Wednesday, October 27, 2010

Luck of the Irish Running Out?

John O'Donnell of Reuters reports, Ireland urged to use pension fund to buy bonds:

Ireland's finance minister has been urged by some senior advisers to allow the country's 24 billion euro ($33 billion) state pension fund to buy Irish government bonds to support demand, an Irish official said on Wednesday.

The senior official, who declined to be named but is familiar with financial policy discussions in the Irish government, said no decision to take such action had been made.

A spokesman for Ireland's department of finance, contacted by Reuters, said: "There are no proposals to do this."

Tapping the fund, set aside to pay the state old-age pensions as well as pensions for Irish civil servants, could meet stiff political opposition. Roughly 10 billion euros of it are already earmarked to buy stakes in struggling Irish banks.

But some officials now believe a change in the law covering the fund, which currently prevents it from buying Irish bonds, could help the country as it prepares to return to the debt markets to borrow next year.

"That's an asset that the government has which they can choose to use -- it's there," the official told Reuters, adding that the "firepower" of the 24 billion euro fund could encourage other investors to buy Ireland's debt.

"Under law, the fund is not allowed to invest in Irish government paper. To do that would require a change in legislation," the official said, acknowledging that "raiding the fund" could prove politically difficult.

The suggestion is similar to one made by a prominent economist at Ireland's Economic and Social Research Institute, a think-tank that is influential with the Irish government.

John FitzGerald, a member of a new Central Bank Commission which replaces the old board of the central bank, has recommended selling some of the investments in the pension pot to cut the country's overall debt burden.

But using the fund to shore up Ireland's finances is likely to ignite controversy amid drastic tax hikes and spending cuts.

IRISH HEDGE FUND

Speaking to Reuters, FitzGerald outlined how Ireland could use its cash reserves and the pension fund to reduce its ballooning debt, which is set to match the country's 160 billion euro economic output this year.

"It doesn't make sense to act as a hedge fund," he said, adding, however, that he would be critical were the fund to be tapped to buy Irish bonds. FitzGerald said Ireland "investing in itself ... would lack credibility."

Ireland expects its deficit to blow out to an unprecedented 32 percent of GDP this year due to the one-off inclusion of a bill for purging its banking sector of years after years of runaway lending.

But even excluding the bank burden, which could hit 50 billion euros, the shortfall will be 12 percent of GDP, four times the EU's limit of 3 percent of GDP, as anemic growth and rising unemployment sap tax revenues and weigh on spending.

Once hailed as an economic "Wunderkind," Ireland is battling to prove it is not in need of assistance from Brussels or lender of last resort, the International Monetary Fund.

Olli Rehn, the EU's Economic and Monetary Affairs Commissioner, will meet government members, opposition politicians and trade union officials in Dublin early next week to underline the seriousness of the situation.

Struggling to convince international investors it is not on the verge of a Greek-style debt crisis, Dublin is redoubling efforts to tackle the worst deficit in Europe.

On Tuesday, it said it planned to squeeze 15 billion euros in fiscal savings between 2011 and 2014, double its original target.

Poor Ireland, unlike the US, they can't print dollars to purchase their bonds, so they're resorting to using hard earned savings of pensioners to boost their fledgling debt markets. Needless to say, if they go through with this silly idea, it's a desperate attempt to shore up their public finances and it's not in the best interest of Irish pensioners or taxpayers.

There's an old Irish saying, 'Tis better to spend money like there's no tomorrow than to spend tonight like there's no money!'. But the money has run out. Just like Greece, Ireland is going to go through its share of fiscal austerity and hopefully they'll come away stronger. But I fear that if they start implementing these short-sighted policies, it will only exacerbate their precarious situation, and possibly lead them down the path of another potato famine.

The Irish deserve better. It's high time the Irish government stops using pension monies to implement its policies and starts taking a longer-term view on how to boost Ireland's economy which is way overleveraged to the financial sector.

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