Trading One Uncertainty for Another in Iraq

The House and Senate recently approved defense spending bills that include $25 billion for U.S. operations in Iraq and Afghanistan, and many see that as just a first installment.

President Bush approved spending bills amounting to $150 billion last year to pay for the war and reconstruction of Iraq. That's more than three times what the White House originally estimated, and it has helped contribute to a huge fiscal deficit.

Since overseas central banks continue to buy U.S. government debt, the deficit hasn't prompted a significant backup in long-term interest rates. But some economists say this could change. The International Monetary Fund published a report earlier this year saying large budget deficits pose "significant risks" for the American economy and the rest of the world.

"The more important long-term effect on our stock market is the issue of paying for the costs of the war," said Bruce Fenton, president of independent investment firm Atlantic Financial.

While Iraq's huge oil reserves could allow it to finance its own redevelopment in the future, some pundits say big investments are needed in the country to open untapped oil fields. Expectations for an influx of Iraqi oil onto world markets have proven unrealistic so far and the nation's facilities are still in danger of being attacked by insurgents.

"The stock markets do not like uncertainty, and uncertainty will remain in the region and the world long after the handover," Fenton said.

Michael Panzner, author of the upcoming book The New Laws of the Stock Market Jungle: An Insider's Guide to Successful Investing in a Changing World, agrees that the transfer of power will not reduce the level of geopolitical risk in the financial markets.

"The handover does not actually appear to be a 'disengagement' from Iraq," he said, calling the handover paradoxical. "It will eliminate one uncertainty, but it will uncover a myriad of others."