Central Europe’s Pilfered Pension Pillars
As EU officials underscored the continued hold of 30 banking groups on over half of regional assets and the BIS reported another quarter of cross-border pullback, IMF research dug further to scrutinize emerging member ties and the missing insurance and pension fund capital market support for alternative funding. It found that the 20 percent drop in external positions of Austrian, West European and Scandinavian parents since the crisis had largely been filled with domestic deposits except in a few cases like Hungary, Latvia and Slovenia. Only Austria’s Erste, Raiffeisen and Volksbank had subsidiaries worth more than 30 percent of the consolidated balance sheet and M&A activity was down one-third in 2012 although Polish and Russian institutions were prominent buyers. Regulatory and central bank dictates will further accelerate repatriation and safe asset preference as new capital and liquidity ratios and the single banking union enter into force. Specialty infrastructure and trade lines and small company borrowers will suffer most from retrenchment as home and host country supervisors continue to clash over risk weightings and resolution procedure. Capital market development could promote rebalancing from foreign reliance on overdue improvements, the paper contends. In private pensions early pioneer Poland has the largest pot equal to 15 percent of GDP with 5 percent-plus return and contributions rates over a dozen years. Romania and Slovakia enacted reforms after 2005 with less impressive results. Life insurance accounts for over one-fifth of premium income in 10 countries tracked and should translate into longer-term securities demand and annuities business diversifying from the current portfolio concentration on liquid government bonds and term deposits. The typical equity allocation ranges from 10-25 percent and corporate bond annual issuance for the group is only around $10 billion. As a trading and investment channel the Warsaw Stock Exchange’s $200 billion capitalization dwarfs neighbors’ combination. Fixed-income would benefit from local credit ratings agencies and euro entry to reduce currency risk and foster bourse consolidation. Governments should be careful not to arbitrarily cap pension manager fees while they consider the scope for introducing structured products like infrastructure bonds even though Brussels has been lukewarm on the idea, the document concludes.
Poland’s zloty debt has also been popular with foreign investors who control almost 40 percent of the amount outstanding as the currency and economy continue to slide. The PMI is below 50 on projected 1 percent growth bringing modest benchmark rate reductions. FDI covers over half the current account hole unlike the meager $3.5 billion 2012 figure in Hungary, where the Orban administration has added taxes on absorbed municipal loans to the panoply of bank headaches. To stay outside the excess deficit sanction it retains the option to raise and indefinitely extend the special levy imposed on taking office. The new transaction charge has been passed on to customers aiding fee revenue amid otherwise paltry profits.
