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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.

ADIA Seeks to Sell KIC Headquarters

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The Abu Dhabi Investment Authority (ADIA) is seeking to sell the building that houses the headquarters of the Korea Investment Corporation (KIC). [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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BMO and OTPP Test Blockchain Canadian Dollar Debt Deal

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The Bank of Montreal (BMO) and the Ontario Teachers’ Pension Plan (OTPP) participated in a landmark blockchain Canadian-dollar debt transaction. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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Just Group Acquires Corinthian Pension Consulting

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Just Group plc acquired a 75% ownership stake in the holding company of Corinthian Pension Consulting Limited (Corinthian Pension Consulting). Operating in the institutional world for over 12 years, Corinthian Pension Consulting provides advisory services to defined-benefit pension scheme trustees and scheme sponsors undertaking bulk scheme exercises. The remaining 25% will be retained by current shareholders of Corinthian Pension Consulting. Robert MacGregor will continue to lead Corinthian Pension Consulting, as its Chief Executive Officer. Furthermore, Corinthian Benefits Consulting Limited and Corinthian Affinity Solutions Limited will continue to operate as before, becoming part of a newly formed holding company, Corinthian Group Holdings Limited.

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