Irish Sovereignty: Life Imitating Theory

Ashby Monk

Earlier this year, I wrote a theoretical paper that attempted to conceptualize the value of SWFs to their nation-state sponsors. Put very simply, I argued that SWFs offer nation-states an opportunity to reassert sovereignty and authority in a world seemingly at the mercy of financial globalization:

“Accordingly, policymakers establish and use SWFs to minimize uncertainty and volatility and maximize state-autonomy. The recent crisis has only served to crystallize the utility of SWFs in this regard—one explanation of the ‘spike’ in the number of SWFs around the world. Whether the SWF has a mandate to fill an unfunded pension liability through investments in riskier assets or has a mandate to smooth volatile commodity prices, these funds represent an attempt by governments to manage their future; acting as ‘insurers of last resort’ for a given domestic problem. SWFs thus offer a chance to make reliable and consistent plans in an environment that is increasingly subject to volatility and market-based short-termism.”

With that in mind, let’s now turn to Ireland, where the government is straining under the weight of its obligations. According to the FT this morning, it isn’t all that keen on an outside bailout:

“They have depicted any move to go “cap in hand” for outside assistance as a national humiliation, especially in a country that fought for its political independence from Britain 90 years ago.”

“‘It has been a very hard-won sovereignty for this country and the government is not going to give over that sovereignty to anyone,’ said Batt O’Keeffe, the enterprise minister.”

Fair enough; Ireland isn’t about to turn over internal decision making given its hard-fought independence. So, what can be done? Again, according to the FT:

“…it can resort to the national pension reserve fund, a sovereign wealth fund already used to bail out Ireland’s banks, if it is still unwilling or unable to re-enter the debt markets.”

And there, folks, is a case of ‘life imitating theory’. (…As well as, apparently, a case of ‘smug blognerditis’ on my part…)

Anyway, readers of this blog are undoubtedly aware of the Irish SWF, the National Pension Reserve Fund. And, you all know that this fund was not set up for generic bail-outs of the Irish government. Rather, it was set up to prevent a future pension crisis due to population aging. In other words, it isn’t quite a ‘ready pool of cash’ for the government to tap in to, but, given Ireland’s incredible reticence to turn to the IMF, it may become Ireland’s saving grace. I still have plenty of misgivings about the NPRF being used in this manner. However, if the alternative is a “humiliating” outside bailout and a loss of sovereignty, I understand why breaking the NPRF piggy bank may be preferable. After all, as I argued in my paper, SWFs value to their nation-state sponsors is their ability to help preserve autonomy and sovereignty in times of crisis. I’d say the current Irish case qualifies…

6 Responses to “Irish Sovereignty: Life Imitating Theory”

  1. 1 Kyle Hatton November 15, 2010 at 4:27 pm

    Ashby- any thoughts on whether this kind of additional sovereignty is a good thing? A SWF is certainly a useful vehicle for capturing financial returns within the public sector, but doesn’t the ability to draw on such a fund insulate public officials from the consequences of their poor policy choices in other areas?

    I am skeptical that enabling a government to insure against the negative consequences of its own decisions is a good thing- while it might cause taxpayers pain to bail out their government, at least they recognize the incidence of the bailout- which I’m not sure they will if the funds are drawn from some nebulous public fund.

  2. 2 Ashby Monk November 15, 2010 at 5:23 pm

    Kyle: Great comment. It’s particularly relevant for the struggling countries of the EU. I’d have to say that the fact that politicians sequestered revenues in the present in order to fund a future liability means, by definition, that they were being less spendthrift than they might otherwise have been. So the profligacy of Irish politicians can’t really be condemned, since they were squirreling assets into an SWF instead of spending them. That being said, the vulnerability to external shocks (e.g. the financial crisis) is something the politicians should be on the hook for…and it does pain me to see the original rationale for the NPRF corrupted in this manner. IE the idea was to save for pensions not bail out Irish banks. And the politicians will hopefully pay for this breach of the public trust. Still, as I said above, if the choice is between default, the IMF and tapping the SWF, I’d (unhappily) have to side with the latter. Anyway, thanks for the comment. That’s something I’ll continue thinking about. Cheers.

  1. 1 FT Alphaville » Ireland’s bifurcating bailout Trackback on November 17, 2010 at 6:17 am
  2. 2 Ireland Learns ‘Directed Investment’ Lesson the Hard Way « Oxford SWF Project Trackback on November 22, 2010 at 11:31 am
  3. 3 Markets Lose Long-Term Capital « Oxford SWF Project Trackback on November 29, 2010 at 10:52 am
  4. 4 Lessons from Manila « Oxford SWF Project Trackback on April 19, 2011 at 7:38 am

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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