Before the economy crashed, everyone expected Iraq to be the hottest issue in the presidential battle. But while we’ve been obsessing over markets, both candidates’ positions have been overtaken by events in Baghdad.

The president-elect may face an Iraq crisis before he takes the oath.

Negotiations over a status of forces agreement (SOFA) to keep U.S. troops in Iraq after 2008 have been at an impasse. On Dec. 31, the United Nations mandate that currently legalizes the presence of 150,000 U.S. troops will expire. Unless those troops have some form of legal cover, they will have to cease operations, and start their exit, at the end of the year.

“If there is no legal basis for operations, then there will be no operations,” I was told by Ryan Crocker, the U.S. ambassador to Baghdad, in a phone interview Friday. “That means we do nothing – no security training, no logistical support, no border protection, no training, equipping, manning checkpoints, no nothing.”

Before you cheer, consider this harsh reality. As Crocker notes: “Iraqi security forces are not yet capable of taking on the whole security burden.” A rushed U.S. withdrawal could pitch Iraq back into sectarian conflict (which is already restarting). Other forces, such as a resurgent al-Qaida in Iraq and Iranian-trained militias, would rush to fill the security vacuum we left.

So why can’t we and the Iraqis agree on a SOFA?

Part of the blame lies with initial misconceptions of U.S. negotiators. They underestimated the growing force of Iraqi nationalism as Iraq’s situation improved. When al-Qaida in Iraq was slaughtering Iraqi Shiites, this majority group tolerated the U.S. presence; but as the killing lessened, the Shiite public has become more eager to see U.S. troops leave.

That’s why Iraq’s Prime Minister Nouri al-Maliki appeared to endorse the 16-month withdrawal deadline sought by Sen. Barack Obama. And it’s why Iraq’s leading Shiite cleric, Grand Ayatollah Ali al-Sistani, openly rejects the comparison of Iraq to Japan or Germany, where U.S. troops have been stationed for decades, a comparison often made by Sen. John McCain.

The White House did finally get the message, and U.S. negotiators made big changes in later drafts of a SOFA. They compromised on the touchy issue of legal jurisdiction over U.S. troops – Iraqi courts would have say over soldiers who commit crimes off-duty and outside bases.

And the U.S. team agreed on a deadline for an exit of U.S. combat troops – they would leave Iraqi towns and cities before next July, and would quit Iraq by the end of 2011. This is a deadline not much beyond Obama’s 16 months.

Most stunningly, the United States dropped the demand – stressed by President Bush and McCain – that the timing of a U.S. withdrawal be based on conditions on the ground. Instead, the latest U.S. draft made the 2011 deadline a fixed one, unless Iraq asked for an extension.

And yet – despite this sharp shift in U.S. policy, no accord is in sight.

Some blame the impasse on Iranian pressure on al-Maliki. Iranian officials have repeatedly condemned the idea of a U.S.-Iraqi SOFA, both in public and in meetings with Iraqi officials. “What Iran is trying to do is absolutely clear,” Crocker said.

An even bigger problem may be the ambitions of al-Maliki, himself. Well-informed Iraqi sources tell me the Iraqi premier has become overconfident in recent months. Although his Dawa Party is small, these sources say, al-Maliki hopes to cement his position in Baghdad by presenting himself as the nationalist Arab hero who ousted the Americans. He hopes to keep power after provincial and national elections in 2009.

These sources fear al-Maliki is overestimating the ability of the Iraqi security forces to keep order. They say he is cavalierly unwilling to absorb into government jobs those Sunni militia groups responsible for breaking the back of al-Qaida in Iraq. Down this road lies a return to sectarian killing – with no U.S. troops available to prevent such clashes.

Yet, Iraqi political leaders who say in private that a SOFA is needed won’t endorse it in public. They are fearful of being politically attacked if they do so. The timid include leaders of the largest Shiite political party, known by its acronym ISKY, along with prominent Sunnis who worry that a U.S. exit will leave them vulnerable. Only the Kurds openly support a SOFA. With few willing to promote it, the draft languishes.

Further U.S. concessions are unlikely, nor is it certain that they would make a difference. “We’ve given about all that can be given,” Crocker said.

As a last resort, the United States can ask the U.N. Security Council to renew the U.N. mandate for a U.S. troop presence, an option the Iraqis have previously opposed. However, getting a new U.N. mandate could be difficult if Iraqis want to renegotiate its terms.

Some Iraqis say they believe al-Maliki is waiting until after U.S. elections, believing a President Obama might be more malleable. However, contrary to rumor in Baghdad, Obama strongly supports the need for a SOFA.

“Our elections change nothing,” Crocker said. “There will be the same situation the day after.”

If Obama wins, he should clarify his desire for a responsible, not precipitous, U.S. drawdown and make clear to al-Maliki the risks Iraq faces from a precipitous U.S. exit.

Crocker said he genuinely believed the Iraqi leader wanted an accord and “understands the consequences of not having one.” Let’s hope the ambassador is right.