EQC is constrained against proper portfolio diversification unless it seeks specific Ministerial authorisation, note Duncan and BK Drinkwater.
Drinkwater notes that the fund has to be highly liquid and highly conservative. If EQC can use its cash holdings for the first wave of payouts, then liquidate foreign securities next, it could ride out the initial currency depreciation and the initial hits to the value of NZ government securities. But I don't know why that requires holding NZ government securities rather than a portfolio of other countries' similar offerings. Any earthquake big enough to require a serious chunk of EQC's portfolio will be big enough to hit the dollar and, potentially, the country's credit rating. All of those argue for holding foreign assets to guard against the worst case. What's the risk? Appreciation of the NZ dollar prior to a major event or the tanking of a broad set of foreign government securities. Both can happen. But we could similarly have a major event subsequent to a big recession in New Zealand. Is it really safest having most of the eggs in a basket that's subject to liquefaction? Did anybody at EQC seek the Minister's authorization to have a portfolio that's a little less NZ-centric?
But even if foreign instruments are illiquid, surely they can be used as security for access to fast cash through a loan?
ReplyDelete@Matt: I can't believe that US, Aussie and other T-bills are any less liquid than NZ bills. And if NZ ones are only liquid because govt here feels obliged to redeem quickly, that just pushes the problem back a level: from where does govt get funds to redeem at a moment's notice? Same pool from which they'd be pulling to fix all the other infrastructure.
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