Thursday, December 27, 2007

Why no sovereign wealth fund?

A sovereign wealth fund is a economic tool for depreciating the currency and putting away money for future generations. Jim Flaherty is against it. I'm all for it. A lower exchange rate helps to spread the economic benefit around the country, not just those working in the energy sectors. Energy prices inevitably go down, and having a fund will help to mitigate that impact. Here's the article form

Dec. 27 (Bloomberg) -- Canada doesn't plan to join Norway and other nations that have created sovereign wealth funds to invest rising oil and natural gas revenue in foreign currencies, Finance Minister Jim Flaherty said.

``We don't have any plans to do anything extraordinary,'' Flaherty said in a Dec. 18 interview in Ottawa. ``It's in the best interest of the Canadian economy to continue to have the value of the dollar determined by properly functioning markets.''

Oil exporters such as Norway and Libya have special accounts to prevent soaring energy money from pushing up the local currency, while setting aside the bounty for future generations. Canada's currency has risen 55 percent against the U.S. dollar in the last five years, forcing auto plants and lumber mills to close as exports become less competitive.

Rising oil wealth in western provinces such as Alberta pushed the currency to parity with the U.S. dollar for the first time since 1976, squeezing factories in central Canada that export half their production. Manufacturers have fired 314,000 workers in five years.

The Canadian dollar touched a five-week high as crude oil advanced to more than $96 a barrel. The currency traded at 98.08 Canadian cents per U.S. dollar at 12:15 p.m. in Toronto. The currency earlier rose to 97.85 cents, the highest since Nov. 21. One Canadian dollar buys $1.0195.

``There are better ways of managing foreign-exchange inflows than just letting the currency appreciate, and no effort has been made to sequester some of those funds,'' said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York. Weinberg said Mark Carney, who becomes Bank of Canada governor on Feb. 1, should ``go to Norway and talk to them,'' about the country's $377 billion fund.

`Energy Superpower'

Prime Minister Stephen Harper has touted Canada as an ``energy superpower'' that relies on private investment to develop its reserves. His Conservative Party government is reviewing whether to change foreign-ownership rules for Canadian companies, and this month outlined how it plans to protect energy sources from sovereign wealth funds.

Morgan Stanley, the second-largest U.S. securities firm, predicts sovereign wealth funds may control $12 trillion within a decade as Russia, China and smaller economies such as Bolivia invest windfalls from energy and other exports.

Separately, Flaherty said that carmakers and lumber producers in ``single-industry towns'' may get some relief in next year's federal budget.

Factory Aid

``We have some communities that are being left out of the economic growth because of, for example, the local mill closing,'' Flaherty said. The minister said help for factories may be one of the bigger items in the budget, which Harper said last week will have no major tax cuts or spending programs. The government's ``fiscal update'' in October included C$60 billion ($61 billion) in tax cuts.

Flaherty, 57, also echoed Harper's comments from last week that the government wouldn't bail out Canadian investors holding about C$33 billion in short-term debt that plunged in value. Canada's market for commercial paper sold by non-bank dealers ground to a halt in August after Coventree Inc. and other trusts failed to renew maturing debt because investors were concerned about ties to U.S. subprime mortgages.


Investors reached an agreement on Dec. 23 to restructure their holdings into longer-term debt. The accord, which covers 20 of the 22 non-bank trusts, was approved by a group of foreign banks, Canadian lenders and pension funds after two deadlines were missed. Most holders of the commercial paper will get all their money back eventually, according to Toronto lawyer Purdy Crawford, who represents the investors.

Flaherty said in the interview, which was embargoed until today, that he was pushing commercial banks and investors to negotiate a settlement.

``We have been encouraging market participants to create a process that will result in an orderly working out of the issue,'' he said. ``Participants are going to have to take haircuts of varying degrees.''

Flaherty said his efforts on the issue included ``cajoling, encouraging, hand-holding, coordinating, that kind of thing. Not an investment of public money.''

To contact the reporters on this story: Greg Quinn in Ottawa at ; Alexandre Deslongchamps in Ottawa at.

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