http://archives.tcm.ie/businesspost/2008/03/02/story30894.asp
The European Commission and the US Congress last week floated operating guidelines for sovereign wealth funds (SWFs), which are the talk of the town in global financial circles these days.
SWFs are government-run investment vehicles. They have mushroomed over recent months, as banks such as Citigroup, Merrill Lynch and Morgan Stanley benefited from an overall US$67 billion (€44 billion) infusion into the US, from state-backed white knights offering bail-outs after the sub-prime crisis ‘‘We’re open for business,” was EU Commissioner Charlie McCreevy’s verdict last Wednesday.
However, Russian gas pipeline politics have prompted concerns about Moscow potentially using resource revenue for political purposes. The EC and US may seek transparent disclosure of investment strategies and for SWFs to adhere to purely commercial activity, although all relevant terminology awaits precise definition.
‘‘I think [SWFs are] quite constructive and we should be open to [. . .] that kind of investment,” said Federal Reserve chairman Ben Bernanke during an address to the US joint Houses last week. But last Wednesday, a bipartisan congressional task force was set up to look into operating guidelines for SWFs seeking to invest in the US.
No legislation is mooted, although EC head Jose Manuel Barroso raised this possibility, i f the transatlantic SWF spring-clean did not lead to greater transparency. The International Monetary Fund (IMF) will discuss an SWF code of conduct in April, and last week’s transatlantic think-ins will feed into the IMF process. Western policymakers and business leaders appear divided about SWFs: hard cash is welcome, but uncertainty remains regarding strategic intentions. A protectionist backlash may ensue, but guidelines could ensure a more transparent process and pre-empt barriers being thrown up.
Longer-established SWFs from the Gulf and Norway have been around for two decades, but newer, more assertive funds run by China and Russia are causing concern.
To date, SWFs have been long-term in focus – meaning that their capital infusions do not involve the volatile short-term ‘get in, get out, make a killing’ ethos that hedge-fund money brings. As Edwin Truman, senior fellow at the Peterson Institute for International Economics, told The Sunday Business Post: ‘‘The funds differ from each other in their investment strategies. Some buy stocks and bonds, others buy companies, in whole or a controlling interest.”
China’s fund – run by the Central Bank – has bought itself a seat on the board of Barclays Bank, and last week’s meetings in Washington and Brussels were in part prompted by Russia’s creation of a new national wealth fund on January 30.Putin’s anointed successor, Dmitri Medvedev, hinted that this would seek policymaking influence wherever it distributed its largesse.
The estimated net global value of SWFs is around US$3 trillion, but Morgan Stanley expects this to balloon to US$17 trillion in coming years, To compare, US GDP is aroundUS$12.5 trillion.
The west’s traditional financial centres may lose out, at least in the immediate term, as the credit crunch tightens. Speaking at a Munich conference last week, Guy Hands of private equity group Terra Firma, said: ‘‘Effectively, you will just intermediate Wall Street and the City out of the picture. It is already happening.”
He said the Abu Dhabi Investment Authority (ADIA) – valued at around US$800 billion and currently the world’s biggest SWF – ‘‘will effectively replace Wall Street’’, if current trends continue.
