Attention Finally Turns To Saudi Arabia's "Secret" US Treasury Holdings

Tyler Durden's picture

In November of 2014, we announced the quiet death of the petrodollar.

The system which underwrote decades of dollar dominance and kept a perpetual bid under USD assets met an untimely demise when the Saudis moved to bankrupt the US shale complex by deliberately suppressing oil prices.

The implications, we said, would be far-reaching.

For years, oil producing nations plowed their USD crude proceeds into USTs and other dollar assets in a virtuous loop both for the currency and for the nation that printed it. The “Great Accumulation” (as Deutsche Bank calls it) of USD FX reserves ended for good in early 2015 but no one noticed until China began to liquidate mountains of US paper in an attempt to manage a runaway devaluation effort.

By the start of September, all anyone wanted to talk about was the depletion of EM FX war chests as the world suddenly came to understand that the selling of FX reserves amounts to QE in reverse and might therefore serve to tighten global monetary conditions, drive up yields on core paper, and sap liquidity as traditional net exporters of capital suddenly stopped buying amid slumping commodity prices and the yuan fiasco. Some wondered if the reserve drawdowns would cause the Fed to delay liftoff as the FOMC would effectively be tightening into a tightening.

Against this backdrop we said that the most important chart in the world may well be one that depicts the combined FX reserves of Saudi Arabia and China.

Now that Saudi Arabia’s oil price gambit has backfired on the way to blowing a hole in the kingdom’s budget that amounted to 16% of GDP last year, the market is speculating that Riyadh’s vast SAMA reserves could disappear altogether - especially considering the added cost of funding the war in Yemen and maintaining the riyal peg.

As it stands, the Saudis have around $630 billion parked at SAMA. That's the third-largest rainy day fund on the planet.

How long the reserves will last given the myriad headwinds facing the kingdom is an open question, but here's a useful graphic from BofAML which endeavors to show how long Riyadh can hold out under various assumptions about oil prices and borrowing:

What’s interesting about Saudi Arabia’s UST reserves is that no one knows how “vast” they actually are.

For one thing, SAMA is a sovereign wealth fund, which means we can’t just look at the headline number and make assumptions about US paper because the fund’s holdings aren’t homogeneous.

But there’s more to the ambiguity than that. “It’s a secret of the vast U.S. Treasury market, a holdover from an age of oil shortages and mighty petrodollars,” Bloomberg writes of Saudi Arabia’s US Treasury holdings. Put simply: there’s no way for the market to assess the impact of the SAMA drawdown because the composition of the portfolio is a state secret of both Saudi Arabia and the US.

“As a matter of policy, the Treasury has never disclosed the holdings of Saudi Arabia, long a key ally in the volatile Middle East, and instead groups it with 14 other mostly OPEC nations including Kuwait, the United Arab Emirates and Nigeria,” Bloomberg goes on to note, adding that the rules are different for almost everyone else. Although Saudi Arabia's "secret" is protected by "an unusual blackout by the U.S. Treasury Department," for more than a hundred other countries, from China to the Vatican, the Treasury provides a detailed breakdown of how much U.S. debt each holds.”

For his part, Edwin Truman (the former Treasury assistant secretary for international affairs during the late 1990s) doesn’t get it. “It’s mind-boggling they haven’t undone it,” he says, incredulous. “The Treasury didn’t want to offend OPEC [but] it’s hard to justify this special treatment at this point.”

So who does know how much US paper the Saudis are sitting on? Well, the Saudis of course, “a handful of Treasury officials,” and some bureaucrats at the Fed, Bloomberg says, noting that “for everyone else, it’s a guessing game.”

Yes, a “guessing game,” and one that may have profound consequences for markets and for geopolitics.

With Iranian supply set to flood an already overflowing oil market, Saudi Arabia’s finances are likely to deteriorate further. Especially if the conflict in Yemen continues to fester and the kingdom refuses to cede the riyal peg. That means that unless the Saudis are prepared to take on more debt (and the kingdom’s debt to GDP is already set to rise to 33% by 2020 from just 2% at the end of 2014), they’re going to be selling something from SAMA and the market has no way of knowing what ahead of time.

Politically all of this comes at an especially critical juncture. The US is pushing to reduce its dependence on foreign (read: Saudi) oil and Washington’s rapprochement with Tehran has ruffled more than a few feathers in Riyadh. 

“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, [but] 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,” Bloomberg goes on to say. Here’s more:

“You need dollars if you’re an oil producer, you want to make sure you have dollars on your balance sheet,” said Sebastien Galy, Deutsche Bank’s director of foreign-exchange strategy, who suggests SAMA could be raising cash by liquidating riskier investments such as stocks, real estate and private equity. Holding dollars also makes sense as a hedge against the plummeting price of oil, which is priced in the U.S. currency.

 

Figures from SAMA suggest the kingdom might be reallocating some of its reserves into short-term, liquid assets to help the finance ministry meet budget commitments and defend its 30-year-old currency peg of 3.75 riyals to the dollar.

 

The central bank has increased foreign currencies and deposits held abroad by 7 percent in the first 11 months of 2015, while at the same time reducing foreign securities, consisting of equities and longer-term debt, by 20 percent.

 


If the Saudis are avoiding selling US paper for as long as they can, one wonders what it is they're selling instead to boost cash and deposits. As we noted last week, sovereign wealth funds are set to liquidate $75 billion in equities in 2016, an outflow which may or may not be covered by "dumb" money inflows from the retail crowd. 

In any event, those hoping for an end to the "legacy" policy of keeping Saudi Arabia's UST holdings shrouded in secrecy shouldn't hold their breath. "They'll want to deal with it sooner or later," the abovementioned Edwin Truman says.

We'll close with a simple question: who would be the new patron saint of the US Treasury Department in the event the Saudis drawdown all of their reserves and decide to diversify away from USD assets once the tide turns for crude, red ink turns to black, and the kingdom once again becomes a net exporter of capital? Put differently, who will monetize the US deficit if relations between Washington and Riyadh hit the skids over Iran? It damn sure won’t be China, where authorities are selling USTs by the hundreds of billions.

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KesselRunin12Parsecs's picture

What's the big secret about holding worthless (never to be redeemed) paper issued by a failed government?

jcaz's picture

Yep.  Just walk away- fail to redeem that debt.  Too bad so sad, Hassan.

ParkAveFlasher's picture

"If I borrow ten dollars from you and don't pay back, I'm screwed.  If I borrow a million dollars from you and don't pay it back, YOU'RE screwed."  ... now who said that?

MillionDollarBonus_'s picture

If we're going to talk about foreign holdings of our treasuries, let's at least be honest: dumping US treasuries is an ACT OF WAR. We have a consumer economy and low interest rates are an essential part of our economy. We need to take immediate and ruthless action against anyone who dares to sell our treasuries in any significant size. It's a national security issue, pure and simple.

http://accredited-times.com/2016/01/22/the-case-for-compassion/

BarkingCat's picture

this clown is not the original MDB. Just a poor immitation.

Stuck on Zero's picture

All foreign government holdings of Treasuries should be secret.  That way if there is an overthrow of the government we will deny all knowledge of the debt.

Tarzan's picture

Once again the Saudis are paper tigers....

Hiding behind State secrets, which if exposed would reveal just how BANKRUPT we all are!

I notice, among all the candidates for Prez, red or blue, NON mention the missing pages of the 911 REPORT, not one is promising to unseal the Saudi involvement in 911!

The US and Saudis made a bone head mistake, trying to squeeze Russia.  They flooded the "Markets" with oil while demand was falling off the cliff, because they believed their own propaganda, "recovery" and all,...

Their bullshit is getting harder to hide, can they survive $10 oil?

 

 

Here's a look at what the "EXPERTS" have had to say along the fall from $110 dollar oil

Cramer: $30 oil could be around the corner
Abigail Stevenson    | @A_StevensonCNBC
Tuesday, 7 Jul 2015 | 6:44 PM ET

The good news is that ultimately Garner sees the price of oil recovering significantly to $70 or even $85 over the next 10 to 12 months. However, investors are likely to experience short-term pain before that happens.

-----------------------------------------------------------

Boone Pickens: Why I’m standing by $70 oil by year end
Michelle Fox    | @MFoxCNBC
Thursday, 9 Jul 2015 | 4:05 PM ETCNBC.com

Despite the recent volatility in crude, energy entrepreneur Boone Pickens is sticking to his prediction that oil will hit $70 a barrel by the end of the year.

In an interview with CNBC's "Power Lunch," Pickens said that he expects demand to grow while U.S. production slows down.

"If I miss on $70 it'll be because it's over $70, not under $70. That's how confident I am," the founder of BP Capital said. "I think demand will be over 2 million barrels a day."

-----------------------------------------------------------

What West Texas producers are saying about $40 oil
Morgan Brennan    | @MorganLBrennan
Thursday, 27 Aug 2015 | 1:12 PM ETCNBC.com

.....which pumps about 3,000 barrels of oil and 8 million cubic feet of natural gas per day, currently has three drilling rigs running. Two came online in June, when oil climbed back above $60, a move that had many in the sector, including the Dallas Federal Reserve, believing the worst was over.

-----------------------------------------------------------

Could oil prices really shrink to… $20 per barrel?
Katy Barnato    | @KatyBarnato
Tuesday, 6 Oct 2015 | 12:49 PM ET

Despite its warning, Goldman Sachs said there was a less than 50 percent chance of oil falling to $20 per barrel. Instead, its base case scenario for 2016 was $45 per barrel—a level that Birol said was still too low for U.S. shale producers to maintain current production.

-----------------------------------------------------------

3 reasons why oil is back above $50
by Ivana Kottasova   @ivanakottasova October 9, 2015: 8:50 AM ET
Crude truth behind oil's global boom
 
So much for even cheaper gas!

World oil prices have charged higher this week, breaking back above the psychological barrier of $50 a barrel for the first time since July.

.....It said U.S. production will continue declining until the middle of next year, before growth returns in late 2016. The agency also said it expects global demand for oil in 2016 to grow at its fastest in six years -- that's also good for prices.

-----------------------------------------------------------

$80 oil in 2016? This director thinks so
Reem Nasr    | @reemanasr
Monday, 19 Oct 2015 | 4:46 PM ETCNBC.com

As oil supply falls in non-OPEC countries, it could signal higher demand that could send crude oil prices to as high as $80 a barrel, says David Pursell, managing director at Tudor Pickering Holt.

"I think you have to believe that the market is not as oversupplied as consensus believes," he told CNBC's "Power Lunch" on Monday.

-----------------------------------------------------------

The surprising case for $100 oil
Alex Rosenberg    | @CNBCAlex
Wednesday, 25 Nov 2015 | 6:00 AM ETCNBC.com

One of the biggest stories over the past year and a half has been oil's epic tumble, which has reduced the price of a barrel of crude from nearly $110 to just more than $40. But one strategist says the commodity is set to stage a striking turnaround.

-----------------------------------------------------------

Brent oil $90 to $100 in 12 to 18 months: Pickens
Matthew J. Belvedere    | @Matt_Belvedere
Tuesday, 23 Dec 2014 | 10:13 AM ETCNBC.com

Energy entrepreneur T. Boone Pickens predicted Tuesday that Brent crude oil will be at $90 to $100 barrel in 12 to 18 months. "The world got along fine with $100 oil," he said on CNBC.

-----------------------------------------------------------

Alaska governor: Unless oil hits $110, we need a tax hike
Anita Balakrishnan   
Wednesday, 30 Dec 2015 | 6:32 PM ET

-----------------------------------------------------------

MailOnline US - news, sport, celebrity, science and health stories
By Tanya Jefferies for Thisismoney.co.uk
Published: 13:23 EST, 12 January 2016 | Updated: 05:50 EST, 14 January 2016
 

'Sell everything!' Dire warning from Royal Bank of Scotland as fears mount that markets are set for new crash and oil could plunge to $10 a barrel

prefan4200's picture

1.  US signs an agreement to look the other way while Iran develops nuclear weapons

2.  Iran bombs the shit out of Saudi Arabia and SA ceases to function as a country.

3.  US Treasuries, and the obligations, destroyed.

4.  Since SA no longer exists and treasuries no longer exist, US can walk away from its obligations. 

Saudi Treasury debt problem solved !  Iran happy, US happy, and the world then understands why the US signed the agreement with Iran.

Tarzan's picture

There's one thing wrong with your scenario,

The Saudis have NUKES, Iran doesn't, YET!

Tall Tom's picture

Israeli Knesset is very unhappy.

 

And the neocons in DC will not let what you propose develop...

August's picture

Bear in mind that Boone is pushing 90.

He may be correct, but timing as always is the issue.

Sanity Bear's picture

I'd argue that buying the USTs is the act of war. It's literally a stake in the ability to extract wealth from your future.

LawsofPhysics's picture

Not when they yeild ZERO interest!!!

that in FACT would be "literally" be waiting to simply get your money back....

 

Sanity Bear's picture

zero interest for now is not zero interest

ParkAveFlasher's picture

Donald Trump, future Re-neger-in-Chief..

Socratic Dog's picture

He's the Bankruptcy Candidate.

Grumbleduke's picture

... now who said that...

 

Someone who'll never get a million borrowed or printed.

Ham-bone's picture

Whoa - wait a second...Tyler, put down the crack pipe!

It was the Fed's FFR at ZIRP coupled w/ QE from '09 on that was both the cause of the oil price increase and the driver of all the new overcapacity (90%+ of new global supply coming from US/Canadian shale/tar sands thanks to the Fed's "lower for longer" pledge).

 http://econimica.blogspot.com/2016/01/federal-reserve-responsible-for-oil.html

Saudi and OPEC have continued to see net exports decline as their internal consumption is rising faster than their production.  True, they didn't decrease production to attempt to raise prices but it sure wasn't they they flooded the market with new marginal producers based on highly leveraged plays. 

It was the dollar weakness on ZIRP + implementation of QE in Dec '08 which saw Oil prices bottom @ $33...the same month QE was implemented  http://econimica.blogspot.com/2016/01/qe-treasurys-dollar-and-oilall-tied.html

It was the ongoing dollar weakness and monetization that maintained oil until the taper began to be felt in later '14...and oil began it's fall in Aug '14...as QE was tapering out and oil was tumbling by the time QE terminated Oct '14...and oil has collapsed since absent weak dollar / monetization.

BRICS's stopped accumulating US Treasury's as of July '11 but it was the Fed and BLICS which kept the bid.  However, when the Fed stopped accumulating Treasury's via QE in late 2014...all remaining foreign sources likewise ceased accumulating!  As for "oil exporters" (aka OPEC), they're holdings have been very stable around $200 to $300 B while BLICS members have skyrocketed up and down and all around.  OPEC as a Treasury holder is holding a quarter of what China and Japan and the BLICS all hold.  Not saying it doesn't matter, but even if SA holds the majority of it, it has less than Luxembourg or Ireland or Switzerland...perspective.  Of course nobody knows where the BLICS $'s come from and could be SA...but we'll never know.

Since QE ended, all buying of US T debt has been domestic...a total reversal.  And the impact on the US markets and economy of all net new Treasury buying shifting to domestic sources?...not good.

---What is the likelihood of a Fed U-turn in 2nd half of 2016 and re-implementing QE to weaken the dollar and offer a whole lot of support for oil?  A resumption of large US deficits, NIRP, plus re-implementation of QE should be the hope of all oil producers and the global suppliers of most everything...otherwise strong dollar plus deflation thanks to depopulation coming from the bottom up world over adds up to global depression.

When one adds in the fact that the days of a growing pie for everybody are nearly over...many pieces to be considered.
http://econimica.blogspot.com/2016/01/sources-of-growth-examined-and-found.html

Of course, since China and BRICS plus OPEC all generally continue to accumulate $'s but are not recycling them into US Treasury debt, as they had done with about 50% of these $'s from '00-'11...just how are these dollars being recycled???  And as they need lower $ reserves thanks to significant increases in non-dollar denominated trading...perhaps they are buying something else?!?

http://econimica.blogspot.com/2015/04/exactly-what-did-nixon-say-about-dollar.html

LawsofPhysics's picture

Still believe in infinite growth for a population/economy confined to a biosphere with limited resources?

Good luck with that.

Escrava Isaura's picture

 

 

“Debt you don’t pay, you keep negotiating”

Delfim Neto, Brazilian Finance Minister

piceridu's picture

This post by ZH is why I love ZH...and the PTB hate (yet read) ZH

OCCULTARE's picture

belgium will save us.

It always does.

KesselRunin12Parsecs's picture

Belgium... AKA... The ECB version of jew bankers working the other end of the check kiting scheme

JRobby's picture

“It’s mind-boggling they haven’t undone it"

Is it?

Countrybunkererd's picture

More like the place where World War's are settled IMO... or do i mean where nations throw bullets at eachother?  Hmmmm...certainly The EU is falling apart so... The Jew, as usual, has little to do with it if you open your eyes even a bit you could see that.  But i understand that you cannot possibly let go of your worldview and blame the truly responsible parites for your ills or perceived ills.

KesselRunin12Parsecs's picture

I see any 'ills' that exist being mostly perpetrated by privately owned central banks. To an astonishing, almost mathematically impossible ratio, those are owned, & run by Ashkenazi jews. Those are the facts & are visible in plain sight for anyone who wishes to 'open your eyes even a bit'.

Ms No's picture

Somebody invented and then implemented the entire system.  It would be nice to know more about the genesis of the crime of usery.  The problem seems to be finding where it actually started.  They may have been attempting to gain control all the way back to the time of Jesus. 

The templars were bankers murderers and pirates.  The disease seems to have sprung up in Greece, Rome and Babylon all around the same time and then in the 18th centrury the Rothchilds were crawling everywhere and pretty much owned everybody.... where did this pestilence start?

We don't need to outlaw being a Jew we just need to outlaw predatory banking then they will be just like everybody else.  I get that you need big banks to finance war and our Monsanto agriculture model but other than that do we have to have banks?   

KesselRunin12Parsecs's picture

Nice story...

 

But I don't give a FF about who committed the 'Original Sin'... I'm only concerned with identifying who are the major players in the present day...

 

If my father was a serial killer & I decided to follow in his footsteps (is it 'his' fault, or mine)...

Ms No's picture

I understand the sentiment but the problem with that is that we don't know who they are.  We would like to think that we know who they are and that we could round up Kissinger, Soros and the big banker boys and it would be over in a days work.  This is not how power structures work. 

The real power will be behind the scenes of an organization/organizations and will most certainly be pyramidal in structure.  Those holding true power are anonymous and the tools that we see are just that, tools of the structure.  Just like .gov and espionage things would be on a need to know basis and this is how sensitive information is always protected.  Their identities are most certainly sensitive information.

Power structures from the mob to high alphabet agencies always maintain a heirarchy that are set up to protect those at the apex.  People who think otherwise have not researched espionage or it's tactics, the very foundation of which is rooted in utilizing secrecy and obscuring and confusing the nature of the power structure itself, it's motivations, current moves and above all it's members.

The pyramid structure is not just used to protect the apex from the masses, it is used to protect the apex from the rungs below and protect from infighting. 

It's important to know what links these people.  Whether it be family ties, ethnicity, religion/cult or what have you.  In order to know thine enemy you have to understand it's history.   

chubbyjjfong's picture

A message to zh comment contributors. The name is Janet! (and I will accept Jan). It is not Old Yeller, Old Man Yeller, Grandma Yeller nor any other kind of Yeller whether that be young or old! You people make me want to puke in my mouth and should be ashamed of yourselves. One fellow zh commentator described my Janet as having a face that could stop a train while another asked how it could be possible that the nipples of my Janet could not be trodden on whilst showering. THAT IS NOT ACCEPTABLE AND WILL NOT BE TOLERATED! I am no troll nor am i naturally aggressive in nature, but let this be heard. If I so much as read one more comment that is even slightly derogatory, vulgar or written with any subtlety nasty undertone toward my Janet, so help me god I will down vote you. You heard correct, i will 'junk' your backsides! You have been warned!

Lurk Skywatcher's picture

"i will 'junk' your backsides!"

'cos you like it when Janet does that to you?

 

BarkingCat's picture

I bet no one has junked Janet's backside in a very long time.

Countrybunkererd's picture

the "real" MDB?  Few can write such lovely sarc.  Even Old Man Yeller couldn't pay for such well written sarcasm, the FED could, but not Grammy HO.

daveO's picture

''Put differently, who will monetize the US deficit if relations between Washington and Riyadh hit the skids over Iran?''

Maybe Iran?

Baby Bladeface's picture

Will not be Iran. Those who buys U.S. bonds is the pest of the country.

Will monetise The Fed, as always...

Ghost of Porky's picture

What is the USD to GOAT conversion rate these days?

Dre4dwolf's picture

Saudi Arabia is Americas whore.

She behaves unless she wants to get back-handed like Syria, Afghanistan, Iraq......... and take note it never ends well for the people " on top " in those countries, they usually endup hanging on national TV.

Saudi Arabia can't do anything but keep pumping free oil.

ineedsmoney's picture

I wouldn't mind seeing a prince or two hanging from the gallows.  Maybe the executioners could set up some of their customized Bentleys in the background while they hang.  Maybe make it a PPV event.

August's picture

>>>Maybe make it a PPV event.

Somebody would make a fortune off those rights.

The big issue is whether it should be a stand alone event, or tied in with the World Cup.

Sanity Bear's picture

It's the US that's the whore in the relationship. Saudis have more money than they know how to spend, and we got plenty of politicians who will do anything - and I mean anything - for it.

Soul Glow's picture

There will soon be a currency crisis that involves the yuan, the ruble, the riyal, and the dollar.  For the longest time the yuan and riyal were pegged to the dollar.  Soon both will be free floating.  Then the ruble and yuan will make a pledge to help one another and join a peg and the riyal will peg to them.  This will be the blow to the dollar that everyone is waiting for.

Consuelo's picture

Yeah...   I think there might be something shiny and heavy involved in this turnabout as well, no...?

Sorry_about_Dresden's picture

No fucking way! The Chinese  are linked w/ Germany. Why will not tie there currency  to any nation since they  ultimately  want the Yuan to be reserve currency 

BarkingCat's picture

Once again, but this time in English???