No agreement on sovereign funds

Washington: Despite the rhetoric from some European nations on the need to tighten control over hedge funds and sovereign wealth funds (SWFs), the G-7 meetings fell short of any concrete suggestions on the issue and on ways to contain the looming credit crisis in the developed markets.

Prior to the meetings, European nations including Germany and France had called for tougher actions to regulate the SWFs.

However, during the meeting there was an agreement on a British-backed proposal that any regulation of SWFs must not be based on protectionism, but must reflect genuine considerations of national security issues.

Out of an estimated $2.5 trillion held by the SWFs, the share of Gulf-based funds is estimated to be $1.5 trillion.

Some of the recent high-profile acquisitions such as Dubai's and Qatar's purchase of a combined 48 per cent stake in the London Stock Exchange, Dubai's proposed acquisition of a 20 per cent stake in US stock exchange Nasdaq and a Chinese government-owned fund's purchase of a major stake in Blackstone, a leading hedge fund in the United States, raised eyebrows in the West.

Concerns

Many are concerned about the political dimension of the large-scale investments by these funds in strategic sectors.

The G7 yesterday agreed to meet the governments involved in these funds, including the UAE, Kuwait, Saudi Arabia and China separately, to discuss their concerns directly.

Meanwhile, the G7 said the IMF is making efforts to reform, but must go further. "We remain committed to achieving an ambitious package of fundamental reforms," the G7 said in a statement.

The G7 officials praised the IMF's intention to increase and modernise exchange rate surveillance and said it should be firm and even-handed.

The reforms also include changing capital and voting shares to better reflect the realities of the world economy, the statement said.

Yuan policy

That means a bigger voice in Fund decisions that reflects the growing weight and role of dynamic members, many of which are emerging markets.

The meeting called on China to be more flexible in its exchange rate policies.

"We welcome China's decision to increase the flexibility of its currency, but in view of its rising current account surplus and domestic inflation, we stress its need to allow accelerated appreciation of its effective exchange rate," the meeting said in the statement.

Strong world economy

The world economy remains strong despite turmoil in financial markets, soaring oil prices and a weak US housing market, the G7 finance ministers said.

Financial markets are recovering from this year's crisis sparked by the meltdown in risky US home mortgages, although uneven conditions are likely to persist for some time and will require close monitoring, the G7 statement said.

"So far there is very little evidence that it is bleeding over into other areas," US Treasury Secretary Henry Paulson told reporters after the meeting.

Reforms: Progress is disappointing - McCormick

US Treasury Under Secretary David McCormick said yesterday that progress so far in amending the International Monetary Fund's (IMF) voting power to give emerging countries more recognition is disappointing.

"We're disappointed that we haven't moved forward more quickly," McCormick told reporters in a telephone news conference.

"It's one of those things where we've made some progress but not enough."

Outgoing IMF managing director Rodrigo Rato initiated the effort to reform the Fund by strengthening the way it monitors the world economy and currency exchange rates and by revamping its voting structure to better reflect the rising importance of emerging powers like India and China.

The change in voting power will be achieved by redistributing quotas that each country holds in the Fund, a delicate task that now passes into the hands of incoming IMF chief Dominique Strauss-Kahn.

- Reuters