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Hungary For Pensions?
Gergely Szakacs and Marton Dunai of Reuters report, Hungary rolls back pension reform, defies markets:
Hungarian lawmakers voted to roll back a 1997 pension
reform on Monday, effectively allowing the government to seize up to
$14 billion in private pension assets to cut the budget deficit while
avoiding austerity measures.
With
financial markets on edge across Europe over debt and deficits, Prime
Minister Viktor Orban has spurned international advice to cut budget
costs, as Ireland and Greece have done, in favor of unconventional
policies meant to revive Hungary's moribund economy.
Parliament
passed the pension legislation with 250 votes for, 58 votes against
and 43 abstentions. Orban's ruling Fidesz party has a two-thirds
parliamentary majority.
By
plugging its budget shortfall with the pension funds and new taxes on
banks and mostly foreign-owned businesses, Orban has promised to end
years of austerity and bolstered the popularity of his right-of-center
Fidesz party in opinion polls.
But
the strategy -- which also includes regaining "financial sovereignty"
by ending a 20 billion euro ($26.38 billion) safety net deal with the
European Union and International Monetary Fund -- has worried investors,
caused losses in Hungarian assets, and prompted a downgrade by Moody's
ratings agency last week to Baa3, the lowest investment grade.
The
government has also criticised the independent central bank for
raising interest rates last month, and is poised to change the central
bank law so it can fill the rate-setting Monetary Council with its own
candidates.
Economists
say that by raiding private funds, Orban will cut the deficit to below
3 percent of gross domestic product next year. But he will also only
delay reforms which they say are vital to tackle a debt pile equivalent
to 80 percent of GDP -- just above the EU average but higher than any
other country in the bloc's post-communist East.
The
plan depends heavily on economic growth -- a problem if Europe's
recovery slows next year as expected -- and analysts have also warned of
risks to long-term fiscal sustainability.
"While
the country's headline deficit is forecast to move only to 2.9 per
cent of GDP in 2011, it has achieved this through myriad short-term
policies that mean the budget will be unsustainable after 2012 with a
hole of some 500 billion forints ($2.38 billion)," said Peter Attard
Montalto at Nomura in London.
DOUBT ON REFORMS
The
legislation imposes stiff penalties on Hungarians who do not transfer
their pension assets back into the state system by the end of January.
The
government will sell the assets and use the income to cut debt, plug
holes in the state pension fund, and create room for tax cuts for
households and small companies.
It
hopes tax cuts, including a 10 percent corporate tax rate for all
companies from 2013, will boost growth to 5.5 percent by 2015, a faster
pace than any achieved in the past 20 years.
The
pension change -- which pension funds said amounted to nationalisation
-- has not hurt Fidesz's popularity so far, as most Hungarians had not
expected to get proper pensions anyway.
"I
haven't worked in a fully registered job for more than 10 years. What
kind of pension savings do you think I have? Take it, please, if it's
good for the country," said Tamas Kemeny, 37, a radio technician.
Some Hungarians, however, are shocked by the lack of choice offered by the government.
"I
have no idea whether the state system is better than the private
pension system but now they tell me I can say goodbye to half of my
pensions if I'm not in the state pension system. This is like choosing
between a kiss or a smack in the face," said Gabriella Kiss, 21, a
student.
Investors are sceptical.
The forint has lost 5 percent against the euro since Fidesz's April
election victory, and 3- and 5-year bond yields have jumped more than 2
percentage points to almost 8 percent.
The
government has promised to unveil a structural reform plan worth 600
billion-800 billion forints in February, but little is known about the
details.
According to realdeal.hu, PM tells retired Hungarians in letter that pensions are safe:
Prime
Minister Viktor Orban has written a letter to retired Hungarians
ensuring them their pensions are safe and that gas prices will not rise
for small household consumers, Mr Orban's spokesman Peter Szijjarto
said at a press conference on Saturday.
The letters will be sent
by the National Pension Directorate and should arrive in pensioners'
postboxes by next week at the latest, Mr Szijjarto said.
Mr
Orban writes in the letter that the way pension savings play into the
hands - without the knowledge of pensioners - of private investors is
"unacceptable trickery". For this reason, the government took measures,
without delay, to rescue pensions and make them secure for the long
term, he writes.
To rescue pension savings? How? By following in Bolivia's footsteps
and nationalizing them? This is a disturbing trend. If more countries
start going down the road of nationalizing pensions, all that's going to
happen is that they'll buy some time but ultimately their pension
system will go broke.
Governance rule #1 to keep pensions
safe: Keep politics out of pensions! Unfortunately we're witnessing a
free-for-all when it comes to pensions. I fear that this is going to
end up being a huge policy blunder as Hungary struggles to reform its
economy. And it sends the wrong message to foreign investors at a time
when Budapest appears keen on attracting new funds
from the emerging markets, such as China, India and the middle east,
rather than traditional sources in western Europe. I wish them luck
because they just moved down a slippery slope which could set them back
years.
***Feedback***
An economist who knows a lot about pensions and Hungary had this to share with me:
Hi Leo, the essence of this story is that
according to reasonable (government) projections, the pay-as-you- go pillar in Hungary was
headed, for demographic reasons, for an unmanageable deficit about twenty years
hence. Adding the additional obligations now assumed by the government in
the act of ‘saving’ pensions will turn a very difficult situation into an
impossible one, long after the present government will be gone. They know this.
»
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Raiding private pensions seems dishonest, but the tax on banks and foreign investment could help rein in financial speculation and hot money. Or it's paranoid false-populist xenophobia. Could be a good start, could be very bad.
Speaking of pensions, what is the financial status of the PBGC these days? Will they end up under the Fed's wing too?
These so called pension 'assets' don't exist anyway, certainly not at the value listed on the books of the pension funds. What would these 'assets' realistically fetch in the case of liquidation?
The government is taking nothing from nowhere. The 'money' is not there people.
This is fucking scary shit people. Another reason why I took about 30 percent out of my pension. Got debt free and bought some more SILVER! Yeah Baby!
hoser
Even Blind Freddie could see this coming at least 6 months ago. It's one of the reasons that I have found Leo's contributions here to be an absolute intellectual wank ... managing pension funds of any type will soon just be a matter of choosing which Treasury maturity you prefer (assuming you have any say in it at all).
silver coins worst investment ever devised.
Lo fasz!
LMAO!
http://www.urbandictionary.com/define.php?term=lofasz
How does this differ from our much vaunted Social Security "Trust Fund"? Isn't that all basically paid out of current expenditures anyway? Haven't the funds in the "Trust Fund" been either used to buy .gov debt or just misspent?
Isn't this essentially what Ireland just did? They borrowed from their pensions so their deficit from bailing out their banks would not look as bad?
Didn't Bill Clinton basically steal from So-So security to make his budget tricks? Americans should get out of their 401k soon after Jan 1 before the USA government takes charge of it for them.
While I don't agree with nationalizing pensions/401K, I also don't agree with any governmental guarantee of retirement money payouts (as is often the case with pensions in particular). If the government guarantees the liabilities, it should control the asset side as well.
Ergo, the guarantees should be removed.
Clinton probably. Bush Sr did big time. They are all corrupt.
They have already tried this twice in two years since Obama has had the presidency. The see those trillions in private 401k's and pensions (that are still left) and the govt. want it. They will force mutual funds that control 401k's to invest in treasuries.
more plans are allowing a conversion from 401k to Roth IRA... you take the hit, but you get more control...
it'll be interesting times next year
Interesting development - especially that there's public support for this move. If they indeed pull it off and use those $14b to reduce their external debt, then Hungary's debt/GDP ratio could fall below the 'magic' 80% limit in one quick step, down to somewhere between 70%-75%.
So if you believe in austerity and if you believe in paying down debt, then this is a HUF long CDS short event.
(Also watch out for the inevitable downgrade of Hungary. The rating agencies do not like taxes on banks and do not like debt reduction.)