Liquidity Crunch or Worse
Saudi Arabia burnt through its reserves faster than anyone thought.
In signs of a huge liquidity crunch, at best, the country has delayed paying contractors and now considers paying them in IOUs and tradable bonds.
In retrospect, the Saudi threat to dump US assets looks more ridiculous than ever.
Please consider Saudi Arabia Considers Paying Contractors With IOUs.
Saudi Arabia has told banks in the country that it is considering giving contractors IOUs to settle some outstanding bills, according to people with knowledge of the discussions.
A projected budget deficit this year is prompting the government to weigh alternatives to limit spending. Contractors would receive bond-like instruments to cover the amount they are owed by the state which they could hold until maturity or sell on to banks, the people said, asking not to be identified because the information is private.
Contractors have received some payments from the government in cash and the rest could come in “I-owe-you” notes, the people said.
The government started delaying payments last year to prevent the budget deficit from exceeding $100 billion after the oil slump.
Beyond a Liquidity Crisis
Deficits don’t shrink if you delay paying the bills. Deficits arose because more money was spent than collected.
On May 17, the Senate Passed a Bill Allowing 911 Victims to Sue Saudi Arabia.
Obama threatens a veto. Meanwhile, Saudi threatens to dump $750 billion in U.S. securities and other American assets if the bill becomes law.
Does Saudi Arabia even have $750 billion. Color me skeptical.
Saudi Arabia’s bluff that it would sell US assets if the Obama signed the bill seems more ridiculous than ever.
For discussion of Saudi involvement in 911 and the alleged dumping threat please see Understanding the Saudi, Chinese “Economic Nuclear War” Threat; Saudi 911 Round-Up.
For discussion of Saudi Treasury holdings, please see Treasury Department Finally Discloses Saudi Treasury Holdings – Incorrectly?
There is no “nuclear” economic threat by Saudi Arabia or China as some have proclaimed.
Mike “Mish” Shedlock
They may have to sell some to pay contractors. Or pay contractors WITH the bonds. But they sure are in no position to “dump” them.
Yes – dumping, capital flight, and need to pay bills are not the same thing
Mish
Worse than that, they are fighting a 2 front war. They can’t use their own people (Wahhabi) to fight the war, because if they armed them, they would overthrow the royalty. Instead, they have to rely on Jordan (paid through the Saudi Treasury) and others to fight the war for them. This is at a time when the benefits to the public have been cut to bare bones and the natives are restless. The Wahhabi hate the royalty for their excess, My bet is the royalty are not far from extinction at the hands of their own people. Keep in mind that because of threats from inside and outside forces, every oil well is mined to prevent any victorious force from immediately having access to the oil deposits.
@Greg
There is a cultural reason why Arabs must hire mercenaries.
http://www.meforum.org/441/why-arabs-lose-wars
Not sure I understand the difference between “dumping” and “selling” in this instance. Usually “dumping” refers to selling products at below the cost of manufacture (itself a fungible calculation). If the Saudis were truly “dumping” Treasuries at below the cost of digital printing, then I would put in a bid on the dumped bills. Buy, buy, buy. Buy them all!
California paid its vendors with IOUs in 2009. Many banks refused to take the IOUs, but if you were a vendor and had done the work you had no choice; either that or nothing. Was never owed money by the state, so had no personal experience with the IOUs. But would be curious about the experience of others with the California 2009 IOUs.
IOUs would be the Saudi version of fiat currency. Their oil and gas in the ground is more backing for the IOUs than the average fiat currency. Fighting a needless war in Yemen and financing a proxy army in Syria to fight Assad are taking their toll on the kingdom. The old guns and butter game that sank LBJ in the USA. All war all the time will crash any kingdom eventually, no matter what the price of oil. Could it lead to peace in the Middle East, for a few years at least, just to staunch the red ink?
In a world of negative interest rates, I think there would be many buyers at public auction for whatever quantity of T-bills with positive yields that the Saudi wished to sell or dump or liquidate. Furthermore, the USA bond market is the most liquid in the world and could absorb the selling with hardly a hiccup. I think if the Saudis put their hoard up for public auction, there would be selling of negative yield Euro and Japanese bonds to finance buying the Saudi hoard. But since it is indeed all bluster and bluff, nothing will happen.
Bottom line: USA Senate is all bluff and hot air, too; election year posturing because they know Obama will veto the bill in the best interests of the USA. So Senate, which has buried the issue for 15 years, can pretend they care when really they don’t. This reminds me of the bluff of a poker game combined with the trash talk of WWE wrestling. Great entertainment.
I think dumping would be offloading at whatever could be got for, without consideration of market reaction or any great effort to manage a higher exchange. I don’t in essence see a problem in that, in theory they would drain dollars or euros or gold etc. out of the market in exchange for the US debt. As the t-bills act as money then all else being equal it might send the dollar down a little, but I think they would get a fair exchange with whatever they moved into as long as the intention were not to crash the market while selling for peanuts- I don’t think they would do that as it would be their loss.
On the other hand dumping treasuries, which they are ALWAYS in a position to do, and in fact may be left in a position to HAVE TO for local political reasons, has other conotations. It means openly exiting the US financial, political and economic sphere, winding down leverage from it and forfeiting on contracts where treasuries are used as leverage. That is a VERY big deal, both for the US and Saudi as well as the middle east and globally. There are in between routes possible, but you can be SURE that they will be hard to find as geopolitical interests are at maximum levels on all sides , whichever direction is being decided on.
The tensions are palpable in more sense than one, whether the different actors can really pull off the show as an eternal distraction, or whether it falls through, you can be sure that it is based on underlying sentiments and is aimed to channel, appease and empower of them in varying degrees – without the local ground sentiment of some kind it would all come across as some rediculous abstract. Some may see through it to a degree, but that does not take into account those who believe in it all, and they would form a hard undeniable reality, whether we like it and agree, or not.
Seems like they are moving to a parallel currency that is not pegged to the dollar then.
Given the state of the middle east Saudi is arguably more reliant on US military support than the US on Saudi oil and oil revenue investment. Don’t think for a moment that a breakdown in Saudi US ties would be anything pleasant though, it is much more complex than trade and finance, with the US watching its own back first of course… I don’t think US intervention in the region will be remembered as a success, just less of a failure compared to what might happen afterwards…for which it will share the blame.
No, their model is not the USD. It’s the Euro and the Eurozone. All they need is a Draghi-like frontman pitching deficit financing masterfully and they ]can go a decade longer on nothing but natural gas.
By ‘natural gas’ I mean the BS kind, similar to what routinely comes out of the ECB as monetary policy.
Yes, I caught the jest
I don’t think it is that straightforward though, there is a tendency towards western management that is actually somewhat alien to local culture and religion. For example interest is ‘banned’, Islamic finance works on direct capitalization transferred into fixed loan. The framework is not expansive monetarily in essence.
I think you will find Arabs have a stronger idea of what hard money means, a clearer idea on the meaning of debt. Gold is still traditionally an alternative currency whose use is well understood.
So you will have a keen eye cast on the goings on by more conservative members of society as well. That government spending may be considered profligate or excessive falls into the hands of the conservative viewpoint, it is the overeach in government planning that is open to critism, not a state manipulation of accounts, as the accounts are almost totally owned by royalty, under a large degree of religious oversight.
In short, it does and doesn’t bare comparison with western systems!
Balance sheet
The SAMA balance sheet is denominated in Saudi Riyals, which is pegged at an official rate of 3.75 against the US dollar. All currency notes issued by SAMA are fully backed by equivalent gold deposits.
https://en.m.wikipedia.org/wiki/Saudi_Arabian_Monetary_Agency
Crysangle – the world is filled with plate-spinners, visionaries, and neocons. Plate spinners are just trying to make it through the day and are the type to pray in fox holes. These are the meddlers, amateurs, and bureaucrats. Visionaries can be constructive or destructive in minor or extreme ways. You win big or you lose big. Neocons don’t handle ‘no’ or negotiation well and need to be in control. Thus the predisposition to war. Unfortunately, all govt intervention comes across badly and and interference with Saudi internals will end badly.
My comment on the revelation about the stock of Saudi Treasuries was: Actually the most interesting part of this story is to reevaulate how much the Saudis actually own in assets, and how close they are to running through their wealth with today’s oil prices and government spending. Their pile of treasures seems quite a bit smaller than many calculations have assumed up until now.
There is no “nuclear” economic threat by Saudi Arabia or China as some have proclaimed.
But if their economies undergo massive deflation, surely that would cause some significant global “fallout”, but of a less proactive nature.
With the crackup booms now beginning their crackup phase, what with China imploding, the EU imploding, ME imploding, Japan already busted, the economic deflations will be quickly addressed with new-found love for protectionism. The US refuses to get its fiscal house in order, so you can bet the protectionism is coming here, too (regardless of who wins the election).
What are the chances of a Congressional override of a veto in this case?
It appears to me that an Obama veto would be the biggest middke finger a President ever directed toward his constituents. Bald treason in fact.
“Does Saudi Arabia even have $750 billion. Color me skeptical.”
Officially? Doubtful.
But Egypt’s Mubarak supposedly worth $70 billion … Gaddifi $30 to $40 billion … zero doubt that the Royal family combined have stolen hundreds of $billions.
That is what strong arm monarchys do.
The family’s personal wealth is spread all over the globe. The Saudi government itself, like every government, has more liabilities (including entitlements) than assets. You can bet any tax increases the Saudi government enacts will never affect royal family assets.
Seems to me that a substantial carbon tax after the election would add insult to injury to the SA economy. I still believe the threat of such tax is what is holding down petro stock prices, along with influencing present low oil prices in futures markets.
As for political ties, a continuation of the Carter Doctrine is the likely path.
Anyway it’s sliced, there will be ongoing blowback from US intervention in the tribal affairs of the barbarians that inhabit that oil rich sandbox. At least until the US is weaned from Imported oil addiction.
You can (///could) win almost any argument by the line “But we are capitalists, right?” But naaah, not so many left. Most people look to the government. mishgea is one of few voices left.
Portugal threatened to do this a few years back. They floated the idea that instead of selling bonds on the market for difference in their budget deficit, they would just hand the bonds to citizens as payment in lieu of Euros.
They would essentially stamp the bonds with “legal tender for all debts both public and private” and create a secondary currency. The EU, of course, squashed that idea.
I was surprised that the Senate approved legislation which would open up Saudi Arabia to lawsuits by Americans who lost relatives in the 911 attacks.
Now the bill goes to the House. The purported conservative and Trump critic Paul Ryan is already pushing back. Again, siding with Obama.
The GOP male version of Nancy Pelosi.
I’m surprised you are surprised, LFOldTimer. It’s such an old trick, like placing a ball under one of three balls and taking bets. Fools the public time and again. Odds of overriding a veto are zero. Better odds betting on Brexit.
It is all Showtime Theater, public relations, election year positioning. Straight out of the LBJ Masters of the Senate playbook. Anything populist, like taking on the bad guys, be they banks or Arab villains, the House and Senate will vote for so they can strut in front of the voters back home in an election year. Like 2008/9, when people got their populist show legislation and bankers still got their bonuses.
The fact that the Senate passed the legislation tells you they feel safe in the knowledge that either the House/Ryan or Obama will prevent the legislation. Privately, they are all against the legislation. Publicly they need to appear otherwise to the voters. Obama, who is retiring, and Ryan can safely take the fire for their respective parties. Indeed, this makes Ryan almost indispensable to the GOP. Obama is just helping his party try to recapture the Senate and keep the socialist reshaping of America intact.
Trust me, Joel. I’m as cynical as you are. You may be correct. The Senate passing the bill may very well be a head fake. The vote comes down to “Who do you support? The families of the 911 victims or the House of Saud?”. A real hot potato for any pol.
But I’m still surprised the Senate passed it – as opposed to finding some technicality in the law or excuse to bury it (ie. more legal research needed, etc…).
Paul Ryan is really pushing his luck with his resistance. Of course one of the conditions that Lyin’ Ryan concocted when appointed to the Speaker position was that for his first 2 years on the job the House could not remove him. Remember? So he can be as anti-conservative as he wants and he’s completely safe while he simultaneously accuses Trump of not being conservative enough to carry the GOP nomination.
The most we can hope for is that he’s “Cantorized” in the upcoming Wisconsin election. But that’s a huge longshot.
But I agree with you. In the end the chance of the Saudi lawsuit bill becoming law is probably about the same as the sun rising in the west tomorrow morning.
SA is not about to raise taxes, they don’t have hardly any taxes. There is no personal income tax and no sales tax. There is the “Zakat” which is a 2-1/2% tax on net worth, but that is dictated by Islam and goes to the religion. Only businesses are taxed in SA. They’ll just have to reduce some spending, and subsidies on gas & diesel for the residents. Or maybe they can talk Obama into some US Foreign Aid courtesy of you & me.
Oh Jesus, The House of Saud just became Riyadh on the Chicago River!
The collapse is happening even faster than forecast here at my blog!
“Saudi Arabia burnt through its reserves faster than anyone thought.
In signs of a huge liquidity crunch, at best, the country has delayed paying contractors and now considers paying them in IOUs and tradable bonds.
In retrospect, the Saudi threat to dump US assets looks more ridiculous than ever.”
Indeed. The collapse is right here, right now.
“Saudi Arabia has told banks in the country that it is considering giving contractors IOUs to settle some outstanding bills, according to people with knowledge of the discussions.
A projected budget deficit this year is prompting the government to weigh alternatives to limit spending. Contractors would receive bond-like instruments to cover the amount they are owed by the state which they could hold until maturity or sell on to banks, the people said, asking not to be identified because the information is private.
Contractors have received some payments from the government in cash and the rest could come in “I-owe-you” notes, the people said.
The government started delaying payments last year to prevent the budget deficit from exceeding $100 billion after the oil slump.”
This is exactly what is happening in Illinois, with there budget, no money, no payments to creditors. This is not working for Illinois, and it won’t work for the House of Saud. Neither has a realistic way of raising their revenues, and cutting spending is politically difficult for both. Although the House of Saud could have a revolt if it implements the welfare cuts too quickly. In Illinois, the people can just move, but that is not an option for the Saudis. Who would take them?
This problem will only increase for the House of Saud. The delays do not allow the payments to catch up to the spending. They only delay payment. What this means is the House of Saud has burned through enough of its hard currency reserves that it is unwilling to burn any more. It will need to maintain some for actual necessities like toilet paper, and money printing.
This is what happens if a country does not have the money to print money.
To see the link head over to maddogslair.com
A country without diapers, aspirin, toilet paper, even money is no country to visit, and certainly no country to live in.
Saudi undoubtedly has money for these necessities, for now, and it has oil money flowing in. The problem is the outflow is far greater than the inflow, and the outflow must be cut to match the inflow or serious consequences will occur.
The House of Saud has one trump card, the value of ARAMCO, but it is a one time deal. They can sell some of the stock, and use that money to take necessary action. Once sold, it is gone for good.
Unless the price of oil miraculously rises to well above $110 per bbl, the House of Saud is in real and long term trouble. Now we shall see if it can create a real economy in the kingdom, and get the Saudis to go to work, the real thing not “dilettante’s jobs” with the actual working roles filled by indentured foreigners.
Expect Iran to begin capitalizing on this immediately. They will seek to pressure the kingdom to burn through even more cash.
Grab some corn, and a beer, this should be good!
Come visit me over at maddogslair.com
When Trump is elected we will nuke these Saudi ISIS bastards. Incinerate Mecca NOW!
Well guess what is the next country to invade to …
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