Market Watch

Polish Pension Sausages and Fed Incentives

A little recent news concerning foreign bank deposits. It looks as if the below chart indicates that there is a large amount of capital hanging out  in foreign US bank branches (imagine that). In order to reduce risk and incentify risky capital allocation  at home the fed has banished all foreign deposit insurance ($250,000) in a 5-0 vote. At play, according to Hedge/WSJ HERE,  1 trillion in deposits.

The move rejects what officials called a “creative” legal proposal from the banking industry. “We don’t want to become the deposit insurer for the world,” FDIC officials said at a briefing.

The FDIC’s action was prompted by the move last year by U.K. regulators to propose changes in the way deposits held at overseas branches should be treated. FDIC officials said the U.K. proposal potentially opened the door to those deposits being insured by the FDIC; the rule being finalized Tuesday clarified that isn’t the case, said FDIC Chairman Martin Gruenberg.

“The final rule protects the deposit insurance fund, while at the same time recognizing both the FDIC’s commitment to maintaining financial stability through the prompt payment of deposit insurance and the evolving nature of the global banking system,” Mr. Gruenberg said in a statement.


Smart move actually by the Fed to reduce their risk and create incentive at home. Small tip-off however to upcoming events for those who pay attention.

Hey, at least its better than Poland which just watched half of its pension funds nationalized (Reuters/Hedge)……

By way of background, Poland has a hybrid pension system: as Reuters explains, mandatory contributions are made into both the state pension vehicle, known as ZUS, and the private funds, which are collectively known by the Polish acronym OFE. Bonds make up roughly half the private funds’ portfolios, with the rest company stocks.

And while a change to state-pension funds was long awaited – an overhaul if you will – nobody expected that this would entail a literal pillage of private sector assets.

On Wednesday, Prime Minister Donald Tusk said private funds within the state-guaranteed system would have their bond holdings transferred to a state pension vehicle, but keep their equity holdings.  The funds would effectively be left with only the equities portions of their assets, even this would be depleted, and there will be uncertainty about the number of new savers joining.

After all, this is a last ditch step which no rational person would engage in unless there were no other option. Simple: there were no other option, and the driver is the same reason the world everywhere else is broke too – too much debt.

By shifting some assets from the private funds into ZUS, the government can book those assets on the state balance sheet to offset public debt, giving it more scope to borrow and spend. Finance Minister Jacek Rostowski said the changes will reduce public debt by about eight percent of GDP. This in turn, he said, would allow the lowering of two thresholds that deter the government from allowing debt to raise over 50 percent, and then 55 percent, of GDP. Public debt last year stood at 52.7 percent of GDP, according to the government’s own calculations.

To summarize:

- Government has too much debt to issue more debt
- Government nationalizes private pension funds making their debt holdings an “asset” and commingles with other public assets
- New confiscated assets net out sovereign debt liability, lowering the debt/GDP ratio
- Debt/GDP drops below threshold, government can issue more sovereign debt

You see, he is from the government, and he is confiscating the pensions to make them “safer”. Confiscation is Safety and all that…

Polish officials have tried to reassure investors, saying the overhaul avoids the more radical options of taking both bond and equity assets away from the private funds outright.

They say the old system effectively made Polish public debt appear higher than it really is.

Well, once you nationalize private assets, the public debt will indeed appear lower than it was before confiscation: we give them that much.

End result: “The Polish pension funds’ organization said the changes may be unconstitutional because the government is taking private assets away from them without offering any compensation…. This may lead to the private pension systems shutting down,” said Rafal Benecki of ING Bank Slaski.


Can you smell what the Rock is Cooking? Smells like private wealth sausages…