Sovereign Wealth Funds as domestic investors of last resort during crises

Helene Raymond

Working Papers from HAL

Abstract: Usual definitions of Sovereign Wealth Funds (SWFs) put emphasis on their foreign investments. But after September 2008, some Sovereign Wealth Funds refrained from foreign investments and intervened to support their home economies during the crisis. We show that the interventions of Sovereign Wealth Funds as domestic "investors of last resort" are far from marginal and that they are not a passing innovation of the last global crisis. We review first the cases of interventions of SWFs as "shareholders of last resort" and differentiate interventions targeted on banks, from more general interventions designed to support non financial firms. We also run some regressions to quantify the impact of Gulf SWFs' interventions on their home Stock returns and volatility. We find that the interventions of the Kuwaiti SWF were unsuccessful, whereas the Qatari intervention of October 2008 managed to rise effectively the Stock market return in the short run. We then turn to the interventions of SWFs as "lenders of last resort" and insurance funds against major crises. In some cases (Russia, 2009; Australia, 2007-2008) the lending by SWFs is targeted on the home banking sector. SWFs can provide medium term financing to ease the liquidity constraints of banks, whereas Central Banks' loans are mostly at short term. But the intervention of Saudi Arabian SWF in 2008 was of a different kind, as the lending was targeted on non financial firms to make up for banks' reluctance to lend and stimulate the economy. Lastly we discuss the role of Sovereign Wealth Funds as insurance funds against major crisis. SWFs may be used for government spending during crises or even intervene on Stock markets to counter speculative attacks, as was illustrated by the interventions of the Singaporean SWF GIC and of the HKMA.

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Date: 2010
Note: View the original document on HAL open archive server: https://hal.science/hal-04140918
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Journal Article: Sovereign Wealth Funds as Domestic Investors of Last Resort During Crises (2010)
Working Paper: Sovereign Wealth Funds as domestic investors of last resort during crises (2010)
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