In Latin America, just before a bankrupt state entirely runs out of money, it is traditional to try one last smashand- grab for the savings of the private citizen. We have seen this trend not just in South America’s recent financial history but down through the ages, where kings, tyrants and emperors expropriate the wealth of the nation to prop up their dysfunctional regimes.
Could it happen here? Could the savings of the private citizen be expropriated by the State to pay the last of the Croke Park promises? Or worse, could the remaining wealth of the private citizens be used to pay the odious debt of the banks? The answer is yes, and you have to be aware of this because this is often the way things end when a state goes bust.
Hopefully, the new Government will be wise to what was being hatched in the last desperate days of the previous regime. Just before Christmas, the State eyed up savings in our pension funds in one final effort to get its hands on your wealth.
There is a lot of money in Ireland’s private pensions. Currently, there is â‚¬48bn in defined benefit private pensions and â‚¬23.7bn in defined contribution schemes. This is a lot of bread and could finance a government for a number of years.
In addition, the pension funds need a financial fix and it would be in their interests if your cash were sequestered because it is no secret that many private pension funds in Ireland are suffering from funding difficulties. They have seen their original investments in bank shares wiped out and their position in the bonds of peripheral European countries and, of course, their exposure to Irish bonds have taken a hammering as the price of these bonds has fallen.
Like the Irish State, they are finding that their future liabilities might outweigh their ability to pay. These pension funds either need extra capital injections, or access to investments that return a risk-free high yield. Up to now, although not debarred from taking huge positions in Irish government debt, the more prudent pension fund managers have made a call on not putting all their eggs in that basket. But what might happen if that changed?
In December, Brian Lenihan introduced a scheme that seems, on the face of it, to provide just such an opportunity for the State to get more of our savings and for the pension funds to get higher yielding bonds to recapitalise their funds. So what is going on?
Consider the following. Irish sovereign debt is currently trading at very high yields, with our 10-year bonds at 9.4pc. If our pension funds could invest in that government debt at something close to that yield, it would go a long way towards covering the potential future losses of those funds. Under current legislation, pension funds can only invest in top-rated, low-yielding, sovereign debt — for example German bonds, yielding 3.2pc on 10 years. They have little access to the high-yielding stuff because it is more risky.
In order to overcome this, the scheme introduced by Brian Lenihan in December allows for the National Treasury Management Agency (NTMA) to issue new bonds that will be available for Irish pension funds.
The NTMA will allow Irish pension funds to buy new debt paying high interest.
On the face of it, this seems to be a very neat solution to what is likely to become a serious funding problem for Irish pension funds. It also has the added benefit of being a new source of funding for the State — rather than relying purely on the IMF and EU. It means that the State can start the process of grabbing people’s savings.
Just because something looks sensible on the face of it, doesn’t make it clever at all.
First, we have to look at a basic rule of investing. If the yield (interest rate) on an investment is high (and 9.4pc is very high for sovereign debt) then that price reflects the risk associated with that bond. Higher yield equals higher risk.
So pension funds will be exposing themselves to higher risk. Or rather, they will be exposing their members to higher risk. Remember these are some of the same lads who were buying Irish bank shares at the top of the market, so their judgment might not be the best.
Pension funds will also be further exposing Irish savers to the Irish State. Bad enough that the State is taxing us to pay for the banks but now it is taking our savings, through a sleight of hand with the pensions funds, to finance the banks too.
Remember it is your money. Private pension funds get their funding from people in employment putting their money in their pensions for the future. In an economic downturn, the number of people employed falls, therefore the number of people paying into the funds decreases (while the number of people withdrawing from the fund (pensioners) remains fairly constant. So, of course, now more than ever, the pension funds are attracted to something high-yielding, particularly if the State says, “Don’t worry, we will pay you in full.” But that’s just another promise.
When you think about it, the funding pressures on the pension funds are the same as the funding pressures on the State. Reduced economic activity in the State leads to reduced earnings for the Government, making buying Irish government bonds more risky. Can you now see how your savings might be put at risk by a scam which seems designed to help the State and the Irish pension fund industry?
THIS is yet another example of the “insiders” in Ireland saving their own skins and giving the bill and the attendant risk to the “outsiders” — the ordinary Joe.
A little birdie told me that the NTMA is considering offering a 30-year Irish government bond yielding 6.2pc in the near future. This might look attractive to the pension funds at first blush and it might appeal to the “green jersey” brigade — the insiders who in times of trouble call on us, the outsiders, to do our patriotic duty. Well, amigo, there is nothing patriotic about bailing out Anglo.
This initiative is yet another example of pyramid scheme thinking. At the top of this pyramid, the Irish State offers an Irish pension fund a huge yield. This helps the State cover its huge budget hole momentarily and makes the balance sheets of the pension funds look robust because the yield is so high. So at the top all looks fine. But at the bottom the entire scam is predicated on the economy — you and me — continuing to stuff our money into the base of the pyramid in taxes and now our savings. In this way, the State manages to tie up all the income and the wealth of the individual citizen in its scam.
When the likes of Argentina ran out of options, it swiped its people’s savings in various elaborate stitch-ups. We may be going down the same route. In Argentina this led a friend of mine to describe Argentinian compatriots as “great patriots and terrible citizens”. When they play football they are the most passionate supporters but ask them to keep their money at home and they will laugh, citing the last time patriotism was used to rob them. No gracias, amigo. Could it happen here? Cinnte!