BLOOMBERG: SAUDI HOLDINGS OF US TREASURIES UNDER SCRUTINYJanuary 25, 2016
This absolutely crucial news story was shared by Mr. B.G., and I'm passing it along as possible corroboration of the idea we've been entertaining and discussing from time to time on this website, that "something has changed" with respect to the Anglo-sphere's dealings with Saudi Arabia, a change in part highlighted by that regime's own recent financial difficulties.
First, a little context. Conventional wisdom has it that the Saudi regime hiked oil production in part and at Washington's behest, as a form of economic warfare on Russia, to cripple the energy-driven Russian economy, and to punish Mr. Putin for his "aggression" in the Ukraine. The flip side of this conventional wisdom also has it that the Saudi regime was only too happy to do so, since the then-emerging US fracking market would be undercut due to its higher costs for extraction, a move also certainly to the liking of "Big Oil." Yet another consideration entering into this contextual background is that the sanctions against Iran are about to lift, due to the deal brokered by the Obama Administration and various European intermediaries, and with that, Iran's production now re-enters the picture (opening the possibility of course that Iran may be doing its own form of economic warfare on the Saudi regime by driving prices even lower. But that's another "high octane speculation" for another day).
With that in mind, ponder this article that Mr. B.G. shared very carefully:
There are a number of statements here that caught my eye, for they do seem to indicate that some sort of profound sea-change - a paradigm shift if you will - is underway with respect to the "special relationship" between Washington and Riyadh. The article begins by noting that the extent of Saudi holdings of US sovereign securities is a closely held US Treasury secret, and has been since the 1973 Yom Kippur war and the OPEC oil embargo. Then it notes that the regime has been "burning" through its foreign reserves as the oil glut has posed severe problems to the economy, causing it to even consider taking its oil company public to raise money to meet budget shortfalls. The article then notes also that the Treasury Department has disclosed the holdings of other nations, including the significant holdings of Japan and China. Only the Saudis get "special treatment."
But that may end in the future, for without some sort of accurate publicly available benchmark on the extent of these holdings, monetary policy becomes difficult to manage accurately; consider, for example, this statement:
Because its holdings are believed to be the largest, Saudi Arabia’s moves have drawn scrutiny, particularly as other central banks in emerging markets sell Treasuries to raise cash in defense of their currencies. (The Treasury doesn’t break out private and public holdings, but its disclosures say about two-thirds of foreign holdings are held by official institutions such as central banks.)
And then there's this:
“I come down on the side of thinking there should be more transparency,” said Jeff Caughron, chief operating officer at Baker Group, which advises community banks with more than $45 billion in investments. But at the same time, “the Treasury is constrained by political sensitivities and that comes into conflict with market participants that crave more transparency. It’s an understandable conflict.”
And events in recent months, from President Barack Obama’s landmark nuclear deal with Iran to Saudi Arabia’s execution of a prominent Shiite cleric who challenged the royal family, underscore just how sensitive U.S.-Saudi relations have become. The longstanding rationale for the alliance has also been undercut by America’s domestic oil boom, which has made it far less dependent on Saudi exports.
Whatever the political considerations, some analysts speculate Saudi Arabia may actually be trying to hold onto its Treasuries as part of a strategy to bulk up on dollar assets amid the deepening turmoil in global financial markets.
So what's the high octane speculation here? Basically, it's this: there appears to be a quiet, though firm and growing conviction that Saudi treasury holdings should no longer be the big secret that they are. Such secrecy leaves everyone guessing, and in a volatile international economic and political situation, more, and not less, transparency would seem to be the order of the day. I suspect also that when one looks at the large sell offs of US Treasuries recently, and connects the dots here, that the extent of those holdings are probably already quietly known and quietly bandied about in the corridors of power. In this respect, it's worth pondering carefully the fact that Mr. Xi just recently returned to China from his Middle Eastern tour, and that all accounts indicate that the Saudis are ready to cooperate in China's "New Silk Road Project," a cooperation which will, like it or not, put them into some sort of relationship with their sworn Shia enemy, Iran. Whether or not Mr. Xi can pull off the long term lessening of tensions between the two oil giants that this project will require, it's an almost sure bet that he indicated that any trade between China and the Riyadh regime will have to be conducted in yuan.
And if all this high octane speculation and dot-connecting is true, then it's an indicator that the regime in Riyadh is becoming increasingly brittle and fragile. An end to the secrecy of its treasuries holdings, in any form, might contribute more to that fragility. And on the other side of that argument, one might also argue that continued secrecy might work against Riyadh, and for those in Washington seeking even greater leverage over the kingdom. This is a quiet story, to be sure, but one to watch closely.
See you on the flip side...