Monday, December 13, 2010

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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