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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.

PSP Investments and Blue Sky Alternative Investments End Strategic Partnership Agreement

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Blue Sky Alternative Investments Limited informed Canada’s Public Sector Pension Investment Board (PSP Investments) that it agreed to terminate its strategic agreement effective March 31, 2019. In December 2017, Blue Sky Alternative Investments forged an agreement with PSP Investments to assist in committing capital in a number of agricultural investments.

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Yield-Hungry Korean Insurance Capital Backs TSX Broadway

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Mirae Asset Daewoo Co., Ltd., the Seoul-based investment banking firm, has provided a US$ 375 million loan for a redevelopment in New York’s Times Square. It joins L & L Holding Company, Maefield Development, and Fortress Investment Group who are bringing the development known as TSX Broadway to life. The building is at 1568 Broadway in Manhattan. TSX Broadway, a US$ 2.5 billion project when all equity financing is added in, will allow for renovations and expansion of the 46-storey building. An LED screen, which is not an uncommon sight in the Big Apple, will wrap around the corner of the tower. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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OFFICIALS: Saudi Crown Prince Denies Interest in Acquiring Manchester United

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The Saudi Arabian government dispelled rumors that Saudi Crown Prince Mohammed bin Salman will acquire football club Manchester United. However, Saudi Arabia’s Public Investment Fund (PIF) had talks regarding sponsorship with the football club. Manchester United signed a partnership deal with Saudi Arabia’s General Sports Authority in 2017.

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