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Foreign funds helping U.S. in crisis
“In an era where financial assets under management, not the size of a standing army, increasingly dictate the influence of nations, massive pools of capital controlled by foreign governments have been labeled a clear and present danger by both the United States and European Union,” said Joseph Quinlan, chief market strategist at Bank of America.
But he added that the increasing power of the funds outside China was mostly the result of the spectacular rise in oil and other commodities, which filled the coffers of the petro-states but has been rapidly reversing since July.
“Energy policies that effectively reduce world oil demand, oil prices and oil profits would go a long way in diluting the financial clout of the world’s major oil producers and their sovereign funds,” Mr. Quinlan said. “Reduce the number of petro-dollars in circulation, and you reduce the influence of SWFs.”
Even as their sources of revenue and earnings rapidly dwindle, perceptions of the funds have been improving in light of the constructive role they played in stabilizing the U.S. financial system earlier this year.
Indeed, the crisis could have been far worse had SWFs not plowed huge sums into troubled financial services companies in the past year.
For example, China Investment Co. has invested $5 billion in Morgan Stanley; Abu Dhabi’s Investment Authority took a $7.5 billion stake in Citicorp; Kuwait’s Investment Authority bought a $5.4 billion equity share in Merrill Lynch; and Government of Singapore Corp. (GIC) a $9.8 billion stake in the Swiss bank UBS.
Anne Miroux, chief of investment analysis at the Geneva-based U.N. Conference on Trade and Development, and lead author of the U.N. report, said that SWFs still have “huge potential” and that they are now going beyond traditional areas such as services.
Robert Vastine, president of the U.S. Coalition of Service Industries, an industry umbrella group, said the funds can and should do more.
“All this wealth has to be recycled, or Wall Street is not going to get help,” he said in a telephone interview. “These funds have been extremely helpful. The key thing is we need to recapture these funds to generate stability and growth in our economy.”
The Treasury Department, with an eye on financing the nation’s huge national debt and current account deficits, has been the chief cheerleader encouraging investments by sovereign funds in U.S. companies and markets.
“Maintaining open investment policies is more important today than ever,” in light of today’s financial crisis, said Robert Saliterman, a Treasury spokesman.
Despite their recent stabilizing role in shoring up the capital base of major banks heavily impacted by the mortgage crisis, there is still suspicion of the funds in many countries - especially funds from emerging nations, the U.N. report said.
Concerns include the possibility that SWFs could gain control of strategic industries or that such funds might invest in companies that were privatized in recent years and that improvements in efficiency might be rolled back.
“Investments by SWFs can raise concerns as to whether their objectives are commercial or driven by political, defense or foreign policy considerations,” writes Angel Gurria, secretary–general of the Organization for Economic Cooperation and Development in a June letter to the organization’s 30 members.
There is also skepticism in some quarters about investments from funds in countries that “lack a free market or respect for human rights and sound environmental standards,” the report said.
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