The big news today is the announcement in Ireland that the total cost for the banking industry rescue may reach €50 billion. And you thought Ireland was getting its act together? Actually, it was…kinda. This is a lovely explanation by The Economist:
“Ireland looks like an abstemious jogger that has suffered a heart attack…Ireland has tried hard to fix its problems. Public-sector wages have been slashed and new taxes raised. The economy is already flexible.”
The Economist is right, Ireland has taken extraordinary measures (and behaved quite abstemiously) to shore up its economic woes. In fact, the government has done something that, back in 2001, it vowed it would never do: it has used its National Pension Reserve Fund to help shore up the domestic banking industry.
When the NPRF was established in April 2001, the idea was that it would not be touched (…for any reason…) until 2025. Here is the blurb from the NPRF website:
“No money can be drawn down before 2025 and, from then on, drawdowns will continue until at least 2055 under rules to be made by the Minister for Finance.”
Granted, the NPRF has not technically been tapped by the government. Rather, the government has used its new authority (thanks to The Investment of the National Pensions Reserve Fund and Miscellaneous Provisions Act 2009) to direct the NPRF to invest in some struggling ‘listed credit institutions’.
In my view, however, the result is the same; the NPRF is acting outside of its original mandate. Call it what you want — and the NPRF calls these “directed investments” — this is an extraordinary request. In fact, the website goes on to say that, “the Fund’s statutory investment policy is not applied to these investments.” In other words, the Fund doesn’t consider whether these “investments” are sound; it just does what it’s told.
And so, this pension reserve fund has become a key component in the government’s bank recapitalization plan. And what began with a €7 billion bank program in February 2009 will apparently continue today with billions more from the NPRF.
I still have some misgivings about the NPRF being used in this manner. Yes, I get how grave the situation is and that desperate times necessitate desperate measures. But the country has cracked into its pension piggy bank 15 years too early. And it pains me to see the long-term, intergenerational issues, once again, taking a back seat to the “needs of the day”. How…seriously…how can governments ascribe to these long-term problems (such as pensions or climate change) the same sort of urgency as a banking crisis? Because these long-term problems require long-term solutions…