from Follow the Money

The real reverse bailout

February 4, 2008

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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Counting the funds Kuwait and Korea committed to Merrill and Singapore and Kuwait committed to Citi, sovereign funds have provided US and European banks about $42b in new capital over the past two quarters.

That tops the $30b the IMF lent out over a four quarter period in the Asian/ Russian crisis of 1997-1998, and is roughly the same size as the $40b or so the IMF lend out to Argentina, Brazil, Turkey and Uruguay over a two year period in 2001-2002.

But it pales relative to the $54.7b increase in the New York Fed’s custodial holdings for foreign central banks between January 2 and January 30 of this month. Counting ADIA’s contribution along side the contributions from KIA and the GIC, Citi raised about $17.5b from sovereign wealth funds over a three month period. The US Treasury -- judging from the rise in the New York Fed’s custodial data -- got $29.7b in a single month.  Custodial holdings of Agencies increased by only a bit less, $25b. (Data here)

$55b a month -- $630b a year -- is a very large sum. It is almost enough to cover the US current account deficit, at least in the absence of any capital outflows from the US.

The New York Fed’s custodial data rarely captures all of the growth in central bank dollar assets. It may, though, be unusually strong in January for seasonal reasons -- everyone sure seems to have woken up on January 1 and either decided to shift from bank deposits to Treasuries or to transfer the Treasuries they bought in London in December over to the New York fed for safe keeping.

But the strong rise in the New York Fed’s custodial holdings in January also isn’t inconsistent with data from the big central banks that suggests that global reserve growth was very strong in q4 -- in the order of $300b. $55b a month isn’t an implausible sum. Far more money is still being stashed away in central banks than in sovereign funds, and far more money is still being invested in safe government bonds than in more risky assets.

My guess is that when the Treasury releases the results of the next survey at the end of March, the overall increase in central bank holdings between June-2006 and June 2007 will set a new record. And my guess is that the data for June 2007 to June 2008 will be almost as big -- though it still a bit too early to tell.

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