Wealth funds under scrutiny

WASHINGTON (Reuters) - Global finance chiefs on Saturday called for a more broad-based effort to calm financial markets, including tighter scrutiny by the International Monetary Fund and other institutions of increasingly powerful state-owned investment funds.

This year's fall meetings of the International Monetary Fund and World Bank come amid a slowing pace of global growth and heightened risk from recent turbulence in world credit markets and soaring oil prices.

That has particularly affected Group of Seven rich nations whose finance ministers and central bankers met on Friday and concluded that their growth will suffer because of ongoing turmoil in markets.

By contrast, developing countries that are well represented among IMF members have been emboldened at these meetings by the fact that their growth rates are thriving and have used the opportunity to flex their economic muscle.

"The irony of this situation: countries that were references of good governance, of standards and codes for the financial system, these are the very countries that are facing serious problems of financial fragility putting at risk the prosperity of the world economy," said Brazilian Finance Minister Guido Mantega.

TABLES ARE TURNED

After years of hearing from developed countries about the importance of prudent economic policies, developing nations felt they clearly had the upper hand, with China and India leading world growth and rich countries' economies slowing.

Meanwhile, developed countries called on the IMF to increase its monitoring of growing state-backed wealth funds that hold surplus reserves mainly from oil exporters and China.

Those funds are investing amounts which cause some nervousness among rich members of the Group of Seven industrial nations, which want to ensure the investments are for profit-making reasons only and are not politically motivated.

U.S. Treasury Secretary Henry Paulson said he considered the IMF "uniquely positioned" to identify model behavior for these Sovereign Wealth Funds.

His point man for international matters, Under Secretary David McCormick, told Reuters there was general agreement that some code of principles was needed to ensure the funds did not rouse such resentment that countries put up barriers to stop the funds from investing.

Belgian Finance Minister Didier Reynders said it was too early to know how the financial sector difficulties would affect economies in the end, saying central banks should stand ready to lower interest rates, or to postpone rate increases, without damaging inflation.

WANT MORE POWER NOW

Developing countries also took the opportunity to push for a greater say in the voting power of institutions like the IMF. Brazil warned bluntly that under-represented countries were likely to "go their own way" unless they get a greater stake.

"Developing countries, or many among them, would go their own way, were the perception to arise that reform will not happen or that we will be left with a purely cosmetic form," Brazil's Mantega said.

Some countries saw signs of progress in negotiations among IMF members on how to increase the voting powers of the developing world but others were far from optimistic.

German Finance Minister Peer Steinbrueck said no progress had been made by countries trying to agree on formula that would rebalance the voting system to reflect the rise of countries like China or India.

"I think we've come back to the point where we started," he told reporters. "We are further away from a solution on quota reform that ever."

"Some common ground among members is emerging," said Swiss Finance Minister Hans-Rudolf Merz. "But the timeline remains ambitious."

Intense political sensitivities are involved in trying to divvy up voting power more frequently. Some old powers like Britain and France potentially could see China move past them in voting status if an intensely negotiated formula truly acknowledges China's fast-growing economic might.

Also, developing countries insist any overhaul in votes must be large enough to transfer significant additional power to them and to make clear they are not simply being given a pat on the head.

"Any modest result, which simply tinkers at the margins, would call into question the relevancy and legitimacy of the fund," Brazil's Mantega argued.