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 �00A;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