By Steven Mufson and Anthony Faiola
Washington Post Staff Writers
Thursday, September 25, 2008
As the world watched Congress struggle yesterday with a plan to bail out the U.S. financial system, foreign leaders balked at similar fixes for their own economies, a few even dismissing the credit meltdown as an American problem. Some foreign investors who had previously provided crucial injections of capital remained on the sidelines.
Senior U.S. officials, notably Treasury Secretary Henry M. Paulson Jr., have in recent days urged the leaders of other industrialized countries to help prop the global financial system. But the appeals have fallen short. While policymakers and economic analysts in Europe and Latin America said yesterday that they recognized the severity of the challenge facing the global financial system, they saw little need at the moment for major rescue packages in their own countries.
"The situation we face here in Europe is less acute, and member states do not at this point consider that a U.S.-style plan is needed," said Joaquín Almunia, the European Commissioner for Economic and Monetary Policy in Brussels.
Meanwhile, the sovereign wealth funds of Asian and oil-rich Middle Eastern nations, which have come to the rescue of U.S. firms before only to see these investments erode, showed little interest in taking a similar gamble.
"We are not responsible for saving foreign banks," said Badr al-Saad, managing director of the Kuwait Investment Authority, in remarks broadcast by al-Arabiya satellite television Tuesday. "This is the duty of the central banks in these countries." Kuwait's sovereign wealth fund pumped at least $3 billion into Citigroup in January, but the stock has lost a third of its value since then.
Major overseas holders of cash, including foreign banks, are hoarding their money, declining to lend to each other, much less to distressed financial institutions in the United States.
With the global flow of money seizing up, the U.S. Federal Reserve yesterday pumped billions more dollars into central banks overseas. The Fed channeled $30 billion to central banks in Australia, Denmark, Sweden and Norway to relieve the stress of the global credit crunch. That came on the heels of the $247 billion the Fed made available to central banks in Europe, Canada and Japan last week, an action that roughly doubled the dollars previously available to them.
The Fed money is designed to alleviate a massive shortage of dollars that has made it nearly impossible for banks to get the short-term loans needed for daily operations and international transactions, which are still largely conducted in U.S. currency.
As part of the deal, the foreign central banks set aside their own currency as collateral in exchange for the new lines of credit from the Federal Reserve. The Fed hopes to dampen the need for other central banks to buy dollars, which could spread the crisis to international currency markets.
Some foreign companies with strong stomachs and balance sheets are seeking opportunities to exploit the crisis and scoop up U.S. assets or buy into U.S. firms for fire-sale prices.
Japanese firms, in particular, have turned into bargain hunters, looking to buy the best of troubled U.S. firms while leaving the chaff for U.S. bankruptcy judges, regulators and taxpayers. In recent days, Nomura Holdings, Japan's biggest brokerage firm, bought the lucrative Asian operations and part of the European unit of bankrupt Wall Street investment firm Lehman Brothers. Mitsubishi UFJ, Japan's largest bank, reached a deal to buy 20 percent of Morgan Stanley for $8.5 billion.
The Japanese banks have reemerged after going through their own upheaval following the burst of the Japanese stock market bubble in 1989 and its real estate bubble in 1990. Although saddled with bad debt for almost a decade, consolidations and restructuring turned those banks around in the early 2000s, emboldening them to reach out now.
Barclays, one of Britain's largest banks, has said it will acquire Lehman's profitable investment banking and capital markets businesses as well as its landmark headquarters building in Manhattan. "This is a once in a lifetime opportunity for Barclays," Robert E. Diamond Jr., Barclay's president, said in a statement last week.
British Prime Minister Gordon Brown, meanwhile, said Britain would do "whatever it takes" to stabilize the markets. His government nationalized the ailing British mortgage lender Northern Rock in February.
Speaking at the U.N. General Assembly, French President Nicolas Sarkozy proposed holding a special Group of Eight meeting before the end of the year to address the crisis. His aides said Sarkozy would deal with the crisis in a major policy speech today.
But European leaders gave little sign they would create their own bailout funds to boost bank liquidity, despite entreaties from Washington. The French government, for one, has said that it does not think banks in France are at great risk of contamination from the toxic loan problem. Finance Minister Christine Lagarde told reporters that the government had no intention of making funds available and had received no request for aid "of any kind" from French banks.
The Russian government, flush with reserves from oil revenues, is looking inward, moving to prop up its troubled banks and stock market. On Tuesday, a state-owned bank agreed to buy and bail out Svyaz Bank, a midsized lender struggling to pay creditors. State banks are also in talks to rescue a boutique investment bank, Kit Finance, that defaulted on debt obligations.
"If a situation which could break the stability of the banking system emerges, the state will intervene," Arkady Dvorkovich, the chief economic adviser to President Dmitry Medvedev, told reporters last week. "The state will act swiftly, so that no one doubts that our goal is stability."
In Latin America, where several major countries were staggered by financial crises over recent decades, there was relief that this time it isn't them.
Bankers and economists in Brazil, South America's largest economy, said their nation has felt the impact of the U.S. financial crisis but its $200 billion of reserves and strong economic growth make any serious problems unlikely.
"For once, Brazil is a comfortable place from which to watch the crisis," said Candido Bracher of Itau, an investment bank. Asked whether any Brazilian companies would need a government bailout, he said: "We are far, far away from that."
The world's big sovereign wealth funds -- whether run by the oil-rich sheiks with well more than $1 trillion in Kuwait, Dubai and Abu Dhabi alone or the technocrats of communist China -- have been missing from the scramble to rescue the American banks and investment houses.
"It was thought that [foreign] money would come in, but people have gotten more jittery and have become concerned about the long-term fiscal implications of this crisis on the U.S. as well as the debate in Congress," said Simon Johnson, former chief economist for the International Monetary Fund and senior fellow at the Peterson Institute for International Economics. "They are weighing the implications carefully and not rushing in."
China Investment Corp., a $200 billion state fund set up last year, spent more than $8 billion on stakes in the Blackstone Group, the world's largest buyout fund, and Morgan Stanley, the second-biggest U.S. securities firm. The value of those investments has plunged about 43 percent.
"Morgan Stanley and Goldman Sachs have enough capital to solve their own problems independently," the state New China News Agency said regarding rumors of talks between the firms and Chinese funds.
"It is clear that the investment banks were all unduly optimistic a few months ago about the full impact of the subprime crisis, taking the position that they had no further exposure, and hence there was little downside for the SWFs," said Nader Sultan, former chief executive of the Kuwait Petroleum Corp. and senior partner of F&N Consultancy. "I would say they lost some credibility."
Sovereign funds, reeling from setbacks in other parts of their own international investments, also don't make decisions fast enough for the quick deal-making that has stunned Wall Street over the past two weeks, Sultan said.
Moreover, said Kuwait Investment Authority's Saad, "We have social and economic responsibilities toward our own country." Kuwait's investment authority has put more than $375 million into its own sagging stock market, Saad told al-Arabiya. The central bank of the United Arab Emirates said Monday it had set up a more than $13 billion fund to try to ensure the kingdom's banks had enough cash.
Staff writers Ariana Eunjung Cha in Shanghai, Ellen Knickmeyer in Cairo, Edward Cody in Paris, Philip P. Pan in Moscow, Juan Forero in Caracas and Josh Partlow in Rio de Janeiro and special correspondent Karla Adam in London contributed to this report.