Cant happen here right?
While the world was glued to the developments in the
Mediterranean in the past week, Poland took a page
straight out of Rahm Emanuel's playbook and in order
to not let a crisis go to waste, announced quietly that
it would transfer to the state - i.e., confiscate - the
bulk of assets owned by the country's private pension
funds (many of them owned by such foreign firms as
PIMCO parent Allianz, AXA, Generali, ING and Aviva),
without offering any compensation. In effect, the
state just nationalized roughly half of the private
sector pension fund assets, although it had a more
politically correct name for it: pension overhaul.
By way of background, Poland has a hybrid pension
system: as Reuters explains, mandatory contributions
are made into both the state pension vehicle, known
as ZUS, and the private funds, which are collectively
known by the Polish acronym OFE. Bonds make up
roughly half the private funds' portfolios, with the
rest company stocks.
And while a change to state-pension funds was long
awaited - an overhaul if you will - nobody expected
that this would entail a literal pillage of private sector
assets.
On Wednesday, Prime Minister Donald Tusk said
private funds within the state-guaranteed system
would have their bond holdings transferred to a state
pension vehicle, but keep their equity holdings. The
funds would effectively be left with only the equities
portions of their assets, even this would be depleted,
and there will be uncertainty about the number of
new savers joining.
But why is Poland engaging in behavior that will
ultimately be disastrous to future capital allocation in
non-public pension funds (the type that can at least
on paper generate some returns as opposed to
"public" funds which are guaranteed to lose)? After
all, this is a last ditch step which no rational person
would engage in unless there were no other option.
Simple: there were no other option, and the driver is
the same reason the world everywhere else is broke
too - too much debt.
By shifting some assets from the private funds into
ZUS, the government can book those assets on the
state balance sheet to offset public debt, giving it
more scope to borrow and spend. Finance Minister
Jacek Rostowski said the changes will reduce public
debt by about eight percent of GDP. This in turn, he
said, would allow the lowering of two thresholds that
deter the government from allowing debt to raise
over 50 percent, and then 55 percent, of GDP. Public
debt last year stood at 52.7 percent of GDP,
according to the government's own calculations.
To summarize:
Government has too much debt to issue more debt
Government nationalizes private pension funds
making their debt holdings an "asset" and
commingles with other public assets
New confiscated assets net out sovereign debt
liability, lowering the debt/GDP ratio
Debt/GDP drops below threshold, government can
issue more sovereign debt
And of course, once Poland borrows like a drunken
sailor using the new window of opportunity, and
maxes out its new and improved limits, it will have no
choice but to confiscate more assets, and to make its
balance sheet appear better, until one day, there is
nothing left in the private sector to confiscate. At that
point the limit itself will have to be legislated away,
and Poland will simply continue borrowing until one
day there are no foreign lenders willing to take the
same risk as the nation's private pensioners. At that
point, Poland, which is in the EU but still has the
Zloty, can just go ahead and monetize its own debt
by printing unlimited amounts of its currency.
Of course, we all know how that story ends.
The response to the confiscation was, naturally, one
of shock:
The reform is "a decimation of the ...(private pension
fund) system to open up fiscal space for an easier life
now for the government," said Peter Attard Montalto
of Nomura. "The government has an odd definition of
private property given it claims this is not
nationalisation."
"This is worse than many on the markets had feared,"
a manager at one of the leading pension funds, who
asked not to be identified, told Reuters.
"The devil is in the detail and we don't yet know a lot
about the mechanism of these changes, what
benchmarks will be use to evaluate our
performance... (It) looks like pension funds will lose a
lot of flexibility in what they can invest."
Catastrophic consequences for fund flows aside, the
Polish prime minister had a prompt canned response:
Tusk said people joining the pension system in the
future would not be obliged to pay into the private
part of the system. Depending on the finer points,
this could mean still fewer assets in the private funds.
"The (current) system has turned out to be built in
part on rising public debt and turned out to be a very
costly system," Tusk told a news conference.
"We believe that, apart from the positive consequence
of this decision for public debt, pensions will also be
safer."
You see, he is from the government, and he is
confiscating the pensions to make them safer.
Confiscation is Safety and all that...
Polish officials have tried to reassure investors, saying
the overhaul avoids the more radical options of taking
both bond and equity assets away from the private
funds outright.
They say the old system effectively made Polish
public debt appear higher than it really is.
Well, once you nationalize private assets, the public
debt will lindeed appear lower than it was before
confiscation: we give them that much.
End result: "The Polish pension funds' organisation
said the changes may be unconstitutional because the
government is taking private assets away from them
without offering any compensation.... This may lead
to the private pension systems shutting down," said
Rafal Benecki of ING Bank Slaski."
Unconstitutional? What's that. But whatever it is, it's
ok - after all the public pension system is still
around. At least until that too is plundered. But in the
meantime, all such pensions will be "safer",
guaranteed.
But best of all, in the aftermath of Cyprus, we now
know what the two most recent European blueprints
for preserving the myth of solvency are: bail-ins,
which confiscate deposits, and pension fund
"overhauls", which confiscate, well, pension funds.
And now, back to the global recovery soap opera.
While the world was glued to the developments in the
Mediterranean in the past week, Poland took a page
straight out of Rahm Emanuel's playbook and in order
to not let a crisis go to waste, announced quietly that
it would transfer to the state - i.e., confiscate - the
bulk of assets owned by the country's private pension
funds (many of them owned by such foreign firms as
PIMCO parent Allianz, AXA, Generali, ING and Aviva),
without offering any compensation. In effect, the
state just nationalized roughly half of the private
sector pension fund assets, although it had a more
politically correct name for it: pension overhaul.
By way of background, Poland has a hybrid pension
system: as Reuters explains, mandatory contributions
are made into both the state pension vehicle, known
as ZUS, and the private funds, which are collectively
known by the Polish acronym OFE. Bonds make up
roughly half the private funds' portfolios, with the
rest company stocks.
And while a change to state-pension funds was long
awaited - an overhaul if you will - nobody expected
that this would entail a literal pillage of private sector
assets.
On Wednesday, Prime Minister Donald Tusk said
private funds within the state-guaranteed system
would have their bond holdings transferred to a state
pension vehicle, but keep their equity holdings. The
funds would effectively be left with only the equities
portions of their assets, even this would be depleted,
and there will be uncertainty about the number of
new savers joining.
But why is Poland engaging in behavior that will
ultimately be disastrous to future capital allocation in
non-public pension funds (the type that can at least
on paper generate some returns as opposed to
"public" funds which are guaranteed to lose)? After
all, this is a last ditch step which no rational person
would engage in unless there were no other option.
Simple: there were no other option, and the driver is
the same reason the world everywhere else is broke
too - too much debt.
By shifting some assets from the private funds into
ZUS, the government can book those assets on the
state balance sheet to offset public debt, giving it
more scope to borrow and spend. Finance Minister
Jacek Rostowski said the changes will reduce public
debt by about eight percent of GDP. This in turn, he
said, would allow the lowering of two thresholds that
deter the government from allowing debt to raise
over 50 percent, and then 55 percent, of GDP. Public
debt last year stood at 52.7 percent of GDP,
according to the government's own calculations.
To summarize:
Government has too much debt to issue more debt
Government nationalizes private pension funds
making their debt holdings an "asset" and
commingles with other public assets
New confiscated assets net out sovereign debt
liability, lowering the debt/GDP ratio
Debt/GDP drops below threshold, government can
issue more sovereign debt
And of course, once Poland borrows like a drunken
sailor using the new window of opportunity, and
maxes out its new and improved limits, it will have no
choice but to confiscate more assets, and to make its
balance sheet appear better, until one day, there is
nothing left in the private sector to confiscate. At that
point the limit itself will have to be legislated away,
and Poland will simply continue borrowing until one
day there are no foreign lenders willing to take the
same risk as the nation's private pensioners. At that
point, Poland, which is in the EU but still has the
Zloty, can just go ahead and monetize its own debt
by printing unlimited amounts of its currency.
Of course, we all know how that story ends.
The response to the confiscation was, naturally, one
of shock:
The reform is "a decimation of the ...(private pension
fund) system to open up fiscal space for an easier life
now for the government," said Peter Attard Montalto
of Nomura. "The government has an odd definition of
private property given it claims this is not
nationalisation."
"This is worse than many on the markets had feared,"
a manager at one of the leading pension funds, who
asked not to be identified, told Reuters.
"The devil is in the detail and we don't yet know a lot
about the mechanism of these changes, what
benchmarks will be use to evaluate our
performance... (It) looks like pension funds will lose a
lot of flexibility in what they can invest."
Catastrophic consequences for fund flows aside, the
Polish prime minister had a prompt canned response:
Tusk said people joining the pension system in the
future would not be obliged to pay into the private
part of the system. Depending on the finer points,
this could mean still fewer assets in the private funds.
"The (current) system has turned out to be built in
part on rising public debt and turned out to be a very
costly system," Tusk told a news conference.
"We believe that, apart from the positive consequence
of this decision for public debt, pensions will also be
safer."
You see, he is from the government, and he is
confiscating the pensions to make them safer.
Confiscation is Safety and all that...
Polish officials have tried to reassure investors, saying
the overhaul avoids the more radical options of taking
both bond and equity assets away from the private
funds outright.
They say the old system effectively made Polish
public debt appear higher than it really is.
Well, once you nationalize private assets, the public
debt will lindeed appear lower than it was before
confiscation: we give them that much.
End result: "The Polish pension funds' organisation
said the changes may be unconstitutional because the
government is taking private assets away from them
without offering any compensation.... This may lead
to the private pension systems shutting down," said
Rafal Benecki of ING Bank Slaski."
Unconstitutional? What's that. But whatever it is, it's
ok - after all the public pension system is still
around. At least until that too is plundered. But in the
meantime, all such pensions will be "safer",
guaranteed.
But best of all, in the aftermath of Cyprus, we now
know what the two most recent European blueprints
for preserving the myth of solvency are: bail-ins,
which confiscate deposits, and pension fund
"overhauls", which confiscate, well, pension funds.
And now, back to the global recovery soap opera.