The scenario of a U.S. debt default would be devastating for institutional investors; furthermore, catastrophic for the world economy. US$ 16.4 trillion is the current debt limit for the United States. Political gridlock and balance of power which has served the United States well for over its history has manifested the issue of debt ceiling brinkmanship. In 1917, Congress passed the Second Liberty Bond Act which put in place statutory limits on the amount of federal debt allowed to be outstanding at a point in time. Over the decades and years, Congress has repeatedly raised the debt limit in order to permit additional borrowing.
Recently, an idea from the internet took hold, the plan of minting a US$ 1 trillion platinum coin through an obscure law that was meant to mint commemorative coins. The minted coin would be deposited at the Federal Reserve Bank of New York to hold over the U.S. government’s debts until a debt limit increase. Financing the Federal government, through a coin or coins, would be a clear, negative signal to institutional money in the long-term. The coin plan would undermine the United States budget process and set precedence for executive power in American politics; however, a default would be far worse in terms of current investments. Ratings agencies would most likely act in a negative manner if this coin scenario came into fruition.
During a press conference on January 9, 2013, White House spokesman Jay Carney did not rule out the idea of minting a US$ 1 trillion coin.
Brinkmanship is a dangerous strategy to engage in; however, there are many points in economic history where brinkmanship led to positive outcomes. The United States has amassed a massive current account deficit over the decades, more so at a faster pace in recent years. This battle of ideas could result in spending cuts and entitlement reforms, if the White House were willing to compromise with Congress. While the rest of the world’s fiscal governments cut spending, sell off public assets (some to sovereign funds), and raise taxes, the United States keeps expanding debt. This approach has irritated many sovereign funds and pension investors as they have had to increase risk in their portfolios to achieve their target level of returns. This has been a boon for alternative asset managers.
Medium-Term Market Reaction Scenarios
|Possible Scenarios||Medium-Term Reaction||Probability|
|Negotiations – Significant Reform, Contain Spending||Very Positive||Low|
|Negotiations – Scalpel Reform||Positive||High|
|Negotiations – Postponing||Neutral||High|
|New Debt without Congressional Approval||Negative||Medium|
|President’s usage of Section 4 of the 14th Amendment||Negative||Low|
|Platinum Coin(s) Minting||Very Negative||Low|
|U.S. Default||Catastrophic||Very Low|
Source: Park Alpha
In the coming weeks, the White House will likely not mention the coin deal scenario publicly. The scenario that would most likely happen if negotiations with Congress fail is that the White House may go with the “Weimar” coin plan as a last resort. This would be used to prevent a calamitous default. If President Obama used the coin deal, then Congress would have leverage that the President has tipped the balance of powers of U.S. government.
The Council of Institutional Investor’s spring conference for 2018 – held this week in Washington D.C. at the Omni Shoreham Hotel – was packed with member-hosted panels, where nearly 400 of the top investment professional, regulators, and corporate governance experts gathered together to share their insights and engage in forward-looking discussions on how to drive a multi-stakeholder approach to responsible investment over the long-term.
Sovereign Wealth Fund Institute (SWFI) had the opportunity to attend several breakout sessions, including one presented by Maryland-based Institutional Shareholder Services that sought to address one of the most pressing challenges facing institutional investors today: How can environmental, social, and governance (ESG) criteria help drive voting at the board level? Moderated by Georgina Marshall, Head of Global Research at ISS, panelists provided a diverse array of perspectives on how to harness ESG considerations as an effective decision-making tool.
For Bonnie Saynay, Global Head of Responsible Investments at Invesco, fostering an environment conducive to communication with investment teams using a “player-coach” model is critical. Moreover, Saynay warned investors of thinking too broadly on ESG considerations, and to instead focus in on the criteria that is most important to them as an organization, and to then tailor their stewardship practices to match those priorities: “If everything is important, nothing is important,” she said.
Clare Payne, head of corporate governance for North America at Legal & General Investment Management, highlighted the importance of procuring the latest ranking data from a number of different providers, as well as how to develop one’s own internal system for scoring so as to cut through the clutter and provide a contextualized framework for making investment decisions on your own terms.
Remuneration is the name of the game for Robbie Miles, Vice President and ESG analyst at Allianz Global Investors. Amid the ever broadening scope of influence that responsible investment commands, Miles urged attendees to work with their managers on mandates that link compensation to the long-term performance of the fund, as well as long-term holding periods.
Wrapping up the panel was Stu Dalheim, Vice President of Shareholder Advocacy at Calvert Research Management, advocated for diversity at the board level across a number of different metrics – including ethnicity, gender, and professional backgrounds – in order to reflect the reality of their client base, as well as provide an apparatus for robust debate and adaptation in an ever-changing business environment.
On March 12, 2018, Macquarie Investment Management, the investment management unit of Macquarie Group, revealed a deal that they acquired Luxembourg-based ValueInvest Asset Management S.A. from Denmark-based Fynske Bank A/S. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]
On March 12, 2018, the U.S. Federal Reserve issued an enforcement action that the Industrial and Commercial Bank of China Limited (ICBC) is not doing enough regarding anti-money laundering (AML) protections and ordered the Chinese bank to toughen its checks on illicit funds. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]
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