April 29, 2008
Column: Do not panic over foreign wealth
It sounds like something from a political thriller by Michael Crichton. Arab sheikhs and Chinese communists amass billions of dollars. They wait for a moment of financial weakness in the US. Then they use their massive “sovereign wealth funds” to buy large stakes in strategic US firms. They secure places on the board. Then, at a crucial moment, they…
Well, what exactly do they do? Slip out of a board meeting and blow up the building? Deliberately destroy the companies in which they have invested, in the hope of harming the hated Americans?
The fears aroused by the rise of sovereign wealth funds are deep – but vague. SWFs are investment vehicles controlled by governments. They are rich and getting richer. They currently control about $3,000bn and their total valuation by 2015 has been variously projected at anything between $10,000bn and $15,000bn.
The remainder of this column can be read here. Please post comments below.
“Finanz und Wirtschaft” gave over a page to this topic this month.
SWFs are nothing new, the Kuwait one was founded in 1953, Temasek in 1974, the Abu Dhabi one in 1977, the GIC(S’pore) in 1981,
the Brunei one in 1983….
But SWFs should be extra careful these days where and via whom they invest their cash abroad. As the saying goes: “Good judgment comes from experience and experience comes from bad judgment”.
Posted by: J.J. | April 29th, 2008 at 10:01 am | Report this commentGR: “The trouble is that legitimate caution about sovereign wealth funds could easily spill over into illegitimate hysteria”. Absolutely agree with the tenor of your argument. Industrial espionage and political machinations have to be guarded against, but also balanced against the upside which you document.
Regarding your point on hysteria, big money managers, who do not have exposure to the retail space, and who are therefore little understood by the man in the street (and MPs), seem to go through cycles of attracting this type of reaction. Today sovereign wealth funds, last year private equity, before them hedge funds. It’s clear that sovereign wealth funds, and their counterparts the national pension funds, will have an increasingly important role to play as their wealth and sophistication increase, as we have seen with private equity.
If the sting can be drawn in a sensible way, then that will only be a benefit to the world economy.
Posted by: AYC | April 29th, 2008 at 10:15 am | Report this commentunderstanding sovereign wealth funds:
1) Their “wealth” has been hugely overestimated.
-These countries operate de-facto USD currency pegs and thus their currencies have weakened with the dollar although some countries have allowed minor appreciateion of their currencies.
-because they conduct their trade in USD (ie, oil, gas, and 99 percent of comoddites are prices and settled in USD) naturally most of their assets are US treasury bonds and agency securities. meaning they sell the US oil and get not cash, but ten year USD IOU’s (there is a historical reason for this. in the 70’s the german mark and japanese yen were fixed to the USD just like the chinese yuan and opec currencies today. The implications were also exactly the same as with china and the resulting rising price of oil toady, except in one small feature. the US treasury, as a result of rising oil prices and germanys and japans unwillingness to strengthen their currencies, decided to subsidize its oil bill by paying for it with printed US Dollars. This had the negative effect of causing hyper inflation in both the US and Iran, america’s key oil supplier. contrary to popular thought, it was not the arab oil embargo that caused inflation, but the US governments deliberate printing of money to subsidize its oil bill. Of course the Shah of Iran complained too and threatened to sell his oil in DEM and JPY so he was promptly and conveniently deposed
-china, russia, and opec, while seemingly much more well off, realise the delayed inmpact of owning so many USD IOU’s, meaning that their US treasury bonds will soon be worth a hell of alot less once the inflationary effect kicks in and interest rates rise rapidly. Also, because US treasury debt is not a “real” asset, they have no inflation protection nor the same tradable value when interest rates start rising, a double wammy
- There is no way the american government will let these countries make any investment into their real assets, ie their companies
- the US also doesnt sell anything that anybody wants, except technology and financial products, and the chinese and opec are currently barred from buying technology, only worthless US asset backed and mortgaged backed securities
- the capital injections from swf into banks like citi have actually deluted their voting rights, citi may even buy back those shares at some point, ensuring the saudis will never have a controlling state
- direct control is blocked, remember dubai ports
in other words, these SWF funds are screwed as they cannot sell their stock of USD debt into anything else which beckons the old saying,
if i owe you some money, i am in trouble. if i owe you lots of money, YOU are in trouble..
Posted by: Reza | April 29th, 2008 at 10:27 am | Report this commentLast month a ‘discussion’ broke out in this blog about whether GW Bush was to blame for the current financial crises. I would say the result was a draw–hey! the markets will do what the markets will do–but on this one, he certainly *is* to blame, if blame is the right word, for the SWF.
It’s hard for me to find a comparison in economic history to the state of the States, Britain’s empire was in credit right through WWI, I’m not up on the Austro-Hungarian and, earlier, the Spanish. However, Niall Ferguson has drawn some (negative) parallels with the Ottoman Turks in the FT: (1 Jan.2008 “An Ottomon warning for indebted America).
In any case waging war is expensive, even if it is ‘only’ a small one, and waging war, lowering taxes and borrowing your war-making money from foreigners is IMO stupid, but then, I write from the vantage point of the lender not the borrower.
Posted by: MaryCunningham | April 29th, 2008 at 12:10 pm | Report this commentFor countries that depend for their wealth on a narrow range of exports (small wealthy industrial countries like Taiwan and countries dependent on commodities exports, SWFs can be a useful tool to hedge their undiversified economies. Oil producing states can invest in securities that do well when oil prices are low, for example. Since it is difficult (if not impossible) for such countries to build diversified economies as one sees in the U.S. or E.U., such hedging is merely prudent.
Posted by: RWB | April 29th, 2008 at 3:56 pm | Report this commentTo what extent are investments like the bailing out of various failing US investment banks inspired by the protection racket that America runs to keep the likes of the House of Saud in power in exchange for recycling the proceeds of oil back to the West?
(Mainly recycling in terms of unnecessary arms purchases and unrealistic projects that pay Western companies handsomely but cause little development in the client country).
Posted by: Pacifist | April 29th, 2008 at 4:13 pm | Report this commentJust a simple question:-
To what extent are investments like the bailing out of various failing US investment banks inspired by the protection racket that America runs to keep the likes of the House of Saud in power in exchange for recycling the proceeds of oil back to the West?
(Mainly recycling in terms of unnecessary arms purchases and unrealistic projects that pay Western companies handsomely but cause little development in the client country).
Posted by: Pacifist | April 29th, 2008 at 4:15 pm | Report this commentReza,
I hardly know where to start your points are so wild, but I’ll make an effort. SWFs are not the same thing as foreign exchange reserves, which
is what I think you are confusing them with. Hence your argument is a mish-mash, mixing up SWFs with “balance sheet” holdings.
To be clear, SWFs are for the most part separate from foreign exchange reserves, and are perhaps easiest visualised as giant investment funds, with one client.
They hold investments in a variety of different asset classes, including infrastructure, which you allude to, but also commodities, hedge funds,
equities, wider private equity funds, and of course direct investments in companies.
Your comments are at points contradictory and sometimes untrue. For example, you say that “There is no way the american government will let these countries make any investment into their real assets, ie their companies”. You then go on to mention the capital injections into banks such as Citi. Well then, what do you call those, if they are not direct investments?
Your understanding of the terms of those investments is also sadly lacking.
MaryCunningham, please explain how you can blame Bush for SWFs. The twin deficits maybe, but SWFs?
I think we’d better stick to middle east politics on this blog.
Posted by: AYC | April 29th, 2008 at 7:23 pm | Report this commentIn general all the stressing by US and some EU countries about sovereign-wealth funds is difficult to take seriously, considering the fact that in particular the US government’s policies have contributed significantly to the growth of these funds!
Are’t these funds more or less huge Hedge Funds? Just owned mostly by the major oil-exporting countries. With oil prices probably remaining high this will mean funds in trillions of dollars at some point. This is investment capital. That’s a good thing in the world. I think sovereign-wealth funds could potentially be a positive development for the rest of the world. By investing globally you have global supply of capital. Even if some of the investors are perceived as hostile governments or potentially hostile it does not follow that this is a threat to US welfare or security or any other country. It has been argued that using such funds to purchase companies does not undermine national security just because the purchaser is a foreign government, but instead increases security because “the investment is a hostage”. It could result or bring about very good behavior by the investor, who is a stake holder in the very society it invests in. Obviously it is different if the purchase is a security risk. The concern with Dubai /Ports case (which resulted in a hysterical knee jerk reaction from the US public post 9/11, which is not all that unusual from the US public when it comes to anything or anyone deemed “foreign”) was that Arabs employed by the Dubai company would obtain information about the ports and could pass it on to Islamic terrorists.
Anyway, what the heck are these governments supposed to do with their huge dollar surpluses? we want them to be paid in dollars for their oil… and they want to invest them…they are hardly going to just purchase U.S. Treasury notes! No one with any real money and real economic sense does just that!
Posted by: Lisa-Helene Lawson | April 29th, 2008 at 7:50 pm | Report this commentPacifist,
The US has been pulling this magic trick for years. Because global trade and finance is conducted in dollars, and the US controls the supply and printing of dollars they are in effect able to control the entire basis of global trade and as a perk, get a hell of alot for free because their currency is a reserve currency and they can just print as much as they want. The reason it works is because people have (had) faith in the USD and or US treasuries as a medium of exchange and secondly, because there really was no competition. In other words, the saudis are perfectly able to use their US treasury bonds to buy european goods. however, there are only so many tresury bonds that the europeans want, hence a weaker dollar and less purchasing power for the Saudis. Of course nobody ever buys anything from the americans except crap or weapons (this is the recycling effect of the USD through USD pegged regimes), in effect meaning that the US is taking most of Saudi arabias oil and other world commodities for FREEEE!!! but nobody understands this concept, or at least they didnt understand it until now that the world is starting to reject the USD.
Key note, had the UK adopoted the Euro, the world would now be a very very different place. The addition of the UK into the EMU would have lent the final necessary support to the euro as a world reserve currency, meaning that oil would probably have immediately been priced 50/50 in euro and USD. This also means that their would not have been an iraq war because the UK would never have been involved. it also means that probably most world commodities would then be priced 50/50.
Can anyone imagine what that would mean for the US?
Posted by: Reza | April 30th, 2008 at 2:39 am | Report this commentLisa Helene,
IN fact, SWF’s are very conservative and most are their holdings are indeed UST notes and agency bonds. They are nothing like hedge funds because they own cash instruments ( not derivatives) and are not taking short positions. They have been trying for years to diversify out of USD, realising that they are indeed screwed by holding that worthless junk in the long run. this has had the effect of causing stock prices and real estate values in emerging markets to sky rocket (especially in the arab world as saudis prefer to invest their money near home out of fear of US seizure), the euro to rise and the USD to fall.
Also, remember that they DO NOT want to be paid in USD. THis is a very very very sensitive political issue. If the saudis were to even mention repricing oil in euro they would be invaded, full stop!..
Posted by: Reza | April 30th, 2008 at 2:51 am | Report this commentReza:”IN fact, SWF?s are very conservative and most are their holdings are indeed UST notes and agency bonds. They are nothing like hedge funds because they own cash instruments ( not derivatives) and are not taking short positions”
True. What I meant by the hedge fund comparison is that hedge funds and private equity funds are often criticized due to their lack of regulation and lack of transparency, which is very similar to the criticism most of the sovereign wealth funds face….and while I agree that SWF appear very conservative in their undertakings … due to the lack of transparency it is somewhat unclear what is exactly going or whether there is any corruption in management of them etc. In any event it is only in the last couple of years that they are investing aggressively in international companies …and I do not see that as a bad thing in itself…I am glad the funds are there …especially in this economy …they may save us from a significant global downturn…however, it is also true that if that happens, then new geopolitical dynamics most certainly come to play …but then maybe they have already….
As to the dollar…well, no one is more unhappy with the US dollar than me (as it certainly puts a damper on my traveling abroad!) On the whole, the US should be very grateful to the Saudis to hang in there with the US dollar…
Posted by: Lisa-Helene Lawson | April 30th, 2008 at 5:51 am | Report this commentoh, if its corruption you speak of then you are absolutely right. the arab SWF are the worse. but the arabs dont need the SWF to cause trouble, they have gold and fx reserves at every big bank in switz, lux, etc ,etc with which to cuase trouble with. they will never be able to buy any major assets. You may recall that the shah of iran bought a large share in daimler benz which he was then dilluted out of and forced to sell. The iranian government also owned 10% of thyssen krup which they were forced to sell and the shares were effectively frozen and the iranians couldnt exercise their voting rights. the arabs should expect the same treatment…
as for your second paragraph, i dont know if grateful is the right word….the saudi street is defintely not happy. their rulers may be given their lavish and disgustingly extravagant lifesyles.
Posted by: Reza | April 30th, 2008 at 7:56 am | Report this commentMs Cunningham mentioned GWB.
GWB’s hugely expensive invasion of Irak has set in motion a multiplier effect which has had very negative effects (not only in the USA) namely:
a) the USA has twin deficits
b) this caused a loss of confidence in the USD
c) the USD began to fall, also because there is
solid alternative now to the USD - the Euro.
d) the Subprime crisis has had a negative
knock-on effect on the US consumer
e) Now, remember that the US economy
depends on:
1) the US stock market going up
2) house prices in the USA going up
3) domestic consumption in the USA going up
However,
1) Is going nowhere
2) Are falling
3) Is falling
f)In order to
- stimulate US exports
- push up the Dow
- keep the US consumer in spend-mode,
US interest rates have had to be cut.
The result? The USD falls further.
BUT everything quoted in USD - oil,
metals, commodities (inc. RICE), raw
materials - goes, of course, up in price. Why?
Because producers and those who deal in those products wanted to be AHEAD of the next fall in the dollar and not to get caught with a depreciating currency. INFLATION!!
All this is very basic economics.
P.S. I saw film on German ZDF TV last night of
Posted by: J.J. | April 30th, 2008 at 12:43 pm | Report this commentpoor Filipino women in shanty towns, who cannot afford their basic food - RICE - any more, sorting food left-overs from hotels, restos (which we would feed to pigs) from black garbage bags, sorting it, and re-boiling
the remaining stuff and feeding it to young children.
With the exception of Norway and Russia, all those Sovereign Funds come from Dictatorships: Singapore, U.A.E. (Dubai, Abu Dhabi), Saudi Arabia, Kuwait…
Posted by: Enrique | April 30th, 2008 at 3:39 pm | Report this commentBut Sovereign Funds are nothing new and in the past the K.I.A. of Kuwait did an impressive job in Europe.
In Spain, the KIO (Kuwait Investment Office) invested from 1984 to 1991 over 400 billion pesetas (2,4 bn euros) according to his Administrator Al-Nauri, and got a profit of 100 billion pesetas (600 million euros). We are talking about a 17 years old data….
In Germany, KIA got a participation of over 14% in DaimlerBenz AG.
So important and well planned investment of Mideast Sovereign funds is nothing new. In Spain they are welcome (bad luck they didn´t got to undertake the acquisition of Colonial)
In the U.S. and the U.K. they hate Sovereign Funds from the U.A.E., Kuwait and Saudi Arabia because after all those nations are Dictatorships and are not Israeli fans….so sooner or later the U.S. will destroy them.
Posted by: Enrique | April 30th, 2008 at 3:50 pm | Report this commentwell the price of commodoties and inflation is a good reason for any country to consider dropping their peg to the US Dollar. The shortage of food is real and serious. It is on the agenda of the G8 this summer and the UN has formed a taskforce to deal with it…I imagine the old formulas of reforming trade policies , subsidy policies will be bandied about while more people starve…and little changes.
Reza and Enrigue, I do not buy your analysis that US would invade Saudi Arabia if they switched from USD to Euro…we (US) would all be to busy freaking out here in US as it would be a huge psychcological blow, political blow and economic blow to US…
I am not sure why countries have not gone Euro…it would be interesting to me to hear from others here (Mary?) as to why they think there has not been the switch… but fear of a “US invasion” or that US can destroy a counrty somehow if does..does not work for me…something else must be the impediment to why so many countries are not going Euro …as it seems a very just and pragmantic solution to some of their immediate problems…
Posted by: Lisa-Helene Lawson | April 30th, 2008 at 4:11 pm | Report this commentDear L-H L,
One obvious reason, already mentioned by the Saudis, is that they have significant Dollar assets already. Any switch away from the USD, with its actual and psychological impacts, will seriously reduce the value of those investments and harm the holder. Similar considerations must apply to the huge holdings by the Chinese of the Dollar assets.
best,
P
Posted by: Pacifist | April 30th, 2008 at 4:29 pm | Report this commentThank You P! That works for me! I can always count on you being lucid and reasonable! It is my morning…not sure what time it is for you…but have a good day/night or whatever!
Posted by: Lisa-Helene Lawson | April 30th, 2008 at 4:45 pm | Report this commentOn CNN’s ticker this afternoon: Iran dumps the
US dollar in oil trades.
It took the US dollar about 20 years to replace the GB pound as the world’s no.1 reserve currency. As things move much faster these days, the dollar might be dumped much sooner.
How is the US economy is going to recover, now that the off-loading of US consumer debt to foreigners is so public - in Europe anyway?
But…..as some well-known financial outfits are reportedly buying toxic debt from the long-suffering big banks, maybe containers full of MBS’s, CDO’s etc are now on their way to the Middle East, S’pore and China?
Posted by: J.J. | April 30th, 2008 at 4:48 pm | Report this commentAt any rate, the big banks are cutting staff in the West and hiring in Asia, increasing their office space in the East accordingly.
Well, Iraq did the same before being invaded by the U.S….so perhaps the Euro exchange means the beginning of U.S. invasion of Iran.
Posted by: Enrique | April 30th, 2008 at 8:29 pm | Report this commentIran has relatively little choice in its avoidance of the Dollar. Due to unilateral US sanctions, international Dollar transactions (which, in all cases, have to be cleared through a New York bank), do not go through. In fact, banks are barred from doing business with Iran and clearing Dollars.
In a way, the US war on Iran started long ago, at least in the economic sphere.
P
Posted by: Pacifist | May 1st, 2008 at 9:44 am | Report this commentLooks like they’ll have to dump the Euro soon as well Pacifist, as Iran’s biggest bank, the alleged terrorist financing Bank Melli, will soon be subject to an EU boycott after Italy removed its objections.
Posted by: AYC | May 1st, 2008 at 10:58 am | Report this commentDear AYC,
Now that France has a Zionist president, they will try to hijack the EU’s plicies too, although as far as I understand, Italy and Austria are not the only objectors.
Iranians are resourceful and experienced at dealing with race supremacists’ machinations.
Best,
P
Posted by: Pacifist | May 1st, 2008 at 11:31 am | Report this comment