NORWAY: BOILING ECONOMY COOLS, PENSION FUND STEAMS

C O N F I D E N T I A L OSLO 000544

SIPDIS

A/S DAN SULLIVAN (EEB)

E.O. 12958: DECL: 10/01/2018
TAGS: ECON EPET ENRG EINV NO
SUBJECT: NORWAY: BOILING ECONOMY COOLS, PENSION FUND STEAMS
AHEAD

Classified By: Ambassador Benson K. Whitney, reasons 1.4 (b) and (d)


1. (C) Summary. Norwegian financial markets spiraled
downward, immediately following the failed passage on
September 29th of the USG's Troubled Asset Recovery Plan
(TARP). EEB Assistant Secretary Dan Sullivan and Ambassador
Whitney met with Norwegian Central Bank officials, discussing
perceptions of the failed bill, the approximately $400
billion Norwegian Global Pension Fund (one of the world's
largest sovereign wealth funds) and Norway's role within
international regimes and global markets. (Note: Sullivan's
Oslo meetings were on the margins of his participation in the
Scandinavian Renewable Energy Forum, noted in forthcoming
reporting cable). End Summary.

Turbulent Capital Markets Sting Norway
--------------


2. (U) The growing international finance crises adversely
affected Norwegian capital markets, with the Oslo stock
exchanging plummeting to its sharpest decline since 1991. The
shares of leading financial institutions, including DnBNor
and Storebrand tumbled, in addition to perceived "safe"
mammoth companies, like energy giant StatoilHydro and
fertilizer conglomerate Yara. The Norwegian building industry
is facing tough times, with estimates that 20,000
construction jobs projected to be soon lost, with an
estimated additional 20,000 positions threatened.


3. (U) Many media analysts credit the immediate Norwegian
market fall as reacting to the failed TARP legislation.
Media reported that Prime Minister Stoltenberg, prior to the
TARP's vote, warned that not passing the legislation would
represent a defeat for those seeking to "liberate" the market
and finance institutions. Following the TARP's downfall,
Stoltenberg was reported as called the result a failure for
American politicians. Norwegian commentators attribute the
TARP's rejection to the American aversion to the
legislation's "social overtones."

Sullivan Discusses Norwegian Economy, Global Fund and
Financial Policy
--------------


4. (C) On September 30, Assistant Secretary Sullivan and
Ambassador Whitney met with the Norges Bank Governor Svein
Gjedrem and Norges Bank Investment Management (NBIM)'s global
investment leadership, discussing perceptions of the failed
TARP legislation, the Global Pension Fund and Norwegian

fiscal policy, at home and abroad (Note: NBIM is charged with
the daily investment management of the Global Fund's
portfolio). Although Gjedrem stressed that the Norwegian
domestic economy was still prosperous, benefiting from high
export values and inexpensive imports, the growing credit
crisis was hitting home. (Note: Norway is the world's third
largest exporter of gas, and fifth of oil). For example, the
Global Fund is invariably tied to world markets: by
legislation, it must invest its entire portfolio in foreign
investments.


5. (C) Gjedrem pointed out that the value of the currency
exchange market was seriously destabilized by recent events,
with a resulting drop in Norwegian interbank lending. The
Governor noted that an unavailability of dollars would
threaten the ability of Norway's money markets to act
efficiently, and that the freezing-up of the euro-dollar
market would continue for the foreseeable future. (Note:
Norges Bank and the Federal Reserve agreed on September 29 to
increase an existing facility from $5 billion to $15
billion). Sullivan also advocated the need for European
central bank coordination in halting the global financial
crisis, and applauded the GON's related efforts.


TARP'S Failure Hurts Reputation
--------------


6. (C) Gjedrem stated that not passing the TARP was
damaging, but believed similar legislation would eventually
pass. While US financial institutions will eventually
rebound, he voiced concern that the reputations of the
Federal Reserve and FDIC, otherwise strongly respected by
European central banks as highly efficient, would suffer from
a loss of prestige. In short, the TARP's failure would
undermine existing confidence in those USG institutions, and
weaken their reputation.


Scandinavian Meltdown and Investment Opportunities .....There
and Back Again
-------------- -


7. (C) The Governor noted that current international
financial institution failure remains uncommon in the
Nordics, with the exception of a few mid-sized Danish banks.
(Note: the Icelandic government recently stepped-in and
rescued the investment giant Glitnir). Gjedrem briefly
described a banking crisis which hit Nordic banks in the
1990s. At that time, governments stepped in and rescued
distressed institutions. The GON, for example, acquired the
debts of DnBNor, Norway's largest financial institution. The
GON eventually sold-off its equity in the firm, recouping its
investment--and making a modest profit. Sullivan emphasized
that the full impact of the TARP was misunderstood, as it
would have similarly allowed the USG equity shares in the
failing institutions.


8. (C) NBIM executives, while remarking on the "disorderly"
global markets, stressed investment opportunities for the
Global Fund. (Note: the Global Fund invested approximately
$280 million in Lehman Brothers prior to the investment
house's demise). The Global Fund's stated goal of increasing
its share of equities to 60 percent of its total portfolio
(currently 52 percent) would not be hindered by global market
instabilities. Rather, the NBIM executives recounted how
they undertook a buying program following the international
market destabilization immediately after September 11, 2001.
Commenting on how the Global Fund sees opportunities in the
current market, Gjedrem acknowledged that the Fund would act
aggressively, seeking deals--an unusual stand which makes the
Global Fund feel "quite lonely" in the investment world.

Norway and its Fund: IMF, OECD and the Ethical Guidelines
--------------


9. (C) Sullivan discussed Norway's role in the IMF and
OECD, including the GON's leading role in formulating a set
of best practices for sovereign wealth funds within both
institutions. The Assistant Secretary noted the strong
collaboration between the GON's Ministry of Finance and the
Department of Treasury in these areas. Gjedrem frankly
stated that it was crucial for Norway to have open and free
international markets. As Norway purposefully decided that
the Global Fun would not invest domestically, the only
alternative would be to decrease the revenues from oil and
gas resources (taxed up to 78 percent) by simply scaling back
energy production.


10. (C) Ambassador Whitney raised concerns with the Global
Fund's ethical guidelines (Note: The Finance Ministry
developed several guidelines, and invested companies risk
divestment should they fall into one of these categories).
The Global Fund's ethical guidelines are subject to a GON
review process this year, with a White Paper slated for 2009
possibly recommending changes. The Ambassador stressed the
need for consistent, clear and even-handed guidelines. While
the Finance Ministry is responsible for the guidelines review
process, Gjedrem recounted that the Bank has publicly
commented on the need for clear guidelines based on
international standards, and not subject to political or
domestic pressures.

Comment: Which Way is Up?
--------------


11. (C) As the Norwegian economy rebounded on October 1 with
the Oslo stock exchange gaining five percent, liquidity
concerns remain. Norges Bank's offer of a three day liquidity
loan to participants in the Norwegian money market
contributed to an upbeat exchange--quelling, at least
momentarily, Norwegian lending institution liquidity
concerns. Commentators attribute optimism that a new USG
rescue package will emerge to further uplift the Norwegian
stock market. Despite such volatile markets, the Global Fund
is set to find bargains and take risks. The GON's active
participation in sovereign wealth fund best practice
initiatives is driven largely by practical need, and perhaps
less altruistic than proposed. Norway relies on
well-functioning, and open, international markets--"safe"
places to invest their oil and gas largesse.
WHITNEY