Assets controlled by sovereign funds could hit $12 trillion by 2015, at least according to Morgan Stanley.That would put the pool of capital which they control higher than all reserves held by central banks.
If the projection is even close to being true, the issue of whether sovereign funds put money into US and European companies for political reasons will be moot. Legislators and regulators in the regions want the funds to sign in blood that their investment intentions are strictly financial.
If the economic recession in the West goes on for a couple of years, the need for capital will spread from the financial sector to the industrial, retail, airline, automotive, and perhaps even tech industries. US private equity firms are not in any shape to provides tens of billions of dollars to invest in corporations. They need borrowing from banks to set those deals. The banks do not have a farthing.
The central banks will find their capital committed to provide liquidity to a series of financial institutions beset by mortgage-backed paper losses, consumer credit losses and LBO loans which are losing their value, Without help, these banks do not have the money to lend into the system of private customers and businesses. The folly creates a system which is shackled by fear and without access to cash.
That leaves sovereign funds, fat with oil money and savings from frugal countries like Singapore, with much of the world’s free capital.
When the funds come calling and the rest of the system is bereft, the idea of legislating terms will float away like smoke.
Douglas A. McIntyre