1. Sovereign Wealth Funds
as lenders of last resort during the crisis
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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. Introduction …
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 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. … Introduction …
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=> 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. … Introduction
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 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. Outline
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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.
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6. 1. The interventions of SWFs during the crisis were not
marginal. SWFs intervened as …
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 « 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. … 1. The interventions of SWFs during the crisis were not
marginal. SWFs also acted as …
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 … “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. … 1. The interventions of SWFs during the crisis
were not marginal.
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 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. 2. These interventions of SWFs to rescue their home economies
are not just a passing innovation of the last crisis …
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 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.
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10. … 2. These interventions of SWFs to rescue their home
economies are not just a passing innovation of the last crisis.
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… But, this does not mean that these interventions are
efficient …
RESTRUCTURING FORUM - Brussels, 5-6 July 2010

11. 3. Are these interventions efficient? …
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 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.
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12. … 3. Are these interventions efficient?...
Qatar’s Stock Price Index
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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. 3. Do the interventions of SWFs succeed in supporting
the home economies during crises?
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 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).
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14. 4. Conclusion
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 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