September 9, 2008 / 5:51 PM / 11 years ago

U.S. may be vulnerable to sovereign funds: report

NEW YORK (Reuters) - The United States’ current reliance on foreign governments for financing represents a strategic vulnerability, according to a report by the Council of Foreign Relations released on Tuesday.

The longer the United States relies on international central banks and sovereign funds to support large external deficits, the greater the risk the economy’s need for external credit will constrain the government’s policy options, the report said.

It also warns that countries that do not share U.S. political values and policy goals could use large holdings of U.S. assets as political and economic leverage.

“This does not mean foreign creditors are certain or even likely to use their financial assets as a weapon. It does mean that they could do so if they want,” Brad Setser, CFR fellow for geoeconomics, said in a statement accompanying the report.

For the United States to guard against the effects of a disruption in foreign financing, it should consult with allies who hold dollars, support policy changes abroad that would reduce the buildup of assets in state hands, reduce the U.S. budget as well as oil imports, Setser added.

“Rather than encouraging oil-exporting countries to build up assets in sovereign wealth funds, the U.S. should encourage the oil-exporting economies to use surplus oil revenues to pay a variable ‘oil dividend’ to all its citizens,” the report recommended.

The United States should also encourage a new multilateral push for greater exchange rate adjustment by the world’s large creditor countries.

“Undervalued exchange rates contribute to large current account surpluses and reduce the incentive for private investors in the country with an undervalued exchange rate to hold foreign claims,” the report added.

Reporting by Vivianne Rodrigues; editing by Gary Crosse

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