Big banks made an early start in punishing Libya

May 26, 2011

By Una Galani
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

DUBAI — It looks like big banks made an early start in punishing Libya. It’s not a surprise to see a roll call of top international financial institutions listed in a leaked report detailing the holdings of the country’s $53 billion sovereign wealth fund at the end of June, 2010. At the time, foreign governments had, after all, fallen over themselves embracing the regime of Muammar Gaddafi. But for the all the sudden embarrassment of association, some will be looking more red-faced than others.

The Libyan government fund had lost 4.5 percent of its value in the three months ending in June last year. That’s not hugely disastrous given the state of the global economy at the time. But some bets were worse than others and the fund, before being frozen by Europe and America, was clearly challenging the notion that sovereign funds should help cushion their home country’s financial security.

Banks that designed the loss-making structured products will be doubly embarrassed. The LIA lost 70 percent of the value of a single product bearing the name of Societe Generale which had a book cost of $1 billion, in addition to two other poorly performing instruments from the French bank. Products bearing the names of Dresdner and Credit Suisse were also in the red. In total 7 percent of the LIA was held in alternative investments — that’s bold for such a young fund.

Some of the LIA’s other decisions look odd too. Instead of investing outside the country to diversify its economy, 37 percent of its assets were held in cash and deposits mostly with the Central Bank of Libya. In equities, the oil dependent country was heavily exposed to the energy sector with stakes in everything from Exxon Mobil to Royal Dutch Shell. That opened a second channel of vulnerability to oil price fluctuations.

The rationale of other decisions is unclear. Does it make sense for the LIA to buy bonds from other oil dependent economies, such as Abu Dhabi? Or into other sovereign funds like Bahrain’s Mumtalakat? That kind of investment might generate stable returns but it doesn’t help diversify the economy. Finding a home for $53 billion might not be an easy task, but LIA and its money managers were hardly doing a top job.

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