SWFs can help in crisis
Sun, Oct 12, 2008

WASHINGTON, US - SOVEREIGN wealth funds, the state investment vehicles that are flourishing during a boom in commodities prices, could play a role in the current financial crisis, World Bank chief economist Justin Lin said on Saturday.

'They have the capital and now we have the situation,' said Dr Lin, a Peking University professor who took up the bank post in June.

'Certainly the sovereign wealth funds can play some function,' he told reporters on the sidelines of an International Monetary Fund meeting in Washington.

Global credit flows have nearly frozen in recent weeks as financial turmoil that began 14 months ago escalated, notably after the US government allowed the Wall Street investment bank Lehman Brothers to collapse, shaking market confidence.

Sovereign wealth funds (SWFs) have come under scrutiny after several took huge stakes in Western financial firms hit by the US subprime home loan crisis that erupted into financial markets in August 2007.

Some argue that the funds are too opaque and that government acquisitions of stakes in strategic sectors could pose threats to national security.

In total, SWFs control assets worth about US$5 trillion (S$7 trillion), the United Nations estimated last month.

Dr Lin said of the spreading financial turmoil that 'not many people expected the speed and the depth would be so much'.

'We need to have some coordinated effort' to confront the crisis, he said, citing unprecedented concerted interest rate cuts by central banks this week.

But he stressed that 'we need to be pragmatic' in addressing the ailing banking system.

Asked about the so-called Washington consensus that has developed over the past two weeks on how to deal with the mounting crisis, Dr Lin said: 'The Washington consensus should be a goal for our effort but it shouldn't be a prescription.'

The World Bank chief economist said that to bolster badly damaged market confidence, countries need to provide liquidity, 'deal' with toxic assets and recapitalise financial institutions.

'We don't have a one-size-fits-all recommendation,' he said.

In response to a question about how the crisis is impacting China, the world's fastest-growing economy, Dr Lin said his country was in 'much better shape than many other developing countries'.

China has a 'firewall' of capital, a 'very strong fiscal surplus' and can focus on stimulating its domestic economy, he said. -- AFP

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