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Debt Ceiling and a Mega Deficit are Concern for Sovereigns

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Uncertainty is the breeding ground for greater risk and volatility; behemoth conservative investors adore certainty. Sovereign funds have the distinct advantage of being long-term investors; however, short-term risk is increasing as uncertainty looms around deficit and debt ceiling issues. The August 2nd debt ceiling deadline is creeping up. No official deal has been approved by all parties involved. The major rating agencies have continued to project concerns on U.S. sovereign ratings for certain scenarios. With regards to sovereign wealth funds, there is a tremendous issue of macroeconomic concern for their investment portfolios and holding companies.

At the Sovereign Wealth Fund Institute, we predict that there is a 50% chance of a downgrade in the remaining part of 2011 for the United States.

A high probability remains that the United States will not sufficiently address long term deficit issues. Raising taxes or trimming beloved entitlement programs in the midst of a period of high unemployment is politically dangerous. Thus the downgrade could fall into the AA category. There is a slight chance of a debt ceiling rupture. This could possibly lead to a technical default on U.S. treasuries or a default on other U.S. financial obligations. This would be a disastrous scenario that would impact all financial markets.

United States – Gross External Debt Position: March 31, 2011 – Currency Composition of Gross External Debt

Foreign Currency
Short-Term 215,905
Long-Term 956,310
Total 1,172,215
Domestic Currency
Short-Term 4,788,708
Long-Term 6,990,774
Total 11,779,482
Unknown 1,873,611
Gross External Debt 14,825,308

Source: U.S. Treasury – Millions of U.S. Dollars – 6/30/2011

With all this talk, a downgrade to AA for the United States will result in more of an embarrassment, than catastrophic depression. Sovereign funds and other large institutional investors will continue to buy U.S. treasures, but maybe not at the rate of the past five years. In addition, SWFs will perceive U.S. treasuries as no longer a riskless asset, if they haven’t already. The process of diversification from U.S. treasuries would accelerate dramatically whether in countries like Germany or Canada, or gold.

Andrew Claerhout Leaves OTPP

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Andrew J. Claerhout exited the Ontario Teachers’ Pension Plan (OTPP). He was Senior Managing Director of Infrastructure and Natural Resources. His responsibilities included overseeing a swath of infrastructure acquisitions and asset management globally, along with investments in oil and gas, agriculture (avocados for example), timberlands and other resource sectors. Clearehout joined OTPP back in 2005.

Taking his spot in the interim is Dale Burgess, Managing Director, Latin America, at OTPP.

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PwC Sells US Public Sector Practice to Veritas Capital

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PricewaterhouseCoopers (PwC) inked a deal to sell its U.S. public sector business unit to Veritas Capital Fund Management, L.L.C., a private equity firm. Post-deal, the business unit will be renamed and run as a separate company. PwC’s public sector business services U.S. federal government clients such as the Department of Defense, Homeland Security, Veterans Affairs, Health and Human Services and the State Department. The business unit also services local and state U.S. governments.

For the moment, Veritas Capital seeks to keep the current management in place.

Advisors

PwC was advised by Morgan Stanley. Davis Polk & Wardwell advised PwC. Veritas Capital was advised by law firm Schulte Roth & Zabel LLP.

Veritas Capital’s Activities

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HNA Sells 1.2% Stake in Hedged Investment in Deutsche Bank

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Chinese conglomerate HNA Group Co. sold off roughly a 1.2% stake in Deutsche Bank AG for around €300 million (US$ 374 million), reducing ownership down to 8.8%. HNA Group held the bank shareholding through Vienna-based asset manager C-Quadrat Investments AG, in which, HNA is a majority owner in. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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