…This was the case in Argentina where the private sector had large foreign assets while the government had an even larger amount of foreign liabilities. The Republic of Argentina went bankrupt with only a moderate net foreign debt because wealthy Argentines had spirited their assets out of the country, and thus out of the reach of the government, while the poor Argentines refused to pay the taxes needed to satisfy the claims of the foreign creditors.
Ireland is not Argentina and should be able to avoid its fate; but only if the government can mobilize private foreign assets. This should be possible given that these foreign assets are mostly held by institutions, such as pension funds and life insurance companies.
The little data published by the associations of Irish pension funds and that of (life) insurance companies suggest that these two groups of financial companies own over €100 billion in foreign assets, of which about €25 billion are in non-Irish government debt and about €72 billion in foreign equities.
From the point of view of the country, it makes no sense that Irish pension funds invest in Bunds which yield about 2-3%, whereas the government pays close to 6% on fresh money to foreign official institutions (and Irish government bonds promise yields of close to 10%). A very strong case can thus be made that Irish pension funds and life insurance companies should somehow be ‘induced’ to invest their entire portfolio of gilts in Irish government bonds. The €25 billion in financing that this would yield for the government is equivalent to the entire contribution of the IMF to the rescue package.
A similar case can be made for the €72 billion in foreign equity investments. If two-thirds of that sum (or €48 billion) were also be invested in Irish government bonds, the total financing available for the government would rise to over €73 billion, more than all the foreign funds made available to Ireland under the rescue package…
Daniel Gros says pensioners will gain too…
Would this mean robbing retirees of their future? The opposite seems to be the case: the rate of return achieved by the average Irish pension fund has been only around 1.7% over the last decade (as claimed in a recent report of the public pension fund). A massive investment in the bonds of their own government, which offer a return of close to 10% (on the secondary market), should actually be in the interest of present and future Irish retirees as well. Moreover, by doing so, the probability of a state default would actually be much reduced, which in turn will preserve growth prospects for the economy – the most important determinant of future pensions.
According to our MMT friends from Kansas City, Missouri, your own SOVEREIGN bonds are indeed the best and safest pension because such a government cannot be forced by a bond market into defaulting on their promise. But Ireland is not sovereign, it uses a foreign currency the Euro, and is already insolvent. To make such a move before the Irish bank debt is repudiated/resolved/restructured is foolish and has every chance of further impoverishing the Irish people. Pensions require the highest level of security and a short term fix is not enough; future default risk of Irish government bonds inherent in the EMU as it currently exists, would have to be eliminated before such action should be taken.
Gros, whether he knows it or not, confirms Modern Money Theory re the ‘accounting identity’ of money. High Irish government debt requires that there is roughly matching (trade balances mess up the maths somewhat) high private sector savings. This is counter intuitive. Dr Stephanie Kelton of the University of Kansas, Missouri, has promised to dig out the figures and graph them – since economists need this kind of convincing.
If we have so much put by, why don’t the Irish spend, spend spend and get the economy going, I hear you ask? Because, families and business are still paying off their own and the governments (un-repayable) debts, is the answer. There is no short cut and no way round it: the debt has to be re-(your acceptable ending here).