Sovereign funds backlash

A strong esprit de corps will be in evidence in Washington this weekend. The United States is expected to call for restrictions on sovereign wealth funds when it hosts the G7 meeting.  

That will be music to Europe's ears. There has been a re-emergence of mercantilist tendencies in the continent, reflecting genuine fears of politically motivated acquisitions by cash-rich state funds outside the OECD stable. EU economic and monetary affairs commissioner Joaquin Almunia said last month that the penetration of Chinese, Russian and Middle Eastern state funds would be restricted unless they are made more transparent.

In the absence of a global resolution to the sovereign funds issue, Europe's mercantilist economies previously saw their sole sanctuary in bilateral arrangements between the EU and the three major sources of these funds -- Russia, China and the Gulf states.

The United States will reportedly call on G7 central bankers and the International Monetary Fund to agree on a set of guidelines demanding better disclosure by the sovereign funds, and give governments greater ability to scrutinise their activities. One main proposal from Washington will be that the funds declare what proportion of their investments is held overseas.

An agreement on restrictions this weekend will help reduce the conflict potential of anomalous national policies and defuse criticism that Western states are adopting double standards. However, many governments will argue that it is their money and question why should they be so transparent when other areas of financial markets are not.

Read more about the global liquidity deluge here.