest payment with a final Balloon payment. In this scenario, the borrower will only pay the compounded interest for the life of this loan on monthly basis and the final payment, which is the Balloon, will be practically remain as the same amount of the borrowed money. If we use the 10% and 10 year term, the total payment will be $10.3 Billion!! This means that the interest on this loan will be actually more than the loan itself, which is $5.3 billion!
Of course if the KRG ends up with the second scenario as I have explained, this will be disastrous for Kurdistan. Kurdistan parliament should NEVER consider talking out such loan with interest and with a Balloon payment method. The only way to agree to take this loan is if they can manage to get this loan at 4%, which is the actual going rate, and for 10 years principle plus interest payments.
The KRG needs to be very careful to not allow the middle-man to literally make $2-4 billion by putting this deal together. And whenever I mention the middle-man, I am actually referring to the American “advisors/consultants” that I am certain the KRG is using to put this deal together!! Most likely, those “advisors” are attorneys and businessmen with connections in the US and Kurdistan at the same time!!
I strongly suggest that the Kurdistan parliament demand that whoever (foreign advisors/consultants) is negotiating this loan have their names published so we know who they are and how much money they are profiting from us Kurds! We have too many Americans “working” in Kurdistan that have made millions off of us Kurds and that should never be tolerated. This is our money and we should never allow those “advisors” to make such exuberant amount money from us. This deal/transaction MUST be open/transparent to the public and that is the only way Kurdistan Parliament, and the public, should accept it.
In the past I have been very critical of the KRG and have made my displeasure known, but this time, I am been very sincere and honest when giving my educated and well-thought out advice to the Kurdish leadership. I do not want them to make a mistake and agree to a bad loan terms when negotiating this transaction and then regret their actions later.
[You must be registered and logged in to see this link.]
February 9, 2015
Rizgar Khoshnaw — Special to Ekurd.net
In the past few months, the Kurdistan Regional Government (the KRG) has been seriously considering taking out an international loan in order to take care of “certain” expenses that they desperately need to cover. Few months ago, I wrote an article on [You must be registered and logged in to see this link.] web site detailing the problems that the KRG will face trying to put this deal together.
In my previous article, I had mentioned that the KRG will likely use this potential borrowed money to pay their civil servants and other government expenses. But in the past few days, I have been reading/hearing that the KRG is coming out publicly and saying that they will not use this money in order to pay back salaries of the government employees which is a very good move. If so, then what will this money be used for? Will this borrowed money be used to pay the oil companies, such a Exxon? Will this money be used in order to pay for the “contractors” that are trying to complete their projects?? No matter who gets paid with this borrowed money, Kurdistan will pay a very hefty price for this loan, if it is not does properly.
Lets talk about Exxon and their “expenses” in Kurdistan that they are trying to collect from the KRG. How in the world can Exxon claim, as I have been reading, that the have accrued hundreds of millions of dollars in expense in “working in Kurdistan? I think Kurdistan parliament should look into Exxon and their expense before paying them one dollar.
Personally, I have studied and research oil extracting business in Kurdistan, and other countries, and found out that it is extremely inexpensive to work and extract oil in Kurdistan comparing to other nations. The labor cost in Kurdistan is very cheap, the land is given for free and there are very few employees that Exxon is using in Kurdistan. Furthermore, the cost to set up an oil rig, no matter where in this world, is no more than $50 million- and that is a one time expense! And it cost an average $1 a barrel to extract oil from Kurdistan comparing to $40 in the US. Then why and how Exxon is claiming to have hundreds of millions in expense in Kurdistan every year??
Now, lets talk about the loan itself. Having been in business, and I have personally taken out a business loan over 20 years ago, I am very qualified to discuss this subject. I have dealt with American banks for more than 30 years in total and I have borrowed money on more than a dozen occasions. The KRG is in talks with American lending institutions and the formula these banks/institutions use is the same for every loan they award/approve.
Since Kurdistan does not have collateral, outside of oil that Baghdad objects to using, to use as an “insurance” against this possible loan, the primary banks will not directly talk with the KRG. The KRG is now forced to negotiate with a secondary source, which is the “middle-man” in this case. By doing so, the KRG will pay very high interest rate and the loan will not be very favorable to Kurdistan.
I am not part of the team that is negotiating on behalf of the KRG, but I am going to use my experience and knowledge to analyze and predict what will happen with this transaction. Since I said that there will be a “middle-man” involved in this deal, he/she will make out like a bandit- in tune of a couple of billions of dollars!! The only people that would benefit greatly from this loan will be: Some contractors in Kurdistan, the middle-man that is “negotiating” this loan, and the banks that are lending this money, but mostly, the middle-man will benefit. As far as who will lose in this transaction? It will be the Kurdish citizens in general.
We have only two scenarios for such loan and they are: Payment with interest and principle OR interest payment with a final Balloon, one-time payment, and the end of the loan term. Here are the two examples:
1- Interest plus principle scenarios. Such loan will be structured in a way that will have a high interest rate and will have a short life- such as ten years. Most likely, and since the KRG is using neither collateral nor credit, this loan will most likely have an interest rate of 10-12% range.
If this loan has a 10% interest, using the lower figure, and for a standard loan period of 10 years, then the interest (amortized loan) paid on this loan will be $7.93 Billion. This means that the KRG will pay a total of $2.93 Billion in interest alone- interest and principle payments combined. Such action will have a huge burden on the KRG budget and I do not see how they will be able to make such huge annual interests payments?? This $5 billion loan will not be able to generate enough income in order to make the interest payment of this loan.
Normally, such huge loan will have an interest rate of around 4% (that is prime rate plus .5% or .75%) and not 10% such as in this case. As I said earlier, the KRG will not be able to talk directly with international banks and get such low rate of interest. But, for the sake of argument, lets assume that the KRG can get the loan for 4%. The total interest plus principle payment will be $6.1 Billion. This means that the interest in this loan will only be $1 billion which is very manageable and reasonable. If I was advising the KRG, I would say that this is the only way that I would agree to take out this huge international loan.
2- Interest payment with a final Balloon payment. In this scenario, the borrower will only pay the compounded interest for the life of this loan on monthly basis and the final payment, which is the Balloon, will be practically remain as the same amount of the borrowed money. If we use the 10% and 10 year term, the total payment will be $10.3 Billion!! This means that the interest on this loan will be actually more than the loan itself, which is $5.3 billion!
Of course if the KRG ends up with the second scenario as I have explained, this will be disastrous for Kurdistan. Kurdistan parliament should NEVER consider talking out such loan with interest and with a Balloon payment method. The only way to agree to take this loan is if they can manage to get this loan at 4%, which is the actual going rate, and for 10 years principle plus interest payments.
The KRG needs to be very careful to not allow the middle-man to literally make $2-4 billion by putting this deal together. And whenever I mention the middle-man, I am actually referring to the American “advisors/consultants” that I am certain the KRG is using to put this deal together!! Most likely, those “advisors” are attorneys and businessmen with connections in the US and Kurdistan at the same time!!
I strongly suggest that the Kurdistan parliament demand that whoever (foreign advisors/consultants) is negotiating this loan have their names published so we know who they are and how much money they are profiting from us Kurds! We have too many Americans “working” in Kurdistan that have made millions off of us Kurds and that should never be tolerated. This is our money and we should never allow those “advisors” to make such exuberant amount money from us. This deal/transaction MUST be open/transparent to the public and that is the only way Kurdistan Parliament, and the public, should accept it.
In the past I have been very critical of the KRG and have made my displeasure known, but this time, I am been very sincere and honest when giving my educated and well-thought out advice to the Kurdish leadership. I do not want them to make a mistake and agree to a bad loan terms when negotiating this transaction and then regret their actions later.
[You must be registered and logged in to see this link.]
