THE GEOPOLITICAL RISK OF
1MDB
What will happen if we do
not solve 1MDB?
by
Wan Ahmad Fayhsal
If we were a policeman on
duty and suddenly on that day encountered a person who was badly hurt in the
aftermath of car accident. What would our first course of action be? Would it
be appropriate for us to figure out the damaged car, taking pictures of the
accident scene or rush to help the injured person?
Definitely we need to
assist the victim and figure out the other details of the scene later
especially in identifying the cause of accident.
This analogy has always
being used by former Malaysian premier, Tun Dr Mahathir in a time of dire
strait where decisive action must be made in saving critical institutions and
assets, as he had demonstrated in 1997 economic crisis.
Government institutions
and corporations that faced utmost difficulties which could trigger a systemic
risk to the country’s economy as a whole must be saved first and prioritized
above the blame game.
The problems besetting
1MDB – Malaysia’s strategic development
company – is almost similar to the risks exposure of 1997 financial crisis. In
1997, the crisis involved many companies but now it confined to a single
company that holds massive debt.
Much has been written
about 1MDB especially with regard to politically charged expositions championed
by opposition parties in Malaysia. But none thus far have touched on the geopolitical
risk that 1MDB might bring if it is going to enter into an event of default and
worse, foreclosure.
The greatest threat at
hand is the loss of national strategic assets which currently within the fold
of 1MDB: the tract of lands for Tun Razak Exchange (TRX) in Sungai Besi and
number of power plants recently acquired by its subsidiary Edra Energy.
Contagion
In what way 1MDB debt
could be exposed to such problem? One of them is through systemic risk of
servicing debt with debt.
1MDB external debt
exposure would pose a systemic risk to national economy. 1MDB has hired
investment bank Goldman Sachs, dubbed by many as “the bank that rules the word”
as its book runner. Goldman Sachs has histories of mismanagement and unethical
practices when it comes to managing debt.
The current economic mess
in Greece can be traced to role of Goldman in 2002. As an aspiring member of
the newly established Eurozone, Greece like any other European Union (EU)
members, was required to conform to Maastricht Treaty where its debt management
must not exceed 60% of its GDP.
To manage this
expectation, the Greece government then sought help from Goldman for a loan
swap deal in order to mask the Greece’s sovereign debt with a fictitious
exchange rate that would help the debt amount appeared to be smaller than it
should. The swap deal circumvented
weaknesses that existed in Eurostat’s reporting rules that do not
comprehensively keep tab on transactions involved with financial
derivatives.
The impact is huge to
Greece economy as we can see today. On top of the national deficits, Greece
currently is in the brink of economic collapse due to extreme austerity
measures that are being imposed over by powerful EU debt commission: European
Commission (EC), European Central Bank (ECB) and IMF. Dubbed as ‘the troika’,
they have subverted Greece political sovereignty under the suzerainty of the
international bankers.
Threat of Vulture Funds
Second geopolitical
threat is in the form of vulture fund. It is a type of fund institution that buy
over the debts at a discounted price in the view to gain profit through
interest charges by helping the indebted party – either country, company or
individual – in settling the debt within the grace period.
Not of all them are
sincere to help. There are sinister vulture funds that really preyed onto the
debtor’s agony with a view to tie them into a financial serfdom.
Case in point is
Argentina where it is currently being hunted by the vulture funds that have
acquired some portions of their national debt. Failing to resolve the debt
internally, Argentina had to resort to foreign assistances. In that chaotic
period of recession, the government then did not expect some of their debts
were already bought over by group of fund institutions that were known for
their efforts in rescuing distressed entities – including the vulture funds.
In 2012, the renowned
vulture fund manager, Paul Singer through his NML Capital (subsidiary of
Singer’s hedge fund Elliott Capital) filed a court injunction which was granted
by Ghanian superior court to detain the Argentina’s naval vessel ARA Libertad in the Ghana’s port city of
Tema.
As reported by The Financial Times, Elliot Capital had
been tracking the vessel and was bidding for the right moment in enforcing the
legal judgments at the port that falls under the jurisdiction that previously awarded
by US and UK courts. Not limited to that, creditors have been targeting planes
belonging to Argentina’s national airlines Aerolineas Argentinas’ as well as Argentina's
central bank money deposited in the U.S. and Europe.
Argentina is also
fighting a ruling made by New York district judge Thomas Griesa to block all
interest payments to the restructured bondholders unless the payment being made
to the vulture funds led by Paul Singer’s NML Capital. This has caused the
country to default last summer for failing to service their debt on time.
Although we cannot make
direct comparison between 1MDB and to a country that held massive national debt
like Argentina, the sensitivity and risk exposures on the debt that beleaguers
them has almost similar impacts.
1MDB must be resolved
From the situational
assessment above, the risk of 1MDB to fail cannot be taken lightly. It must be
viewed from a larger picture of geopolitics. Though most of the critics
especially coming from Malaysian opposition parties are warranted, the manner
they handle the crisis at hand as well as the solutions proposed are
counterintuitive to the risks discussed.
Bailout is a consequence
of decision that we must make in order to save 1MDB from encountering another
event of default. It’s not only due to the sheer amount of debt that 1MDB
currently owns but also the strategic assets of land and power plants that must
not fall into the wrong hands especially to the external creditors which care
not on the sovereignty of our nation.
The writer is a Fellow at Putra Business School. The article first appeared in The Malaysian Reserve, 28th April 2015.
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