WORLD NEWS TOMORROW | WNT NEWS – This is the headline that Western Europe doesn’t want you to see: The euro mess has driven several large fund managers away from places like Spain, Italy and France and into the debt markets of the likes of Serbia, Hungary and even Iraq. To some investors, the vulnerability of these small and politically tenuous states is nothing compared to the quicksands of the Eurozone. WSJ reports:

Although it is unclear exactly how much money is flowing away from mainstream Europe into pint-size markets, many investors say the shift is happening and reflects reduced emphasis on analyzing interest rates and monetary policy and more attention paid to the risk that countries might actually default on their debts. In short, size is starting to matter less, while credit quality matters more.

New interest in smaller central and eastern European states is one thing, but fresh investment in Iraq underscores both how far the Eurozone has sunk and how Iraq’s booming oil industry might be the key to an unexpectedly stable nation:

New York-based Stone Harbor Investment Partners owns more than 5% of Iraq’s $2.7 billion in dollar-denominated bonds and controlled even more earlier in the year, says Whitney Cox, a portfolio manager at the firm.

While Ms. Cox has never been to Iraq, she is lured by the rise in the country’s oil exports. On Wednesday, crude production was launched at Iraq’s giant Halfaya field, the latest development to bolster the country’s export potential.

Ten years ago, the media was flush with prognostications of the rise of Europe, while Iraq was doomed to years of lawlessness and strife. Now, at least financially, Iraq looks to some people at least like a better bet than Italy or Spain.

Investors, however, are not always smart, and many prestigious investment banks and wealthy hedge funds have gotten themselves in a lot of trouble by looking for yields in all the wrong places. Via Meadia isn’t ready to bet the rent on Iraqi commercial paper just yet—but then neither are we long on Spain.

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