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Asian Tribune is published by World Institute For Asian Studies|Powered by WIAS Vol. 12 No. 2730

Entry of Sovereign-wealth Funds into World’s Financial Empires: Gulf States Are New King-Makers

Sunday Discourse: by Philip Fernando in Los Angeles

Cash rich Gulf States have become kingpins of financial success. The totality of sovereign funds available for investment is estimated to be between 2 to 7 trillion U S dollars. Some are flowing west to keep western banks afloat. How rich is the Middle East? “Stinking rich,” said one Wall Street financier.

This is the last pot of gold lying dormant. Singapore, South Korea and Kuwait also showed how the funds can be used when they gave over $ 20 billion to Citigroup and Merrill Lynch in October 2007.

The backdrop to all this erupted this week when the stock markets had their worse fall in recent years. Some recovered but the roller coaster ride is going on. German DAX suffered a 4.88 percent fall last Wednesday, the steepest out of the major European indexes. The French CAC-40 and Spanish IBEX 35 also lost over four percent. The British FTSE 100 fell by 2.28 percent, while the Russian RTS also plunged by 3.9 percent and took another sharp fall Tuesday. Stocks also were volatile in Hong-Hang Seng Index, Japan’s NIKKEI index and Australia’s ASX also showed similar characteristics.

The U S Federal Reserve announced a 0.75 percent rate cut after the Asian markets had closed last week. The sharp fate cut was immediately criticized as irresponsible by many observers who felt that the Fed Reserve had waited too long and then had a knee-jerk reaction. It was too late according to most observers. Stock market came back after continuous losses, but still looked vulnerable.

Volatility of the U S stock market surprised many. On Wednesday, there was near panic and as the market plummeted more than 300 points. A late rally that day that brought the Dow Jones up by 2.5 percent, erasing the sharp decline of the past three days. The S&P 500 rose by 2.53 per cent and the NASDAQ by 1.05 percent.

The bailout plan proposed by President George Bush and the talks he had with the Congress was no surprise to anyone. The financial regulators in the US are reportedly arranging a bailout of crisis-stricken bond insurance firms MBIA and Ambac.

New York Insurance superintendent Eric Dinallo had meetings with Bank executives as he tried to raise $15 billion in capital for the struggling insurers. A default by the bond insurers would have caused a damning effect through the rest of the finance sector, setting of an inevitable cascade of credit downgrades and a potential financial collapse. The possibility of the intended capital inflow made the share Shares in both MBIA and Ambac shoot up by 10 percent immediately.

U S and European central banks have twin goals to meet: prop up credit markets and avoid recession. They also have to fight inflationary pressures and keep recession at bay-contradictory most of the times. So European Central Bank is trying to keep rates higher while U S Fed reserve had decided to lower them.

Inflation is at 3.1 percent in Europe now, far above the ECB’s target of fewer than 2 percent. ECB president Trichet and Bank of England Governor Mervyn King seemed bent on rates steady. Officials of the Bank of Japan also expressed similar sentiments.

Meanwhile, Federal Reserve’s ability to regulate the U S economy is now under criticisms from many including the well-known billionaire George Soros, who feels that those inflationary trends are likely to undermine the Fed’s ability to regulate the economy through monetary policy. Once the investors lose confidence in the ability of the Federal Reserve they would look for other avenues.

The “raid” on the trillions of sovereign-wealth funds awaiting investment in the west is an automatic option. If federal funds were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield. Where that point is, is impossible to determine. When it is reached, the ability of the Fed to stimulate the economy would be gone according to most observers. The new millennium has arrived.

Gargantuan projects that characterized Gulfs states investment mind-set have given way to new investment outlays. As investment flows into the west there is bound to be some friction. French President Nicholas Sarkozy has announced the need to protect institutions from aggressive sovereign funds coming their way. These funds constitute only about 2 percent of the assets traded abroad now. But they are growing fast. They also are secretive in that the governments owning them are mostly private financiers.

Transparency is not their hall mark. Funds are not doled out on a competitive basis but according to whims of the owners. Some call it geo-political de-escalation. There are no share-holders and accountability. It is hard cash on the table as you need it. It is treated as a friendlier source of finance at the moment. It can be stated safely that once established these sources of funding will be hard to resist.

Philip Fernando is an economics graduate from Peradeniya University, Sri Lanka and the former Deputy Editor of the Sunday Observer.

- Asian Tribunr -

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