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Monday, January 21, 2008

Sovereign Wealth Funds threaten the sovereignty of Western countries

Swaminathan S Anklesaria Aiyar, STOI 20 Jan 2008
For 60 years, the International Monetary Fund has bailed out distressed economies, imposing onerous conditions aimed at ensuring that the loans are repaid. The borrowers have often complained that loan conditions violate their sovereignty. The IMF is dominated by rich countries, and always has a European chief. So, leftists have long accused the IMF of being a tool of western imperialism, controlling the Third World through financial muscle.
Today, a remarkable transformation has taken place. Very few developing countries are borrowing from the IMF, which therefore cannot meet its running costs and is retrenching 400 of its staff. Meanwhile, developing countries have amassed trillions of dollars of foreign exchange. They are using these funds to bail out Western financial institutions hit by the housing collapse in the US. In the process, they could acquire more influence over those they rescue than the IMF could ever dream of. This can with only modest exaggeration be called Eastern neo-colonialism, in financial, though not military, terms. It is already giving the shivers to Western governments.
Last week, Citibank — the world's biggest commercial bank — received $ 14.5 billion from investment funds in China and Kuwait, over and above the $ 7.5 billion it got last November from the Abu Dhabi Investment Authority. Merrill Lynch got $ 5.6 billion from Temasek of Singapore last November, and is now negotiating another $ 6.6 bn. The top Swiss bank, UBS, suffered mortgage losses of $ 10 bn and was rescued by investors from Singapore and the Middle East. The list of distressed Western financial institutions keeps growing, and many will need repeated injections of billions. In the process, they are increasingly becoming owned by Asian government funds. These flows from Asia to the West now dwarf anything the IMF ever gave. Most IMF loans were well below $ 1 bn, and virtually none exceeded $ 4 bn. Never has the world witnessed such a remarkable reversal of financial roles and muscle. Western countries are now the ones worrying about loss of sovereignty, and of neo-colonial subjugation by the new financial overlords of Asia.
Historically, Third World countries have depended on dollars from the West. But after the Asian financial crisis, many Asian countries decided to run big current account surpluses, and so accumulated billions in forex reserves. Meanwhile, the sharp rise in oil prices gave oil exporters unprecedented surpluses, estimated at $ 300 bn per year. So, the balance of financial advantage shifted from the West to the East. Countries with long-term financial surpluses have placed part of their forex reserves in what are called Sovereign Wealth Funds (SWFs), to make long-term investment for future generations. These funds today control a mighty $ 2,876 bn, almost thrice the GDP of India. The lion's share belongs to oil and gas exporters. India too should enter the fray, with a modest kitty of say $ 30 bn. What are the main differences between the old and new rescue outfits, the IMF and Sovereign Wealth Funds (SWFs)?
The IMF provides loans to distressed governments, while SWFs invest in equities, including those of distressed MNCs. The IMF imposes onerous conditions on borrowers. SWFs don't impose conditions, but become part-owners of the distressed corporations, with obvious implications for influence and control. The IMF takes many months to draw up detailed loan agreements with conditions, whereas SWFs make money available almost instantly. This makes SWFs more attractive to those in distress, but also more dangerous in a long-term sense. Successive injections of equity by SWFs may enable them to not just influence but take over western MNCs.
This is the new fear stalking western governments. Already France and Germany have said that they will not allow backdoor takeover in this manner. No backdoor takeovers have been attempted so far. But given the sheer size of SWFs, it will happen in some cases. In Thailand, Singapore acquired control of a Thai telecom firm owned by former Prime Minister Shinwatra, and caused a full-blown political crisis. J Sainsbury, one of the biggest British retail chains, has been acquired by Qatar's SWF. The US in 2005 refused to allow the Chinese to take over Unocal, a big oil corporation. When Dubai Ports acquired P&O, the British–based ports MNC, it acquired several port operations in the US. This led to an outcry about security in the US, and Dubai Ports had to sell all its US operations.
Western countries want SWFs to provide money but not exercise any influence. Exactly as Third World borrowers from the IMF wanted money, but without conditions. Alas, there is no such thing as a free lunch in finance. Up to a point, SWFs may be passive investors. But as their stakes rise, they will demand additional seats on the boards of MNCs, as befits part-owners. This could provide them with long-term influence, exceeding anything the IMF acquired through loans. Ultimately, it could lead to complete takeovers, something the IMF could never do. So, the balance of world financial power has changed, probably forever. Eastern neo-colonialism is combating the western variety, and India needs to become a small part of it. This will transform global relationships.

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