Sunil Jain: SWFs bow out

PERSPECTIVES

Once the knights in shining armour, Sovereign Wealth Funds (SWFs) appear to be taking the backseat in terms of rushing to save collapsing US and European banks. Perhaps this is the result of the huge drop they’ve seen in the value of their investments over the past year.

According to the IMF, a total of $503bn (rose to $580bn by the end of September) was written down by banks and other financial institutions (such as insurance companies) by the end of August as compared to around $352bn that has been raised for recapitalisation. Interest rate spreads on the bonds issued by banks (typically, hybrid securities contain both an equity and debt component) have risen to 400 bps over US T-bills. Interestingly, while 88 per cent of fresh capital raised in the second half of 2007 came from institutional investors (60 per cent was from SWFs alone), this came down to just around 30 per cent in the first half of 2008 (SWFs are now down to around seven per cent). In other words, bank recapitalisation is set to get tougher even as the IMF ups its estimates of the writedowns to $1.4 trillion as compared to the $945 billion estimate in April this year.