"You have been warned" - Iternational Law Compromised, Again - Implications of US foreign policy on US government debt securities - May 13, 2024
Over the past fifty years, the decision to include U.S. government bonds in an investor's portfolio has been a 'no-brainer.' U.S. government securities have long served as the go-to core building block in portfolio construction for most global investors. Considered to be of high quality, risk-free, highly liquid, and denominated in the main reserve currency, US government securities have played a central role in financial markets and for investors worldwide.
However, recent U.S. government actions and threats to the International Criminal Court (ICC) bring into focus the fit of these securities in portfolios. Of particular concern is the recent disregard for international law expressed by US officials which may introduce potential risks to this seemingly straightforward portfolio allocation decision. While this is not the first time the US has threatened the ICC, prior threats did not get the same degree of global attention. Although the US is not party to the Rome Statute of the International Criminal Court which founded the ICC in 2002, according to the ICC website, the ICC now has 124 states are members.
Unless there is some constructive development, recent US actions and patterns of behaviour for several decades concerning the ICC, could trigger a negative spillover onto US financial assets, particularly government securities. This massive market, sized at $26 trillion at year-end 2023, dominates global investor portfolios. Ethical investors may begin to think twice about how well these assets fit their investment guidlines.
For certain investors, especially sovereign wealth funds or large pension funds that adhere to robust ESG and ethical investment guidelines, there could be a need for a reevaluation. In the past, when the US threatened the ICC, ESG, ethical and sustainability considerations were a second thought at best for most global investors, including large sovereign wealth funds. Now, in 2024, these same investors more strictly adhere to strict ESG, sustainability, and ethical guidelines.
ESG investing typically involves considering environmental, social, and governance factors alongside financial performance when making investment decisions. Governance practices include assessing how
governments and corporations conduct themselves in terms of ethics, transparency, and accountability.
What if investors consider reevaluating whether the U.S. government's foreign policy aligns with their ESG criteria and values? Investors may need to re-examine the social implications of the U.S. government's foreign policy, including its impact on human rights, peace, stability and the environment. Indeed other nations can also be scrutinized, however, we have focused on the US given the critical role of US government securities in markets and portfolios. If such money managers are true to the practice, the long-term outlook for US government securities will be less promising for the reasons mentioned. ‘You have been warned.’
Notes and References
124 States Parties to the Rome Statute - US not
The US, a major democracy and global power is not party to the Rome Statute. Other countries on this list include N. Korea, China, Russia, India, Israel, Iraq, Pakistan, Qatar, Syria, Saudi Arabia, Iran, Sudan, and Egypt.
On May 6, 2002, The U.S. formally announced its intent not to ratify the Rome Statute. John R. Bolton, U.S. Under Secretary of State for Arms Control and International Security, sends a letter to Kofi Annan, U.N. Secretary-General, stating that the U.S. has "no legal obligations arising from its signature on" the Rome Statute and it does not intend to become a State Party to the ICC. - Source ICC.
The map below shows parties to the Rome Statute in green. Other countries in orange were signatories, never ratified and subsequently withdrew, including the US.
Source: Wikipedia
$26 Trillion - Massive Market
US Treasury Securities Total Outstanding Year-End 2023
Source: Board of Governors of the Federal Reserve System (US), Federal Government; Treasury Securities; Liability, Level [FGTSL], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/FGTSL, May 3, 2024.
References
* You have been warned. - This is the final sentence from the letter sent by the US Senate, signed by twelve US Senators to the International Criminal Court at the Hague, The Netherlands. - https://www.politicom/f/?id=0000018f-4e0e-d759-a9ffminal-ff4ee9420000
International Criminal Court - https://asp.icc-cpi.int/states-parties/states-parties-chronological-list
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