Connect with us

Why a U.S. Default Could be Great for Sovereign Wealth Funds

Published

on

america2Before getting pied by critics, let us consider the possible benefits of a technical default by the U.S. Treasury for institutional investors. As the U.S. Congress reaches the 11th hour on a budget deal, and investors sit idly by waiting for a decision, television pundits and economists in the United States are voicing concerns ranging from the fall of the U.S. dollar’s exclusive global reserve currency status to a full out economic Armageddon.

At the publishing of this article, Congress in a last minute effort approved the debt ceiling, but these concerns will certainly be revisited again.

Yes, the default would cause widespread and hitherto unknown financial consequences. However, on a global historical scale, it would not be precedence setting.

The last Occidental country to default on its payments was Germany 80 years ago. On May 16, 1933, Germany one-sidedly stopped payments on long-term borrowings. By rejecting crushing debts and reparations, Adolf Hitler was able to strengthen his political power. The result of which is, tragically, too well known. Though we make absolutely no suggestion that Hitler’s uncompromising politics are the direct result of Germany’s default, it is illustrative.

The truth is, if a technical default were to occur, the United States would be in a better position to handle it compared to Greece or Argentina, countries whose economies and resources are not as large or diverse.

France and the United Kingdom have defaulted in the past as well, experiencing less dire outcomes.

Yet, the world is a lot different than in the 1930s; it is more interconnected, and the speed of money flows and transfers have increased exponentially.

What would happen initially?
Global stocks would tank and interest rates would rise, panicked investors would flee from stocks as happened during the global financial crises. But sovereign wealth funds are long-term investors, and they (should) know that stocks will eventually go up – one only needs to look at the average portfolio of a global sovereign wealth fund to see that patience and resolve eventually paid off in equities. Next, fixed income yields would increase, allowing a flood of money back into fixed income instead of chasing riskier assets.

Many money managers predict that the United States would lose its global currency reserve status. Maybe, but would this really be the direct result of a default were it to occur? Or isn’t it a fact that the U.S. dollar as a reserve currency has been on shaky ground for a while now, and the default is merely the proverbial final straw? If the U.S. dollar were to lose its status, would the euro or renminbi be an appropriate substitute?

The truth is, if a technical default were to occur, the United States would be in a better position to handle it compared to Greece or Argentina, countries whose economies and resources are not as large or diverse.

The United States would still be a country with all of its great assets in natural resources, land, innovative technology sectors and higher education. Financial investments would suffer in the short-to-medium term and confidence would be checked, but investors should know better. After all, look at the last western defaulter, Germany, today.

Lastly, avoiding the default won’t result in the collective sigh from investors that pundits think it will. The health of the U.S. economy isn’t a binary demarcated by default or not default. The unfunded liabilities of the United States sit at more than US$ 90 trillion, which includes Social Security, Medicare and now the Affordable Care Act. No amount of congressional bi-partisanship is going to change that anytime soon. Institutional investors need to see the big picture of musical chairs. Thinking any country is “risk-free” is, in and of itself, a risky assumption to make.

Sovereign Wealth Fund Buying Spree – The Benefits
So, yes, a U.S. default would be bad, but in the now infamous words of then Obama chief of staff Rahm Emanuel, “you never want to let a serious crisis go to waste.” As such, the resulting crisis and drop in the markets would be a great time for institutional investors like sovereign wealth funds and public funds to stock up on U.S. blue chip stocks and assets. Great returns are earned when the markets touch bottoms and equities are undervalued out of panic. The technical default would produce such an event and trigger a buying opportunity for giant pools of capital. Thus, for sovereign funds, the real patience wouldn’t be required for watching bitter partisan politics, but for waiting to realize gains in their discounted equities.

Scatec Solar Places Big Solar Bet in Bangladesh

Published

on

Oslo-based Scatec Solar ASA, a publicly-traded independent power producer operating in the emerging market solar development space, plans to construct and own a 800 mega watt photovoltaic solar power plant in Chandpur, Bangladesh. Scatec Solar has solar assets scattered across numerous emerging markets such as South Africa, Rwanda, Honduras, Egypt, Jordan and the Czech Republic.

[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

Continue Reading

APFC Sells $1.4 Billion Stake in Simpson Housing

Published

on

The Alaska Permanent Fund Corporation (APFC) embarked on a major shift in its real estate portfolio by selling a 50% ownership stake in Denver-based Simpson Housing LLLP for US$ 1.4 billion. Simpson Housing had made up roughly 24.7% of APFC’s US$ 5.6 billion real estate portfolio. The other owner of Simpson Housing is that State of Michigan Retirement Systems.[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

Continue Reading

ISIF Invests in Cybersecurity Firm Vectra

Published

on

The Ireland Strategic Investment Fund (ISIF) committed €10 million to Vectra Networks, Inc., a San Jose, U.S.-based cybersecurity company. The investment capital will assist Vectra in creating a research and development center in Dublin.

ISIF is part of a larger funding round of €30 million. These other investors include Khosla Ventures, Accel Partners, DAG Ventures, AI Ventures, AME Cloud Ventures and Wipro Ventures.

Kevin Dillon, who is the former Head of Microsoft Ireland and a Managing Partner at Atlantic Bridge, will join the board of directors at Vectra.

Continue Reading

Popular

© 2008-2018 Sovereign Wealth Fund Institute. All Rights Reserved. Sovereign Wealth Fund Institute ® and SWFI® are registered trademarks of the Sovereign Wealth Fund Institute. Other third-party content, logos and trademarks are owned by their perspective entities and used for informational purposes only. No affiliation or endorsement, express or implied, is provided by their use. All material subject to strictly enforced copyright laws. Registration on or use of this site constitutes acceptance of our terms of use agreement which includes our privacy policy. Sovereign Wealth Fund Institute (SWFI) is a global organization designed to study sovereign wealth funds, pensions, endowments, superannuation funds, family offices, central banks and other long-term institutional investors in the areas of investing, asset allocation, risk, governance, economics, policy, trade and other relevant issues. SWFI facilitates sovereign fund, pension, endowment, superannuation fund and central bank events around the world. SWFI is a minority-owned organization.