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Foreign reserves expanding in emerging economies

The international banking sector is grappling with a grave financial crisis at a time when, paradoxically, there is an abundance of ready cash available, notably from emerging market countries.

Big banks since August have slashed the amount of credit they are prepared to offer each other, anxious to avoid lending money to any institution that could be liable to huge losses because of exposure to the crisis in the US housing market.

The subprime, or high-risk, sector of the US market has been hit with a wave of foreclosures by homeowners unable to meet higher mortgage payments.

That in turn has undermined the value of billions of dollars in securities backed by subprime mortgages and issued by major banks and finance institutions.

But Jean-Francois Robin of the French bank Natixis says "it's not that there is a lack of liquidity [in the global financial system], it's that it is not circulating."

Although the inter-bank market has seized up, there are in fact funds available.

"The world's money supply is growing at a red-hot pace -- 10 to 15 percent a year," said Jean-Herve Lorenzi of the French research group Cercle des Economistes.

Foreign exchange reserves held by emerging market powerhouses such as China and other big commodity exporters -- Russia and members of the OPEC oil cartel, for example -- are expanding at a steady rate.

In such countries, along with Japan and Norway, sovereign wealth funds have been created to find fruitful investment outlets for the reserves that have built up over the years.

The funds, which are said to total more than US$2.8 trillion, have lately come to the rescue of some of the biggest names in global finance.

The US investment bank Merrill Lynch is to be recapitalized thanks to a US$5 billion injection by the Singapore state investment fund Temasek.

Morgan Stanley has been reinvigorated by the participation of the China Investment Corporation, also in the amount of US$5 billion, while another US behemoth, Citigroup, has received a US$7.5 billion lifeline from the Abu Dhabi sovereign fund.

Swiss banking giant UBS, which has been especially hard hit by the subprime meltdown, raised US$11 billion from another Singapore fund.

But sovereign funds are not the only entities sitting on piles of cash.

US billionaire investor Warren Buffett announced on Tuesday he was buying a 60 percent stake in Marmon Holdings Incorporated, an industrial group owned by one of the US' richest families, for US$4.5 billion.

Buffett's investment firm, Berkshire Hathaway Incorporated, will acquire the remaining 40 percent of Marmon over five to six years at a price to be based on the group's future performance, the two sides said.

Marmon, which has been owned by Chicago's Pritzker family since 1953, is a manufacturing and services group with more than 125 units and whose products range from railroad tank cars to electrical wires and cables.

In addition, Robin said, "there's lots more liquidity" held by insurers and pension funds, which manage savings worth hundreds of billions of dollars.

"They have taken their capital out of risky assets," such as stocks and bonds linked to real estate, he said. "And they have lots of money to invest in the coming months, which should help the markets get back on their feet."
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