The chief executive officer of Norway’s $570 billion sovereign wealth fund said the European Monetary Union, which consists of 17 countries sharing the euro currency, will survive amid increasing doubts that Greece will avoid becoming the first member to default on its debts.
“Some people are saying Europe is facing a choice, there is fiscal union or there is a break-up of the euro,” Yngve Slyngstad, the head of the Oslo-based fund, said yesterday in an interview. “I don’t think that’s necessarily true for the union. It may be true for one single member for the moment.”
Greece’s plight has put the euro through its toughest test since its inception 12 years ago. The currency, which German Chancellor Angela Merkel in January called the “embodiment” of Europe, may not survive the region’s debt crisis as taxpayers in Germany balk at the prospect of bailing out governments that failed to comply with fiscal rules, the Centre for Economics and Business Research said yesterday.
“We have proportionally a much higher stake in Europe than in the rest of the world,” Slyngstad said. “There are not a lot of market participants who expect the euro to break up and we don’t expect that either.”
Norway’s wealth fund, which has 60 percent of its bond holdings invested in Europe, has a “huge vested interest in the success of the euro,” he said.
Greek bond yields soared yesterday after European leaders postponed a decision to make a 12 billion-euro ($17 billion) loan payment, fanning speculation the country may run out of money next month. Yields fell today amid speculation that Greek Prime Minister George Papandreou will win a confidence vote enabling austerity cuts.
Europe also still needs to agree on the terms of a second bailout for Greece as a 110 billion-euro package agreed on in May 2010 proves insufficient.
Policy makers in Europe are coalescing around a model for the next bailout that would have bondholders roll over their investment, a solution that Fitch Ratings last week said wouldn’t constitute a default.
Norway’s wealth fund, which gets its capital from oil production, has since the end of 2008 through 2010 cut its combined holdings in Greek, Irish, Portuguese, Italian and Spanish government debt by 13 percent to 13.89 billion euros. An increase in Spanish and Irish bond holdings partially offset large reductions in holdings of Greek and Portuguese debt. The fund added about 3.5 billion euros in Italian bonds last year, after slashing its holdings in 2009.
Slyngstad said the main risk associated with a Greek default comes from the threat of contagion. The oil fund’s holdings of Greek bonds are now “quite low,” he said. “A lot of the concern for the moment is the secondary effect on the European financial sector,” he said. The oil fund has a “favorable” view of covered bonds versus senior debt, he said.
Greece’s 10-year bond recouped most of yesterday’s losses as the yield eased 34 basis points to 16.28 percent. The debt yielded 14.02 percentage points more than 10-year German bunds, Europe’s benchmark.
Standard & Poor’s on June 13 cut Greece by three levels to CCC, the world’s lowest debt grade. Ireland and Portugal also sought emergency loans in the past year, while Spain’s finances came under scrutiny last week, pushing the extra yield on its 10-year bond to 261 basis points, the highest weekly close since January.
Moody’s Investors Service warned on June 17 it may cut its Aa2 rating on Italy, whose 2010 debt reached 119 percent of gross domestic product, Europe’s second highest after Greece.
Norway’s oil fund is Europe’s biggest equity investor and got its first capital infusion in 1996. It’s mandated to hold 60 percent in stocks, 35 percent in bonds and 5 percent in real estate in rules set by the Finance Ministry. The fund first moved into stocks in 1998, added emerging markets in 2000 and this year bought real estate to lift returns and safeguard the wealth of the world’s seventh-largest oil exporter. The fund invests outside Norway to avoid stoking inflation.
Norway, a nation of 4.9 million people, generates money for the fund from taxes on oil and gas, ownership of petroleum fields and dividends from its 67 percent stake in Statoil ASA, the country’s largest energy company.
The fund returned 9.6 percent last year as stock markets rallied, adding to a 26 percent gain in 2009. It grew 2.1 percent in the first quarter, the smallest return since the second quarter of 2010, as European bonds slumped.