WASHINGTON: Last year, as governments in Asia and the Middle East started to buy major stakes in financial institutions in the West, the U.S. government called for an international code of conduct by sovereign wealth funds, hoping the funds would commit to disclosing more of their activities and not play politics with their investments.
Now the push-back has begun.
Officials involved in the drafting of a code, which the International Monetary Fund is overseeing, say that the leaders of these funds are resisting the pressure to embrace even a voluntary set of "best practices" that disavows politics, arguing that it is unnecessary because their investments are already strictly commercial in nature.
In addition, according to various officials, new tensions are surfacing as the leaders of funds in China, Russia, the Middle East and other parts of Asia charge that it is hypocritical of the West to demand regulations when the failure to regulate European and American banks and hedge funds has led to a global economic crisis.
"These funds do not think of themselves as political, and so far they haven't been," said an International Monetary Fund official involved in the drafting of the code who would not speak on the record because he is not authorized to do so. "What we're hearing from them is, 'What are you so upset about?' But the concerns are there, and they need to be taken care of in a code of best practices."
The International Monetary Fund, an institution established after World War II to deal with global financial crises, began drafting a code after consulting with funds from more than a dozen countries.
The funds are controlled by large oil and natural gas producers - including Russia, Norway and countries in the Gulf - as well the exporting superpowers in Asia, particularly China. Experts say the funds control more than $2.5 trillion in investments, a figure that could grow to more than $15 trillion in 10 years.
As several of these funds move to acquire assets in Europe and the United States, concerns have grown about a potential backlash. But the rescues of Citigroup, Merrill Lynch and other big American financial institutions hit by the subprime mortgage crisis has been warmly welcomed by U.S. officials.
In part to ward off a protectionist backlash, the administration of President George W. Bush last October joined with Europe and Japan in seeking a list of "best practices" to which sovereign wealth funds would voluntarily subscribe. They would also include governance structures run by nonpolitical experts and more disclosure of portfolio activities.
Administration officials say they hope the IMF can get a set of "best practices" adopted by autumn.
"I think we've made progress with sovereign wealth funds in convincing them of the need for this effort," said David McCormick, under secretary of the Treasury for international affairs. One reason for his optimism, he said, is that the funds' track record had so far been good and that there was "no evidence of them making investments for anything but economic reasons."
Nevertheless, there is a fear among many experts that without a code, the funds' financial clout could lead them to try to exercise political leverage.
A major advocate of regulation, or at least a voluntary code of conduct, is Lawrence Summers, the former Treasury secretary and former president of Harvard, who two years ago stirred up a furor when he suggested that big exporters sitting on trillions in dollar-denominated reserves move toward diversifying their portfolios.
In an interview, Summers said that in some cases, the funds were "not wrong" to be concerned about Western xenophobia over foreign investments, but that the solution was to agree to more transparency and to disavow politics in their activities.
"I'm inclined to think that if the funds don't agree to some effort to regulate, they're asking for a lot more xenophobia," he said. He added that what he had in mind was a "relatively modest" set of standards. "The general drift should be, we're going to function like regular investors, and not seek to pursue any objective other than value added maximization," he said.
Various public instances of irritation by leaders of sovereign funds have surfaced in recent weeks.
Lou Jiwei, head of China's $200 billion fund, said last week that the IMF's failure so far to get a consensus on the problem was not a cause for concern.
"It seems there wasn't any agreement on that, because nobody wants to accept the fact that anybody's better than themselves," Lou said in Washington in a talk at the World Bank. He added that the discussion was "useful" however, and that "eventually we may reach some common ground."
But another official involved in the discussion said that the more likely outcome would be an agreement on vague generalities - "something that is effectively toothless and devoid of anything other than motherhood and apple pie."
Europe is especially fearful that Russia is investing to gain a foothold in Europe's transportation and energy infrastructure in order to exercise political influence.
The sovereign wealth representatives say this is a red herring, that they invest passively, in portfolios, or in small percentages in companies so that they do not try to control their policies.
Summers says that with these funds due to wield trillions of dollars in investments in the next decade, there could be no stopping them from playing politics - of trying to assert political pressure on a government to rescue a bank they have invested in, for example, or if a government fund started a "speculative attack" on another country's currency, as the investor George Soros did on the British pound in the early 1990s.
[Source:International Herald Tribune]
No comments:
Post a Comment