After much careful study and  2  BIS central bankers’ speeches  planning for a year, the HKMA launched the Tracker Fund, an open-ended exchange-traded fund, in November 1999 and resold $ billion worth of stocks to 180,000 investors. We continued to recoup over $ billion in the next three years through the same mechanism. Ultimately, our market operation turned in a profit of nearly $ billion at prevailing stock prices at that time. 7. The experience of Hong Kong clearly shows that market failures do occur. In the example I have just outlined, market intervention by the HKMA proved to be bold and effective in securing the safety and soundness of Hong Kong’s monetary and financial system. It was, indeed, undertaken in a life-and-death but smokeless war on the financial front. Hong Kong prides itself on being one of the world’s freest and most open markets. Nevertheless, as a much smaller market compared with our American and European counterparts, Hong Kong could fall prey to global predators, resulting in market failures. If the markets were allowed to plunge in free fall, the entire financial system might face a total meltdown. It was at such a critical moment that the Hong Kong SAR Government was left with no other option than to take unprecedented action. Today, with 17 years behind us, Hong Kong remains a free and open market and an international financial centre as before, and any lingering doubt has vanished. After all, “actions speak louder than words”.
3. Of course, CRAs cannot be blamed for every market failure. Let’s turn to the European sovereign debt crisis, the epicenter of which has been Greece. When Greece joined the eurozone in 2001, its sovereign debt rating was a mere A-. The market yield of its sovereign debts denominated in the Greek drachma in 1995 was about 17%. In 2003 after its accession to the eurozone, Greece had its credit rating upgraded slightly to A+, still not a very high rating. Yet, in the ensuing nine years or so, market players were particularly exuberant on the country’s prospect and piled into Greek sovereign bonds without really taking into account its economic fundamentals, fiscal positions and sovereign rating. At one stage in 2005, the Greek sovereign bonds were traded at a spread of as low as eight basis points above the triple-A rated German Bunds. Looking back, this was essentially blind chasing of high risk investments by tens of thousands of market players and investors impervious to objective economic analysis and credit ratings. In the end, they suffered great losses. Furthermore, the capital market failed to price in a reasonable risk premium for the Greek sovereign debts, suppressing Greece’s borrowing costs for a prolonged period of time. BIS central bankers’ speeches  1  This effectively encouraged a borrowing binge by Greece that ended up in the plight today.