In the short term, it was all too tempting. The savings of Asian and oil-exporting countries have helped fuel the current boom. Their purchases of western government bonds have funded the external deficits created by profligate consumers and lowered real interest rates, boosting asset prices.
But the long-term consequences of the bargain are now clearer. Non-US official entities now hold 30 per cent of all Treasuries and they are, quite rationally, keen to diversify. Sovereign reserves stand at $5,500bn – or 29 per cent of US market capitalisation. Governments are moving from lending to the west to owning chunks of it.
In recent months, sovereign agents have taken stakes in money managers GLG and Blackstone and in Barclays. With Dubai’s purchase of P&O in 2005 and Qatar’s bid for J Sainsbury, the full takeover of private sector assets by foreign governments is moving inexorably to the heart of the agenda.
Political hostility and protectionism is likely to intensify, as the deputy governor of the Bank of England noted on Tuesday. Canadian and continental European politicians are already keen to tighten rules. The US may need foreign states’ capital but the failed bid of China’s CNOOC for Unocal and the intervention over P&O suggests it draws the line at full takeovers by foreign state entities.
At the other end of the spectrum is the UK government, which appeared to welcome such deals yesterday. This seems behind the curve. If it is, as a matter of economic policy, fundamentally undesirable for the UK state to directly own UK businesses, it is unclear why the opposite should hold true for foreign governments.
Is there a workable set of principles to govern such capital flows while avoiding an upsurge in destructive protectionism? The US has called for the IMF to draw up such a code and it is in emerging economies’ interests that rules of play are developed.
Some activity will remain taboo. A few sectors will remain out of bounds to any state buyers. Even in the UK the state-backed takeover of big defence companies is unthinkable. In most places energy will continue to be regarded as “strategic” too. Meanwhile a few states will be barred as buyers in any sector. A North Korean bid for Krispy Kreme would be unwelcome.
But for most mainstream situations, workable compromise is possible by developing mechanisms to distance governments from their assets. First, if sovereign funds simply behave as institutional investors that own minority stakes in companies, there is no basis for objection.
The Government of Singapore Investment Corporation and Norway’s Norges Bank have long been seen as blue chip additions to any European company’s share register. Those diversifying their reserves into equities would do well to replicate these transparent and highly professional models.
Second, the agents of full takeovers should ideally be publicly quoted companies rather than governments. That way it can be clear the buyer is subject to market discipline rather than state edicts and agendas. Drawing this line is fiendishly tricky.
The Russian state owns only 50 per cent of Gazprom but is viewed as a dominant influence. Yet in 2001, 59 per cent state-owned Deutsche Telekom was seen as a commercial entity when it bought Voicestream. France’s EDF enjoyed this perception before it was even privatised. Nonetheless, buyers should work to boost their free floats, as CNOOC has done recently, in order to demonstrate their independence.
The challenge is here to stay. Asian and oil exporting countries cannot be expected to buy Treasuries forever. And many western economies rely on capital inflows. Protectionism is not the solution but neither is widespread direct control of companies by governments, with the resulting potential for capital misallocation and inefficiency. By working to insert market imperatives between governments and their investments, these two outcomes can be avoided.
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