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The
cost of believing in America
Konstantin
Sonin
The Moscow Times
22 Jan
08
http://www.themoscowtimes.com/stories/2008/01/22/007.html
Ten
years ago, an economic crisis in one developing country could set
off a chain reaction among investors around the world. And once
investors suffered sharp losses in one place - for example,
Thailand, South Korea or Indonesia - they began rolling back
everywhere. This time around, the scenario is playing out
differently. Although the financial markets crisis that began
last year has not yet reached the point where investors are
pulling out of developing markets, money continues to flow freely
in the opposite direction as the world's financial giants tap
into government funds from former Third World
countries.
Citigroup and Merrill Lynch announced
multibillion-dollar losses in connection with their mortgage
portfolios last week. Citigroup has twice over the past three
months turned for cash to so-called sovereign wealth funds. It
sold 5 percent of its shares to the Abu Dhabi Investment
Authority for $7.5 billion in November, and now it is offering
shares to financial corporations controlled by the governments of
Singapore, Kuwait and Saudi Arabia. The haste with which
Citigroup is seeking investment from the developing world
suggests that the company does not see any light at the end of
the tunnel for its internal financial problems.
In all
fairness, though, this is not the first time Citigroup has
resorted to such measures. The Saudi royal family, along with
others, first came to Citigroup's rescue early in the 1990s. In
fact, it is difficult to find a global financial giant that is
not hunting for cash these days. Merrill Lynch has already turned
for help to a Singapore government investment fund, while
Swiss-based UBS received $9.7 billion from another Singapore
government fund last fall. At the same time, Morgan Stanley
received a $5 billion investment from a Chinese government
fund.
It is understandable why these corporations are
turning to foreign investment funds for badly needed cash. They
very well might not know the full scope of their financial losses
stemming from the collapse of the subprime mortgage market. But
what can be motivating the owners of these sovereign funds to
invest? Of course, buying into a "distressed" company
often leads to reaping big profits down the line, and there is
the possibility that this might actually be one of those rare
opportunities that investors dream about their entire lives -- to
buy a valuable commodity at bargain prices. But there is also a
high probability that they could end up on the losing side of
this gamble. The owners of sovereign funds understand that, as
foreign investors, they are treated as outsiders by U.S.
politicians, and this carries a certain element of political risk
from them.
The dollar has become the world currency based
largely on the belief that the democratic system in the United
States will not allow the government to shift to inflationary
financing. Thus, Chinese and Singaporean investors are willing to
channel huge sums of cash into Citigroup and Merrill Lynch in the
belief that U.S. democracy - with its competitive electoral
system, independent judicial system and a media acting as a
powerful Fourth Estate watchdog - will continue to function as an
effective and powerful regulator of financial corporations and
guarantor of political and economic stability.
We have
already become accustomed to a growing U.S. trade deficit and to
the fact that the developing world finances American consumers to
a large degree. It may now be the case that taxpayers' money from
developing countries being sent to the United States will end up
covering losses incurred by irresponsible bankers and inattentive
market regulators.
Keeping faith in the United States'
economy and democracy comes at a price indeed.
Konstantin
Sonin, a professor at the New Economic School/CEFIR, is a
columnist for Vedomosti.
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