Do governments interfere in the financial markets? – Medhat Nafeh

Posted in: Monday, May 2, 2022 – 18:35 | Last updated: Monday, 2 May 2022 – 18:35

In contrast to the foreign exchange markets, in which central banks regularly intervene, governments strive not to interfere in the stock markets, specifically the stock markets, because the intervention sends out negative signals about the lack of freedom of trade, and disrupts pricing. mechanism according to the natural forces of supply and demand, and it has side effects detrimental to the market.
Government intervention is usually justified by the desire to achieve price stability and restore investor confidence. In rare cases, there are actually some markets that have permanent funds to support the stability of stock prices in the markets, and these funds are announced in some cases, as is the case in Taiwan, and are hidden in other cases, such as the Egyptian market during some ancient periods, in what was known as the Ghost Fund. It is an anonymous fund that worked under authoritarian orders to pump money into the markets and support stock prices when needed, but no one could prove its existence. of that fund in fact because of its secret nature, which gave rise to the scarcity of workers in the field, and they compared it to the secret airport terminal that everyone knows but it is.It remains secret, even by name , and in any case, this fund has long since disappeared and no one knows its fate.
During the economic turmoil that hit the world against the backdrop of the mortgage market crisis in the United States in 2008, the opportunities available to governments to intervene in the stock markets were exploited mainly in emerging and developing countries. In March 2010, both “Khan” and “Batto” published a study entitled “Should governments intervene directly in the stock market during a crisis?” During which they analyzed the impact of the Russian government’s intervention in the stock market between September and October 2008 on market performance. The purpose of that intervention was to reverse the sudden and rapid downward trend in the prices of traded securities by changing market expectations and creating false buying power on equities. The study, using standard models, came to the decisive conclusion that the government “should not make direct intervention in the stock market during crises”, because the negative effect is greater and irreversible, especially in emerging and weak markets such as Russia.
Banot and Rajan attempted to answer the same question from the study referred to in another study published by the University of Chicago in March 2006 entitled “An Anatomy of Government Intervention in Stock Indexes: The Impact of Prices or the Impact of Information ? ” Their analysis focused on another financial crisis no less serious than the 2008 crisis, the Asian tiger crisis of the late 1990s.
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The analysis of the study focused on the Hong Kong Stock Exchange, one of the most important and active stock exchanges in Asia and the world, where the monetary authority intervened to buy the shares of the Hang Seng Stock Index during the period from 14 to August 28, 1998, and the intervention was aimed at deterring speculators and short sellers who put artificial pressure on stock prices.
Immediately, the government intervention led to abnormal returns on a portfolio of stocks weighted by the same index-weighted mechanism, amounting to 24%! These abnormal yields did not decline during the weeks following the government intervention, which somewhat denies the suspicion of temporary price pressure for state intervention, but it does not deny it completely, as prices may not return to decline and correct because directed government procurement absorbed the supply of shares, so that price fluctuations stopped with the termination of Liquidity, i.e. as if the government had partially suspended trading in the markets until conditions stabilized and they recovered from the shock.
The researchers believe there is a particular nature of the Hong Kong market that does not accept generalization to other markets as the government enjoys great credibility due to its possession of large reserves compared to the volume of trading activity in the Hong Kong stock market. These positive signs of the intervention of a rich and reliable government are likely to be the effect of information that prompted the markets not to recover lower, after the unusual tampering with market mechanisms through the government’s share purchases.
It is noted in the two previous cases that the state intervention in the stock market coincided with two severe global crises, and that this intervention was limited to a short period, and in a limited number of shares, and in special cases when the relevant authorities became convinced that the prices of securities do not reflect reality, and that they are Victims of manipulation or unjustified selling pressure. That is, if the market had internal factors for the weakening of prices, and the wave of decline preceded the financial crisis, it is not logical for any forces in the market to intervene to adjust prices, but rather, it leads to one of two things: Either prices will recover quickly after the injection of money has stopped (or say waste funds), and this is evidence of the existence of structural reasons for the decline that are not necessarily related to the fundamentals of the listed companies and their financial performance, but rather to the structure of the market itself and its ability to attract investment, the nature of the regulator or regulator and other reasons. The other thing is that prices are not recovering in the short term, but the trading movement is frozen due to the fact that government purchases or purchases by state-owned entities are classified as long-term investment, which reduces the supply of securities. in the market and reduce the trading movement and lack any opportunities for price correction, as well as any opportunities for activity Market or Attract Responsible Private Investment!
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The crisis in the Egyptian capital market does not require government intervention to create an artificial demand for securities sold at the lowest prices, but it does require a quick intervention to stop the bleeding of the markets by treating the disease itself, not the offer. . The Egyptian Stock Exchange, and behind it the non-bank financial markets, has witnessed a steady decline (almost separate from external shocks) in its performance indicators since 2011 to this writing, and it has not responded to various government incentives, of which the most important is the liberalization of the first exchange rate in November 2016 or the second of which the consequences still today.
The causes of the crisis are well known by the industry, and they have accurately diagnosed it in many published articles, interventions, communication websites and even policy documents, showing a strong correlation coefficient (amounting to causality) between the general decline in performance in the indicators of financial markets, insurance and real estate financing, on the one hand, and the administrative inertia in the leaders of the system on the other. One of the lessons learned from the Hong Kong study is the importance of the impact of information to correct the markets, and the immediate large returns that can be achieved by restoring confidence in the markets but restoring confidence has different instruments from one market to another In its administrative and supervisory arteries.
And if the presidential call was launched a few days ago, specifically during Egyptian family breakfast activities, to demand the government (and not the leaders of the system) of the need to prepare a vision for the development and promotion of the Egyptian Stock Exchange, then that vision must be prepared in isolation from the influences and noise associated with purchases of public money in the shares of stock exchange companies, Because our stock market crisis is not temporary or temporary, and it is not a victim of ‘ a global shock. The shocks could rather help expose it more, especially since it has separated from a mirror of the national economy (and rather of the global economy) after the market capitalization ratio of its restricted shares fell to below 10% of GDP.
The presidential invitation aims to attract direct and indirect private investment, and to expand local and foreign private sector ownership in assets as expected.

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