Slovenia to Consolidate State-Owned Assets into Proposed SWF

Slovenia is planning to consolidate state-owned assets into a sovereign wealth fund. By merging the different agencies, Slovenia hopes to enhance revenue and improve organizational efficiency. The five agencies manage assets of more than €10 billion. Over time, the Government of Slovenia will decide which assets to dispose of. The proposed sovereign fund’s profits will be used to finance pensions and the national budget.

Once a part of Yugoslavia, Slovenia has emerged as an independent nation. In 2007, the country became a Eurozone member and in 2010 joined the OECD. Austerity measures across Europe have negatively affected the Slovenian economy.

The country is highly dependent on exporting to other EU countries.

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The CIC and Being on Equal Footing in Europe

Jin Liqun

In recent weeks, the China Investment Corporation (CIC) has been in the news headlines for its economic view on Europe and current investment activity in the region. It is well known over the past three decades, more importantly this last decade; China has accumulated vast foreign reserves. Created in 2007, the CIC was tasked to manage a portion of China’s financial resources.

Europe is in the midst of troubling economic times. The Chinese government has been supportive of Europe, but the real question is what will be their level of involvement in the European sovereign debt crisis? If China were to increase investment into Europe via sovereign bonds or other non-firm investments, then it must be convinced that Europe has changed.

The people in China are cognizant in where China invests and are keen for the Government of China to be a responsible commercial investor.

Europe is known for its welfare state mentality, but the world is rapidly changing and to pay for the welfare state, economies must grow by a certain percentage. Taxing and budget cuts are only short-term fixes, structural labor changes are a necessity. According to Jin Liqun, supervising chairman of the China Investment Corporation (CIC), some countries in Europe have “an incentive system totally out of whack.”[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

ECB Cuts Benchmark Rate Down to 1.25%

With Greece holding a bailout referendum, downside risk is growing among continental European nations. European leaders made it clear that Greece will give up all European aid if it votes against the agreed bailout package from last week.

The European Central Bank (ECB) is doing everything it can to prevent another recession. In addition, the ECB is also trying to contain an economic contagion that stems from the sovereign debt crisis. To combat this, under the command of new ECB President Mario Draghi, the ECB unexpectedly cut interest rates by 25 basis points to 1.25%. This was a reactionary move since Spanish and Italian borrowing costs climbed after the realization of a scenario of a Greek exodus of the European monetary union.

The ECB is under tremendous pressure to allocate more funds to purchase bonds of distressed European countries.

Public Information: Yves Mersch: Current Challenges in the Sovereign Debt Crisis

This is public information released by the BIS.

Speech by Mr Yves Mersch, Governor of the Central Bank of Luxembourg, at the SWF (Sovereign Wealth Fund) Forum, Montreux, Switzerland, 24 October 2011

To download the full speech (BIS)
To download the full speech (SWF Institute)

Ladies and Gentlemen,

It is my pleasure and privilege to talk in front of this audience of experts and practitioners. I do thank the SWF Forum for this opportunity to share my thoughts on the current challenges of the sovereign debt crisis in Europe.

Montreux seems to be the perfect setting for a central banker to speak. Is there a better symbol for stability and long-term nature than the surrounding Alps? And Lake Geneva represents a perfectly balanced level of liquidity – while central bankers have to deal with the contradiction of abundant global monetary liquidity and a shortage of market liquidity in certain asset classes.

But without further ado, let me embark in today’s topic.

Need for clarification: the often forgotten strengths of the euro area

Some countries in the euro area face a combination of high levels of indebtedness, budget deficits and weak or absent growth. Amid growing market turmoil and the risk of contagion an increasing number of economists call for debt restructuring in the affected countries. These proposals often share an anti-Euro sentiment and seem to be in accordance with the naysayers who were taking potshots at the Euro even before its inception in 1999.

However, many critics ignore the euro area’s strengths. There is a need for clarification. Let me start by stressing some facts:

1. Since its inception almost 13 years ago, the euro area has experienced an unprecedented level of price stability.

2. The euro area has logged real per-capita income growth of around 1 percent a year since 1999, just below the U.S.’s 1.1 percent. Observers often look only at headline growth figures, where the difference is bigger. But the figures match once adjusted for population growth.

3. During the same period of time, the euro area has created 14 million jobs, six million more than the USA.

4. Contrary to common belief, the heterogeneity within the euro area is not significantly bigger than between U.S. states.

5. On a consolidated base public finances are in a much better shape than those of other major currency areas. The euro area as a whole will run a budget deficit of about 4.5 percent of gross domestic product this year. The International Monetary Fund (IMF) expects a U.S. budget shortfall of about 10 percent this year.

6. According to the IMF the aggregate debt-to-GDP for the euro area stands at 87 percent. For the US the debt-to-GDP ratio in 2011 is expected to be 100 percent.

7. The current account is broadly in balance, different from other advanced economies of similar size. For this year the IMF forecasts a current account deficit of 3 percent for the U.S.

Still, there is no room for complacency. The sovereign debt crisis in several Member States of the euro area and financial markets turmoil indicate that we are facing very challenging times.

To download the full speech (BIS)
To download the full speech (SWF Institute)

High Probability Sovereigns to Hold Treasuries Despite Downgrade

Sovereign wealth funds and other governmental investors will likely continue to hold positions in U.S. treasuries, at least in the short-run. Last Friday, Standard & Poor’s downgraded the United States, while Moody’s and Fitch Ratings affirmed their AAA status for the United States. This downgrade is unlikely to cause any mandatory sell-off of treasuries or massive dump by central banks, governmental pension funds, and sovereign funds since treasuries remain the most liquid asset. At this point in time, the United States is not facing the exact same dilemma that Greece is currently dealing with.

Around the globe, government officials publicly did not state there would be a massive sell off of treasuries from their respective countries.

From a practicality stance, treasuries remain safe as other major Western nations with sovereign debt issues are in similar or worse shape than the United States.

Asian countries are major holders of U.S. treasuries, especially China and Japan. Unlike Japan, in China there is a strong growing consensus from government officials of the need for the United States to curb its addiction on borrowing.

South Korea’s vice finance minister, Yim Jong Yong, told reporters in Gwacheon, “Our faith in U.S. Treasuries has not changed,” after a meeting with counterparts from the central bank and financial agencies.

Major Foreign Holdings of U.S. Treasury Securities in Billions – End of Period

Country May 2011 Apr 2011 Mar 2011 May 2010
China, Mainland 1159.8 1152.5 1144.9 867.7
Japan 912.4 906.9 907.9 784.8
United Kingdom* 346.5 333.0 325.2 350.7
Oil Exporters** 229.8 221.5 222.3 228.6
Brazil 211.4 206.9 193.5 161.5

Source – U.S. Treasury

* Includes Channel Islands and Isle of Man
**Oil exporters include Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria.

With all things being said, many countries with non-commodity sovereign funds have large allocations to treasuries. For central banks, this is a result to prevent the unwanted appreciation in their currency against the U.S. dollar. If their currencies appreciate over the U.S. dollar it would hurt their export competiveness. Already, Japan has indicated they are willing to intervene again after selling currency on August 4th. Asian central banks are not thrilled about the American downgrade, but they are willing to hold out.

China’s Love-Hate Relationship with Treasuries

China possesses nearly $3.2 trillion in foreign exchange reserves, mostly in U.S. dollar assets. U.S. treasuries are one of the most actively traded financial instruments on the planet and most liquid. Unwarranted volatility and market uncertainty would weaken the already fragile stability of the international financial system. A short term crisis has been averted; however it seems that Russia and China are not totally pleased. Basically, confidence has not been fully restored. In fact, a prominent Chinese rating agency, Dagong Global Credit Rating Company, has already downgraded the United States from A+ to A.[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

UAE Central Bank Issues Statement on Media Queries Over American Public Debt

According to the Emirates News Agency, “Due to the controversy at the legislative authorities in the US, around the public debt of the US Government, we have received some questions from local and foreign media entities, said the Central Bank of the UAE in a statement.

It added that the Central Bank of the UAE currently possesses no U.S. treasury bonds or any other financial instruments issued by the U.S. government due to the very low return on holding these instruments.

“We believe that the debate on the U.S. public debt ceiling issue will end with a compromise solution before the deadline date”, the statement added.

It indicated that “We do not believe that it is necessary to imagine that the U.S. government may default on its debts given its enormous potential, and we had seen in the past under President Clinton, the U.S. economy’s ability to reduce its public debt.”

The statement noted that no fear on the U.S. dollar, although it is exposed to price fluctuations as it happens with all the major currencies. Despite the fact that the Central Bank foreign reserves are mostly denominated in U.S. dollars, they are invested mostly in non-US assets. Eventually these investments are not obligations on the U.S. government.

It added that there is no direct link between the dollar-denominated assets and the U.S. Government debt. The peg of the Dirham to the U.S. dollar is steady and consistent.”

Read more: Emirates News Agency

Japan Intervenes in Forex Market to Curb Yen’s Strength

As a tool, central banks often intervene in the foreign exchange market when the buy or sell currencies to influence exchange rates. On Thursday, Japan acted alone to curb the yen’s strength in a unilateral intervention. This was the first time since Japan’s March tsunami that the Bank of Japan intervened in the foreign exchange market to limit their currencies appreciation. On Wednesday, the Swiss National Bank amended their key lending rate to a smaller range near zero. Lastly, the Bank of Japan is contemplating an increase in its ¥10 trillion asset-purchasing program.

CIC Making Progress on Managing More Assets

The China Investment Corporation has not received the proposed capital injection from the Chinese Government. It will take some considerable time and analysis.  Some members of the press and media reported the CIC already received the funding; however, the CIC is making progress on its goal of managing more funds for the Chinese Government. The CIC and other governmental stakeholders are working on a mechanism to allow the CIC to receive continued funding. Will the China Investment Corporation be the official manager of diversified governmental Chinese sovereign wealth?

Many sovereign wealth funds, especially the commodity-based sovereign funds have an orderly process of receiving fund injections in an ongoing basis. On the other hand, non-commodity-based funds often receive funds to manage through one-time transfers, not so much on a constant frequency.

CIC remarks at the OECD Forum 2010

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The views, opinions, positions or strategies expressed by guest contributors and those providing comments are theirs alone, and do not necessarily reflect the views, opinions, positions or strategies of the Sovereign Wealth Fund Institute or any employee thereof.