If we were policemen on duty and suddenly on that day, we 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 been used by former Malaysian premier Tun Dr Mahathir Mohamad in time of dire straits where decisive action must be made in saving critical institutions and assets, as he had demonstrated in the 1997 economic crisis.
Government institutions and corporations that faced the utmost difficulties could trigger a systemic risk to the country’s economy as a whole, must be saved first and prioritised above the blame game.
The problems besetting 1Malaysia Development Bhd (1MDB) — Malaysia’s strategic development company — is almost similar to the risks exposure of the 1997 financial crisis.
In 1997, the crisis involved many companies but now it is confined to a single company that holds a massive debt.
Much has been written about 1MDB especially with regard to politically charged expositions championed by the Opposition parties in Malaysia. But none thus far have touched on the geopolitical risk that 1MDB might bring if it is going to enter the event of a default and worse, foreclosure.
The greatest threat at hand is the loss of national strategic assets which are currently within the fold of 1MDB: The tract of land for Tun Razak Exchange in Sungai Besi and the number of power plants recently acquired by its subsidiary Edra Global Energy Bhd.
In what way 1MDB debt could be exposed to such problem? One of them is through the systemic risk of servicing debt with debt.
1MDB external debt exposure would pose a systemic risk to the national economy. 1MDB has hired investment bank Goldman Sachs, dubbed by many as “the bank that rules the world” 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 the 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 gross domestic product.
To manage this expectation, the Greek government then sought help from Goldman for a loan swap deal in order to mask 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’s economy as we can see today. On top of the national deficits, Greece currently is on the brink of economic collapse due to extreme austerity measures that are being imposed by powerful EU debt commission: European Commission, European Central Bank and International Monetary Fund. 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 a vulture fund. It is a type of fund that institution 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 did not expect some of their debts were already bought over by a 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 Ltd (subsidiary of Singer’s hedge fund Elliott Capital) filed a court injunction which was granted by Ghanian superior court to detain 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 was awarded by the 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 US and Europe.
Argentina is also fighting a ruling made by the New York District Judge Thomas Griesa to block all interest payments to the restructured bondholders unless payment is 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 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 coming especially from Malaysian Opposition parties are warranted, the manner they handle the crisis at hand as well as the solutions proposed are counter-intuitive 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 owes 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 author is a fellow at Putra Business School, Universiti Putra Malaysia.