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May 18, 2016

US Treasury Quashes Saudi Threat of Dumping Treasuries

A secret US-Saudi deal from 1973 falls apart.

Ever since the US made a secret deal with Saudi Arabia in 1973 to end the oil embargo, the Treasury Department has never disclosed Saudi Arabia’s holdings of US Treasury securities.

“It’s among concessions that U.S. administrations made over the years to maintain America’s strategic relationship with the Saudi royal family and access to the kingdom’s oil reserves,” Bloomberg News explained, after it had successfully pushed the Treasury via a Freedom-of-Information Act request into finally disclosing the data.

So today, the Treasury released the data on Saudi Arabia for the first time. It’s a doozie: a lot smaller than the number that had been bandied about in the media.

This became a big public issue in early April, when the Saudi government threatened the White House and members of Congress that it would dump its purportedly vast Treasury holdings and other US assets if Congress dared to pass a bill that would permit plaintiffs to sue the Saudi government in US courts for any role in the September 11, 2001, attacks.
At the time, the White House lobbied Congress against the bill. According to the New York Times, these “Saudi threats have been the subject of intense discussions,” with officials warning “senators of diplomatic and economic fallout from the legislation.”

Adel al-Jubeir, the Saudi foreign minister, delivered the kingdom’s message personally last month during a trip to Washington, telling lawmakers that Saudi Arabia would be forced to sell up to $750 billion in treasury securities and other assets in the United States before they could be in danger of being frozen by American courts.
But that purported $750 billion in US assets – to whatever extent they exists – contain a relatively small amount of Treasuries. Today, in its March figures, the Department of the Treasury made Saudi ownership of Treasuries part of its monthly TIC reports: a mere $116.8 billion.

Saudi holdings of Treasuries peaked in January at $123.6 billion and have since dropped 5.5%, as the country grapples with huge budget deficits due to the oil bust and its “costly wars in the Middle East,” as Bloomberg put it.

Until 2 days ago, the Treasury reported Saudi holdings only as part of a lump-sum figure for a group of 14 large oil producers, mostly OPEC members. Those were the only countries treated that way. The holdings of all other countries have been reported by individual country — even the Vatican.

By comparison, China is number 1 with $1.245 trillion in US Treasuries as of March, and Japan number 2 with $1.137 trillion. Note among the next in line, the tiny offshore financial centers with disproportionate positions in US Treasuries, which they hold for others: Number 3, the Cayman Islands with $265 billion; number 4, Ireland with $264 billion; Brazil with $246 billion; Switzerland with $230 billion; the UK with $228 billion; and Luxembourg with $221 billion.

Saudi Arabia, with its $116.8 billion in US Treasuries, is in 13th position, behind Belgium and India.

So how important are Saudi holdings? The total US Gross National Debt is $19.2 trillion, of which the US government itself holds $5.37 trillion in federal pension funds, the Social Security Trust Fund, etc. And the remaining $13.83 trillion is held by the “public,” which includes Saudi Arabia. Hence, its share of Treasuries held by the public amounts to 0.8% — a drop in the bucket!

Saudi Arabia might also hold some Treasuries in offshore custodial accounts to create another layer of secrecy and to keep the securities beyond the long arm of the US government.

But even if Saudi Arabia decided to dump whatever Treasuries it holds to punish the US for trying to come to grips with the facts around 9-11, it would barely make a ripple. In our insane world of negative interest rates, Japan’s 10-year government debt has a negative yield of -0.11% despite the country’s fiscal nightmare; and 10-year yields of other countries are near zero, with the German 10-year yield at 0.14%. In that crazy environment, US Treasuries are hot.

They sport a practically luxurious 10-year yield of 1.76%, more than 10 times the German 10-year yield! So any additional supply that Saudi Arabia might dump on the market would be mopped up instantly at the slightest uptick in yields by buyers that have been mauled half to death by ingenious central-bank policies.

Who is the new king of cross-border mergers and acquisitions that is now buying at record pace and at peak prices, funded by state-owned banks? Read… China Inc. Tries to Buy the World, with Impeccable Timing 

Courtesy of Wolf Richter, Wolf Street

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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