French President Sarkozy Calls For European Sovereign Wealth Funds To Protect Assets

Concerned about the recent decline in stock prices, French President Nicolas Sarkozy, yesterday (Tuesday) called for the creation of European sovereign wealth funds. The funds would be virtual carbon copies of the state-owned investment vehicles that have sprung up from Beijing to Abu Dhabi to disperse their respective nations’ cash reserves in foreign assets.

Addressing the European Parliament, President Sarkozy implored his European contemporaries to embrace the current period of economic upheaval as an opportunity to restructure the global financial system. According to the Daily Telegraph, he also articulated the concern of many Western authorities that sovereign wealth funds, located primarily in Asia and the Middle East, could use their massive cash reserves to scoop up key foreign assets at extraordinarily low valuations.

“Stock markets are at historic lows. I do not want European citizens to wake up a few months from now and discover that European companies belong to non-European capital which has bought at the lowest point of the stock exchange,” Sarkozy said. “I would ask that all of us consider how interesting it would be to set up sovereign funds in each of our countries - and maybe these national sovereign funds could now and again coordinate to give an industrial response to the crisis.”

Sovereign wealth funds, or SWFs, currently control an estimated $3 trillion. That’s already believed to be more than the $1.5 trillion to $2 trillion held by worldwide hedge funds (though some sources put the hedge-fund estimate as high as $5 trillion).

The International Monetary Fund (IMF) and other experts predict the state-run venture funds could control $12 trillion by 2015. But our Investment Director Keith Fitz-Gerald thinks the ultimate total will actually be much higher: Even now, he estimates that the total capital under the control of the “Global Cash Barons” is more likely to reach $20 trillion by the middle of the next decade.

Some of the most prominent funds include China Investment Corp., which holds an estimated $200 billion, and the Abu Dhabi Investment Authority, which controls as much as $875 billion.

Conflicts of interests have already cropped up with respect to international takeovers, most notably in the form of Bain Capital Partners LLC and Huawei Technologies Co.’s failed takeover of Marlborough, Mass.-based 3Com Corp. (COMS).

In September 2007, China’s No. 1 network-equipment maker and Bain Capital launched a $2.2 billion takeover bid for 3Com. The deal stipulated that Huawei would receive a 16% stake in 3Com, leaving the rest to Bain. However, complications arose when the U.S. government expressed reservation about the deal and the possible breach of national security.

The fact that Shenzhen-based Huawei was founded by Ren Zhengfei, a former officer in the Chinese army, raised suspicion about the company’s intentions for 3Com, which has its own ties to the Pentagon.

3Com’s Tipping Point unit makes security software for the U.S. government, and policymakers worry that 3Com’s networking technology would allow China to eavesdrop on U.S. domestic conversations. Another concern was that the company’s encryption technology would make Chinese networks harder to tap.

Similarly, the year prior, Dubai Ports World - a United Arab Emirates-based maritime company - bowed to pressure from U.S. Congress and sold off its U.S. port operations to an American owner.

“There are a number of big French or European groups whose market value today is a third of what it was six months ago,” Sarkozy said, expressing his reservations about the growing role of SWFs. “Yet, there exists in the world sovereign funds with considerable means,” he said.

Europe’s Dow Jones Stoxx 600 Index has lost nearly half of its value since peaking in June 2007.

Sarkozy deflected criticism from former European Trade Commissioner Peter Mandelson, who described attempts to exclude foreign competitors from European markets as a modern day, economic “Maginot Line,” the highly touted, very expensive, and supremely ineffective defensive barrier erected in France prior to World War II as a deterrent to German intrusion.

“It is not a question of building a Maginot Line,” said Sarkozy, “What you have to do is take into account the pragmatic situation, the markets are depressed.”

Critics of Sarkozy’s request point out that Europe lacks adequate funding to create its own SWFs. The funds that sprang from Asia and the Middle East in recent years have huge pools of foreign exchange reserves and petrodollars to draw from. European nations don’t have these stockpiles of cash.

“We simply don’t have the money,” Joerg Kraemer, chief economist at Frankfurt-based Commerzbank AG (CRZBY.PK) told Bloomberg.

Sarkozy’s proposal also “suggests that all foreign sovereign wealth funds are negative,” Kramer went on. “That’s an assumption I don’t share.”

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Comment by Dr. Sebastian Uremadu

2008-10-22 19:02:39

French President Sarkozy Calls For Eurpean Soverign Wealth Funds To Protect Assets; Comments

I have reservation for President Sarkozy’s calls for increased creation of SWFs to protect assets of EU countries; however, that could be done puely on investment consideration to help sccop and boost international liquidity and investment. Nothing is wrong in Asia and Middle East countries using their massive cash reserves to scoop up key forign assets even at low valuations in a bid to assist shore up global financial liquidity. The question of fear of takeover of companies by non-Europeaninvestors should not be the issue now as salvaging world financial system’s liquidityand economic growth are the main issues presently rather than pursuing a protectionist agenda against non- European investments while world economy is madly heading to inpending recession. What should border the nations with huge soverign weaith fund is to do good credit analysis and properly decide which nations and investments merit extension of such credits in the times so that the funds do not go into wrong hands rather than strict building of economic barriers against other nations portfolio investments in EU. President Sarkozy’s statements are more of political consideration rather than financial in facing the issues at stake in the global ecomic arena. After all EU has been preaching to developing counTies of Africa lifting of trade barriers , why should there be a turn arround when it now concerns them? It then will amount to playing double standards! As much as possible we should avoid playing double standards in a situation like this before us in the times!

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Comment by Colin D Campbell

2008-10-27 07:09:36

I am not a brain when it comes to financial,matters, but I do know what I know.

I want to see the U.S.E. formed as soon as possible. We here in Britain have more in common with Europe that many people think. I know that the USA and us have a language that most of the time allows us to communicate reasonable well, but we have a Gernan Royal Family and a lot of our language comes from Norman French

And the biggest thing we have in common with Europe is our geography. This allows us to holiday in each other’s country without nonpolluting the planet. And I have worked and holidayed in France and am a bit of a Francophile.

Let’s set up the U.S.E. as soon as possible, not wait until China declares war on us, or some other disaster looms. If we could then Pursuade Russia to join, we would certainly be the biggest kid on the block. And we would also be the most civilised kid on the block. The USA is only what it is as a result of European immigration.b It was a good job that Britain lost The War of Independance.

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