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Saturday, April 16, 2016

The Saudi Threat -- Would They Dump All Those Treasury Bonds?

There's a bill in Congress at the moment that would allow foreign countries to be held liable for damages in American courts if they take part in terrorist attacks in the USA against Americans.  Right now, such suits are barred by a federal law passed in the mid 1970's, before there was any domestic terror threat.  The country most threatened by this law is Saudi Arabia which conceivably could be held responsible in suits brought by the victims of 9-11 and their families.  According to an article in the New York Times today, the Saudi government has threatened that in the event the law were to pass, they would be forced to sell $750 billion of treasury bonds and other assets in the USA before such items could be attached by American courts.

Let's take a look at this threat.  First of all, what would happen were the Saudis to sell three quarters of a trillion dollars of bonds?  According to the New York Federal Reserve Bank, daily trading in Treasury securities totals on average about $125 billion dollars.  That means that the market most likely could handle to Saudi bond sale unless the Saudis decided to dump all the bonds on the market at one time.  Over a month, the Saudis could sell out and the effect on the market would be substantial but not likely disastrous.  All those extra bonds for sale would lower prices for the bonds and raise rates.  Of course, the Federal Reserve could announce a new special batch of quantitative easing and buy many of the Saudi bonds.  That would limit any interest rise from the Saudi move.  Were the Saudis to dump all those bonds at one time, however, the price would plummet, but that would lose a fortune for the Saudis.  They might temporarily hurt the USA, but they would permanently damage themselves at the same time.

The departure of the Saudis from the American bond market would, of course, hurt if it were to cause other market participants to exit as well.  For example, were the Chinese and the Japanese (who together have three times more bonds than the Saudis) to dump bonds, the effect on interest rates could be severe.  Even the Federal Reserve might be hard pressed to keep a lid on such a move. 

The Saudis also say that they would dump other assets in the USA.  Those other assets are not identified.  Clearly, however, anything that the Saudis dump will see a major price decrease.  Maybe there will be some choice real estate parcels that will be put on the market in distressed sales.  That should benefit the buyers, not the Saudi sellers.

Of course, there is a solution to this mess.  The Saudis might make the magnanimous gesture of establishing a ten billion dollar fund to compensate those who were injured or killed during 9-11.  There would be no admission of guilt and no change to the law.  All there would be is some sort of compensation to the victims of the attack.  The fund could decide how to distribute the cash.  There would be no court involvement, no lawyers collecting fees, and no sales of treasury bonds. 

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