The Risks of Putting Up Barriers to Sovereign Wealth Fund Saviours; Let's Shake on It: Chancellor Alistair Darling Meets Chinese Premier Wen Jiabao to Discuss Sovereign Wealth Funds Earlier This Year
Byline: BILL CONDIE
THE credit crisis has been dragging on for a year, with no end in sight, so it's no wonder troubled financial institutions and Western governments are taking more interest in sovereign wealth funds (SWFs).
These largely anonymous and controversial government funds, which have built up tens of billions in dollars in cash reserves from oil revenues, suddenly appear to be potential saviours for companies in these credit-starved times. So it was that Barclays raised [pounds sterling]4.5 billion last month in part from the Qatar Investment Authority and just last week US giant Dow Chemical raised $1 billion from a similar Kuwaiti fund to buy Rohm & Hass.
The money is all well and good. But the big issue for many is that these SWFs are closely tied to national governments and appear to lack transparency.
That has prompted serious talk among Western governments about imposing restrictions or controls on these funds. Critics fear the economic clout of SWFs will lead to political influence in their host countries.
Now the author of a new report, the first to look in detail at the strategies and ambitions of SWFs, has warned Western politicians that protectionism could spark off tit-for-tat trade wars that could drag down the world economy for years.
"A political response, rather than one based on real economic concerns, would affect everyone," said Emad Tinawi, vice-president of the corporate advisory firm Monitor Group.
He warned that if the US curtails the fund's activities, other countries will retaliate. "That includes countries in the Middle East and others home to sovereign wealth funds. Protectionist policies in Washington in the 1930s sparked an economic crisis and the world took decades to recover," he said.
Sovereign wealth funds have been around since the Kuwait Investment Authority was established in 1953, but have become more visible as their coffers have swollen from oil revenues or massive trade surpluses.
The 29 sovereign wealth funds monitored by Morgan Stanley are worth almost $3 trillion ([pounds sterling]1.52 trillion), with the Abu Dhabi Investment Authority, the biggest, worth about $875 billion.
The IMF estimates that they will be worth $12 trillion by 2015.
The credit crunch has focused even greater attention on SWFs. It's not just Barclays but also UBS and Citigroup, among others, that have tapped foreign funds for major cash injections. The phenomenon is not limited to banking.
QIA holds diverse stakes including the London Stock Exchange and nursing group Four Seasons Health Care, plus the housing development planned near the Royal Hospital in Chelsea. …