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The Future Fund as Lender of Last Resort?  Your Taxes at Work

Sources being quoted by Reuters suggest that Australian banks are raising term funding from the Future Fund.  ANZ has supposedly raised about A$500 million this way.  A Commonwealth Bank spokesman is quoted as saying that it looked at all funding options and “the Future Fund is clearly emerging as a future source of funding.” 

From a capital raising and portfolio management perspective, this lending would make good commercial sense and is fairly low risk.  However, it does raise some interesting issues as to whether the Future Fund may come to be seen as a de facto lender of last resort.  This also may not play well politically if the perception is that taxpayers are involved in subsiding bank capital.  It should make for some interesting questions at Senate estimates (hint for Coalition staff!).  Future Fund Chairman David Murray has previously argued that the Future Fund would serve to lower the cost of capital for Australian business, which effectively concedes the point that the Fund is providing a more or less explicit subsidy through such lending.

posted on 12 June 2008 by skirchner in Economics, Financial Markets

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Given that the FF’s investment in Australian equities is unlikely to be limited to the ASX’s worldwide index weight (about 2%?), isn’t it inevitable that the FF will lower the relative cost of capital (especially) for Australian listed companies? Does the fact that the investment is in debt rather than equity fundamentally change the story, leaving aside the perception of de facto LOLR?

Posted by .(JavaScript must be enabled to view this email address)  on  06/12  at  05:52 AM


To the extent that the FF simply displaces private saving, I don’t think you can make a strong case in relation to its implications for the cost of capital. 

If it is providing capital on a basis that is not otherwise available in the market-place, I think you can argue that it is distorting the allocation of capital to the extent that the FF invests differently from the most likely counter-factual situation in which these funds would be privately intermediated.

Posted by skirchner  on  06/13  at  06:37 AM



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