Precautions needed. Is Europe a little naïve on the subject of sovereign wealth funds? That was the adjective I used in a previous column and I should explain it. The holders of these funds (SWFs), be they Chinese, Arab or Russian, probably are sincere when they say that their sole aim is to manage the enormous financial resources entrusted to them to the best of their ability, without any hidden political or strategic ambitions. Nonetheless, account must be taken of the possible effects of their operations, irrespective of their intentions.
“Our currency but your problem”. The priority objective of the countries which have created these funds was, originally, to place effectively the deluge of dollars which flooded the national treasuries from the profits of oil or commercial assets. Massive currency exchange operations (to euros or other currencies) and huge demands for the reimbursement of American government bonds are impracticable, because since President Nixon decreed an end to the direct convertibility of dollars to gold (August 1971) and the USA has let the market dictate the value, the countries in possession of dollars have to take care of them themselves. It all comes back to the famous words of a figure in the US administration: the dollar is our currency, but your problem. These words have been bandied about so often that I am almost embarrassed to trot them out again, but they represent the most succinct, simple and clear definition of the reality of the situation.
Excessive sales of dollars on the financial markets would result in a collapse in their value. This is an effect which is already visible in the permanent American trade balance deficit; this effect would increase two, three, even ten-fold if dollars were to be sold systematically on the markets, and all those countries whose monetary reserves are composed mainly of dollars would be directly and dramatically affected. Certainly the USA could not accept a total collapse, but it believes that it is first up to others avoid such a situation. And what country would allow its monetary reserves, accumulated over many years from the sales of its natural resources or the fruit of its population's work, to evaporate overnight?
Multiple effects of SWFs. And so the search begins for more orderly and gradual ways of using the mountains of dollars which one has in one's possession: by granting gigantic loans (such as China has done in Congo), by trying to label the price of oil or other raw materials in euros (but this is drawn-out and complicated), and above all by creating sovereign wealth funds to buy shares or companies all over the world. Replacing dollars with sustainable wealth: this is the starting point, and it is easy to see how the bodies responsible for the task have increased in number.
However, the repercussions of these operations can be very far-reaching. Buying a company or a significant shareholding means entry into the managing bodies, access to patents and production methods, the right to influence operational strategies. Various parliament and business leaders have been, and continue to be, concerned by this. The EU orientation, proposed by the European Commission in its communication of the end of February, aims to lay down principles and criteria in a “code of conduct” which would not be binding but would be accepted voluntarily by the SWFs, with the option for the EU to legislate is the code is not respected. The aim is to maintain an environment which is open to investment, while increasing transparency: increasing the information that the SWFs provide to the market concerning the origin of their resources, their investment aims, their strategies, and so on.
Three elements of confusion. The “risk of naivety” in this construction is based on three observations: a) the biggest SWFs belong to countries with little or no democracy. Without questioning the good faith of the managers of these funds, it is the intentions of the political authorities which need to be known, along with who will ensure respect for the code of conduct; b) outside the EU, the USA has the possibility to control foreign investments in certain areas, and Russia has established a list of 42 economic sectors in which strategic investments are strictly limited or require a special authorisation. The EU's liberal attitude would seem to be somewhat isolated; c) according to experts, the capital held by the SWFs is already double the shares accumulated by the American commercial banks and in 2011 will exceed the entirety of the world's monetary reserves. These figures are enough to make you stop and think.
This column will return to these three aspects tomorrow.
(F.R.)