XIAM007

Making Unique Observations in a Very Cluttered World

Friday 6 September 2013

Poland Confiscates Half Of Private Pension Funds To "Cut" Sovereign Debt Load -

Poland Confiscates Half Of Private Pension Funds To "Cut" Sovereign Debt Load - 



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.

Read more -

Forget rabbit, duck season — it's Drone season for hunters in Colorado town -

Forget rabbit, duck season — it's Drone season for hunters in Colorado town - 

Novelty "Drone Hunting License" sold by Phillip Steel of Droneshooters.com for alleged use in Deer Trail, Colorado.

Hunters in Colorado are lining up for a hot new license: $25 to shoot down a government drone over the village of Deer Trail.
Supporters acknowledge the licenses would be only symbolic, and a town election authorizing them is more than a month away. Still, about 1,000 people have applied for one.
The scheme is part protest against government surveillance and part promotion to get Deer Trail some attention. It’s working, at least on the second point. The federal government issued a warning against shooting at drones.

Read more: - 
http://www.nydailynews.com/news/national/drone-hunting-season-tiny-colorado-town-article-1.1447389

Largest volcano on Earth found, scientists say -

Largest volcano on Earth found, scientists say - 



Move over, Mauna Loa.
A group of scientists say they've found a volcano bigger than you.

Way bigger.
An underwater volcano dubbed Tamu Massif was found some 1,000 miles east of Japan, says William Sager, a professor at the University of Houston, who led a team of scientists in the discovery.
The volcano is about the size of the state of New Mexico and is among the largest in the solar system, Sager says.
Tamu Massif covers an area of about 120,000 square miles. In comparison, the largest active volcano on Earth, Hawaii's Mauna Loa, is about 2,000 square miles, Sager says.
"It's shape is different from any other sub-marine volcano found on Earth, and it's very possible it can give us some clues about how massive volcanoes can form," Sager says.
Tamu Massif is believed to be about 145 million years old, and became inactive within a few million years after it was formed.
The volcano was partly named in honor of Texas A&M University, where Sager worked for 29 years before moving to the University of Houston. Tamu is the university's abbreviation while massif is the French word for "massive" and a scientific term for a large mountain mass, according to Sager.

Read more -