First, a number of European politicians are calling for increased transparency requirements relating to actual portfolio positions of SWFs. 19 A more far-reaching development are the calls for legislation that would block SWFs from taking major stakes in companies in any strategic sectors. 20 Second, a number of politicians have proposed the principle of reciprocity as a guiding principle for granting market access to SWFs. 21 For example, Jean-Claude Juncker, the Luxembourg Prime Minister and Euro-group president, has stated, "Countries that protect their own markets cannot expect to be allowed to make unimpeded investments in Europe." 22 In a strict sense, the principle of reciprocity means that SWFs are only allowed to invest in a foreign country if companies in that country are allowed to invest freely in the home country of the SWF. Since many SWFs are located in countries which are financially less open than a typical OECD country, a strict application of the reciprocity principle would place strong limitations on SWF investments. Third, Larry Summers has suggested that if SWFs were to invest through intermediary asset managers, most risks associated with SWFs would be mitigated, if not avoided. 23 Incidentally, Summers argues that the added benefit of such an indirect investment philosophy is that it generates a better risk-return profile. Fourth, there is now considerable political momentum behind the idea of a code of conduct or a set of guidelines for SWFs.
As you know, the GIC recently committed to subscribe to CHF 11 billion of a mandatory convertible bond which will be issued by UBS in an effort to raise capital in the aftermath of losses on large sub-prime mortgage positions. Subject to the UBS shareholders’ approval, the GIC will in due time become a significant shareholder in UBS. In the process, UBS will significantly strengthen its balance sheet and thereby maintain a substantial capital cushion relative to the regulatory minimum. A strengthened capital cushion is to be welcomed. First and foremost, it serves as a confidence-building measure. Moreover, in uncertain times, a solid capital cushion provides insurance against a further potential deterioration in the global macroeconomic environment. Who is this new Asian investor in the largest Swiss bank? The GIC was set up in May 1981 with an original seed capital of several billion dollars from the Monetary Authority of Singapore (MAS). 28 The central bank reserves had grown steadily throughout the 1970s as a result of public sector surpluses. The GIC’s objective was to invest the portion of foreign reserves, which was surplus to the needs of the central bank for its monetary policy management, in longer-term assets. The mandate of the GIC is to preserve at a minimum the international purchasing power of its assets against inflation and global exchange rate risk. The objective of the GIC is commercial, focusing on long-term investment returns. In many ways, it is similar to the objectives of the large European public pension funds.