International Securities Trading Corporation (ISTC), a Dublin based finance company, may well become the most spectacular Irish financial casualty of the global credit crunch. Investors with very deep pockets will be required to rescue the company by financing a restructuring of its operations.
Last week ISTC, which was set up two years ago as a specialist lender to financial institutions, was facing bankruptcy, with debts of €871 million. The company, to avoid liquidation, sought court protection from its creditors, and secured the appointment of an interim examiner, John McStay. But he has very limited time to arrange a cash infusion for the company to ensure its survival.
What has happened at ISTC has occurred on a larger scale elsewhere in the volatile financial markets that originate in the sub-prime mortgage loan crisis in the US. In the current difficult market conditions, companies in financial distress also present investment opportunities for risk takers. Last week a Middle East investment company threw a financial lifeline to America's largest bank, Citigroup. The bank is facing large loan losses and needs to shore up its balance sheet. The Abu Dhabi Investment Authority (ADIA) bought a 4.9 per cent stake in the bank for $7.5 billion (€5.1bn). ADIA is a government owned sovereign wealth fund, one of world's oldest and largest, with estimated assets of $1,000 billion. Its investment in Citigroup exemplifies an increasing trend in global markets, whereby state-run funds make major cross-border investments. But it also marks a significant shift in the balance of financial power in recent years.
Rising oil prices have greatly benefited state controlled investment funds in the Middle East, just as China's soaring foreign exchange reserves have financed its state-run funds. If the globalisation of wealth has seen the developing world control a larger share of that wealth, the economic and political consequences have generated some political controversy. Last year in the US, criticism by Congress of a bid from a state owned Dubai company to acquire a firm managing American ports, stymied the takeover. While in Europe, there has been much public questioning of China's financial involvement in a bid by Barclays for ABN Amro, a Dutch bank.
Sovereign wealth funds that are state controlled should be seen as a financial opportunity rather than a political threat. In the developed economies, the greatest problem now facing financial markets is that a credit crunch may precipitate a global recession. And part of any solution to the credit crisis must be to encourage those with spare capital to invest, such as sovereign wealth funds, to do so.
