Friday, December 21, 2007

The Ailing US Economy: Can Asians & Arabs Rescue It?

As the widening sub-prime crisis and the resulting credit crunch in the US become serious, there are many Asian and Arab sovereign funds coming forward to help major US and European financial institutions. Citigroup, UBS and Morgan Stanley clearly stand out as the recipients of their largess. Here's a brief run-down of these three deals:

Abu-Dhabi-Citigroup Deal
Abu Dhabi Investment Authority agreed to purchase 4.9% stake in Citigroup for $7.5b in convertible debt. It's a rather complicated deal but the interest rate on this investment by Abu Dhabi works out to about 11%, an unusually high interest rate that speaks to both the risk and the reward of this arrangement. Part of the concern by the Oil-rich country is based on the fact that Abu Dhabi's reserve are held in dollar-denominated assets and the US dollar is continuing to lose ground against other major currencies including the Euro. The other concern is the impact of a US economic slowdown leading to worldwide slowdown that causes reduced demand for oil and lower prices.

Singapore-UBS Deal
The Government of Singapore Investment Corporation(GIC) announced it is purchasing 9% stake in Swiss Bank UBS for about $10b. The identity of a second investor, believed to be Saudi, was not disclosed. The rapid Asian growth has helped balloon the size of the Singapore reserves and they are looking for opportunities to invest. The other factor is that the Singaporean wealth is mainly tied to international finance and trade which they would like to support.

China-Morgan Stanley Deal
Chinese government is buying a 9.9% stake for $5b in Morgan Stanley, one of the largest investment banks on Wall Street. China has been accumulating US dollars at an unprecedented rate with its rapidly expanding manufacturing exports to the United States and the rest of the world.

These three deals are likely to spur other, similar deals. As the rapid Asian economic growth and the commodities boom create tremendous wealth in Asia and the Middle East, these regions have a stake in maintaining this phenomenon by making larger investments in their own economies and supporting the consumers in the West.
The Asians and the Middle Easterners are likely to continue this investment/purchase strategy in the foreseeable future in spite of concerns about the growing deficits in the US and the falling value of the US currency. The only uncertainty here is how the US Congress reacts to it.

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