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DC debt showdown doesn't faze Alaska investment managers

Permanent fund, state treasury express confidence in solution to crisis before harm to state

Posted: July 5, 2011 - 9:33pm

Despite the stakes in the highly partisan debt ceiling battle now ongoing in Washington, D.C., the state’s top public investment fund managers say they don’t expect it to harm the tens of billions of dollars the state has invested in financial markets.

“This is political theater we’re dealing with,” said Mike Burns, executive director of the Alaska Permanent Fund Corp., which manages the state’s $40.6 billion Permanent Fund.

Republican leaders in the U.S. House of Representatives are threatening to block the increase of the nation’s debt limit unless President Barack Obama agrees to cuts in programs they want to see cut. Obama and Democratic congressional leaders, meanwhile, are standing firm on wanting tax increases to accompany spending cuts.

Federal budget officials say that by early August — the specific dates vary — the nation will exceed the statutory debt limit.

That could force cuts in spending on programs, or a previously unthinkable default on the nation’s debt, as it stops paying interest on Treasury bills.

Gary Bader, chief investment officer for the Alaska Treasury Division, doubts it will come to that.

“These things frequently have to go to the last minute before somebody blinks,” he said.

Bader handles investments such as the state’s $20 billion in retirement savings, as well as a further $20 billion other funds.

Bader said the financial markets appear to agree with his belief an agreement will be reached because they are not pricing in additional default risk in Treasury bills. If the risk of default were high, the U.S. Treasury would have to pay higher interest rates in order to borrow money to compensate borrowers for the chance they wouldn’t get their money back.

“The market still thinks Treasuries are pretty safe,” Bader said.

What the two investment professionals say they don’t know is whether the two sides will reach an agreement before or after the deadline, and what exactly the consequences of even a technical default would be.

“This is all new ground to plow,” Bader said.

“I think an agreement will be reached, but how timely, I can’t honestly say,” Burns said.

While some observers have expressed concerns that if the world’s most credit-worthy nation were to decline to pay its bills it could have a devastating effect on the U.S. and even the world economy, Bader said he thought an agreement would be reached before that happened, even if it was after the debt limit was reached and a technical default.

“If there were a technical default, and dire consequences, I think they’d remedy it in a heartbeat,” Burns said.

He remembered back a few years to the Troubled Asset Relief Program, which failed narrowly in the House of Representatives. The stock market did a nosedive, and Congress quickly approved the legislation.

And U.S. Treasury bills remain the safest thing in the world to buy, Bader said.

The Alaska Retirement Management Board, as of its most recent report, held about $2 billion of its portfolio in Treasury bills.

“Even if there is a Treasury that doesn’t get paid immediately, that’s not to say that they wouldn’t eventually be paid,” he said.

“There’s a question if the United States would be viewed overseas as a less credit-worthy risk if it allowed something like that, but I think the United States is still gong to be a credit-worthy risk,” Bader said.

• Contact reporter Pat Forgey at 523-2250 or at patrick.forgey@juneauempire.com.

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