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Workshop Hedge Funds and Sovereign Wealth Funds - Raymond

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Workshop Hedge Funds and Sovereign Wealth Funds - Raymond

  1. 1. Sovereign Wealth Funds as lenders of last resort during the crisis 1/14 HÉLÈNE RAYMOND UNIVERSITY OF PARIS OUEST NANTERRE PRESENTATION BASED ON THE WORKING PAPER: “SOVEREIGN WEALTH FUNDS AS DOMESTIC INVESTORS OF LAST RESORT DURING CRISES” available from Econpapers RESTRUCTURING FORUM - Brussels, 5-6 July 2010
  2. 2. Introduction … 2/14  Sovereign Wealth Funds (SWFs) are:  long term investment funds,  controlled by a government,  at least partly invested in foreign assets (IMF, 2008; IWG, 2008).  SWFs are mainly located in emerging countries with current account surpluses.  Some SWFs’ foreign investments have spurred debate.  However, with the worsening of the crisis in September 2008, a number of SWFs retreated from foreign risky investments and were used to support their home economies. RESTRUCTURING FORUM - Brussels, 5-6 July 2010
  3. 3. … Introduction … 3/14 => The crisis raises some new questions about the objectives of SWFs.  Before the crisis the dominant view amongst economists = the objective of SWFs is to enhance the yield on foreign assets.  However, this dominant view cannot account for the “investor of last resort” part played by SWFs during the crisis.  The interventions of SWFs to finance their home economies during the crisis were clearly not motivated by profit seeking: they were part of rescue measures decided by governments.  They were also far from marginal:  over 40% of the deals by SWFs were targeted towards their domestic markets in Q4 2008. RESTRUCTURING FORUM - Brussels, 5-6 July 2010
  4. 4. … Introduction 4/14  The reaction of stock markets to foreign investments by SWFs has already been studied at length.  On the contrary, the literature on SWFs as lenders of last resort is very scarce. To the best of our knowledge the only exception is a paper by Clark and Monk (2009).  Clark and Monk (2009) focus on the case of the Singaporean SWF GIC and take an institutional approach.  Here:  We will try a more comprehensive (though less detailed) treatment of cases of SWFs acting as domestic investors of last resort,  Take a more quantitative view. RESTRUCTURING FORUM - Brussels, 5-6 July 2010
  5. 5. Outline 5/14 1. The interventions of SWFs during the crisis were not marginal. SWFs intervened to support their home economies, by acting as:  Shareholders / Lenders / Insurers “of last resort”. 2. These interventions of SWFs to rescue their home economies are not just a passing innovation of the last crisis:  Reports of similar interventions during past crises …  The possibility of such interventions is even sometimes provided for in the legal framework of the SWF. 3. Are these interventions efficient?  Some quantitative assessment of the reaction of domestic stock markets to interventions of SWFs.  List some risks associated with these interventions. 4. Conclusion. RESTRUCTURING FORUM - Brussels, 5-6 July 2010
  6. 6. 1. The interventions of SWFs during the crisis were not marginal. SWFs intervened as … 6/14  « Shareholders of last resort », by buying stocks in ailing home firms:  Some of these interventions were targeted on domestic banks:  The Chinese SWF (CIC) bought stocks in local banks from September 2008 onwards.  The Qatari SWF (QIA) bought stocks in local banks in October 2008.  Other interventions:  In September 2008 the Kuwaiti SWF intervened to support its home Stock market.  In October 2008 the Russian Prime Minister signed a ruling to allow the government to invest the Russian SWF (the National Wealth Fund) on the local Stock market.  In France the establishment of a new SWF (Fonds Stratégique d’Investissement), designed to support local firms, was announced in October 2008. RESTRUCTURING FORUM - Brussels, 5-6 July 2010
  7. 7. … 1. The interventions of SWFs during the crisis were not marginal. SWFs also acted as … 7/14  … “lenders of last resort” and insurance funds:  Interventions of SWFs as lenders of last resort:  In March 2009 intervention of Saudi SWFs.  In January 2010 intervention of a Russian SWF ( loan to VEB).  In 2007/2008: Australia’s Future Fund invested in various LT debt securities of Australian banks.  Interventions of SWFs as “insurance funds”:  The Reserve Fund of Russia was used to finance the Russian budget deficit (2009, …).  In January 2009, for the first time since the foundation of the SWF GIC, drawing on past Singaporean Reserves was decided => finance a recovery package. RESTRUCTURING FORUM - Brussels, 5-6 July 2010
  8. 8. … 1. The interventions of SWFs during the crisis were not marginal. 8/14  This quick review of publicized interventions of SWFs to rescue their home economies during the crisis => these interventions:  took diverse forms,  were not based on a risk/return criteria, but clearly designed to alleviate the consequences of the crisis on the home economy,  were far from marginal: several major SWFs intervened during the crisis.  A possible explanation= these interventions are a just another passing innovation in response to a major global crisis.  In the following, we take a different view and show that these interventions are not an innovation. RESTRUCTURING FORUM - Brussels, 5-6 July 2010
  9. 9. 2. These interventions of SWFs to rescue their home economies are not just a passing innovation of the last crisis … 9/14  In the past, there have already been at least 2 reported interventions of SWFs trying to rescue their home economies during a crisis:  In 1998, a dramatic intervention of the SWF of Hong Kong to counter a speculative attack by buying local Stocks.  During the 2006 crash of the Gulf Stock market, an intervention of the Kuwaiti SWF to support its home market.  Besides, according to Clark and Monk (2009), some SWFs have been designed from the beginning to allow them to provide exceptional support to their home economy during major crises => Singaporean SWF GIC, established in 1981. RESTRUCTURING FORUM - Brussels, 5-6 July 2010
  10. 10. … 2. These interventions of SWFs to rescue their home economies are not just a passing innovation of the last crisis. 10/14 … But, this does not mean that these interventions are efficient … RESTRUCTURING FORUM - Brussels, 5-6 July 2010
  11. 11. 3. Are these interventions efficient? … 11/14  It is very difficult to assess if these interventions are efficient in the LR, since most of the reported interventions of SWFs during crises occurred recently.  But, as some of these interventions aimed at supporting the local stock market, it is possible to assess their short run impact on stock returns and volatility. => Using some econometric regressions we tested for the efficiency of 2 interventions of the Kuwaiti SWF (2006,2008) and 1 intervention of the Qatari SWF (2008). We find that:  The interventions of the Kuwaiti SWF to buy local stocks in 2006 and in 2008 did not improve significantly the stock returns.  ≠ the Qatari intervention of October 2008 improved the local Stock returns, without raising their volatility. Explanation? This intervention was coordinated with monetary policy moves of Saudi Arabia and the UAE. RESTRUCTURING FORUM - Brussels, 5-6 July 2010
  12. 12. … 3. Are these interventions efficient?... Qatar’s Stock Price Index 12/14 The 1st vertical line = Lehman’s Brothers Failure. The 2nd vertical line represents the day when QIA’s intervention was launched. RESTRUCTURING FORUM - Brussels, 5-6 July 2010
  13. 13. 3. Do the interventions of SWFs succeed in supporting the home economies during crises? 13/14  Much work remains to be done, but according to these first results the evidence is at best mixed: interventions of SWFs alone do not seem sufficient to improve the state of the home stock markets.  These interventions have also some drawbacks:  Selling foreign assets to buy domestic assets through the SWF can be inconsistent with the exchange rate target.  Even when they are coordinated with the economic policies, these interventions entail some risks:  They can be inconsistent with the LR saving objectives of the SWF.  They can exhaust the SWF.  The benefit is questionable: is it possible for a SWF to smooth down the local effect of a global shock? (perhaps with internationally coordinated interventions). RESTRUCTURING FORUM - Brussels, 5-6 July 2010
  14. 14. 4. Conclusion 14/14  We showed that a large number of SWFs were involved in rescue operations of their home economies during the last crisis.  The interventions concern: Qatar, Kuwait, Saudi Arabia, China, Singapore, Russia, Australia and France (+ HK in 1998).  They probably involve also a few other SWFs, which managed less publicized interventions.  The efficiency of these interventions is however questionable:  When not coordinated with other economic policies (local and foreign), they are probably not sufficient to improve significantly the state of the home economy.  They can jeopardize the LR objectives of the SWF. RESTRUCTURING FORUM - Brussels, 5-6 July 2010

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