The 2008 worldwide economic slowdown raised a number of questions that years of apparent prosperity had hidden. Can global expansion continue indefinitely with slowing population growth and lower gains in economic productivity? Are the world’s banking systems safe and sustainable? How can the population echo booms ending now support the global population explosion entering into their social insurance years?
Poland may not have the answer for all of these problems, but it’s proposing an answer anyway: nationalization.
Poland faces several crises that have simmered under the radar for a while, to mix metaphors. One of these, which relates to so many others, is that the Poles decided to spend beyond their means and found that the cost of credit was increasing. Rather than slashing spending a la Estonia and bringing their spending under control, they went ahead and nationalized some of their private retirement funds.
Without getting into the weeds in explaining this, Poland ran a two-tier retirement system that created a guaranteed public retirement option and a private one, the latter overseen by some of the largest and most reputable institutions in Europe. The private funds invested in state debt as part of their holdings (and invested in private debt for the rest). Poland’s increasingly unpopular government, faced with increasing debt and increasing costs for more debt, simply seized the state debt held by the private funds, thereby (1) reducing the size of the debt overall and (2) reducing future calls on its sovereign credit.
The explanation — that the private funds should never have been allowed to so invest in the first place — is worthy of 1970s Moscow. The promise that the monies taken will be shifted into the state funds before the retirees retire is not even worthy of a scoff.
The companies administering the funds, the fund holders, and a great number of Poles are angry. Bond purchasers in Eastern Europe and more damningly the rest of the world are wondering why they would ever invest in Poland now.
This sort of inept mismanagement is why Prime Minister Donald Tusk’s government looks increasingly unlikely to enjoy the privilege of Government for much longer. The entire move — which will likely be the subject of litigation as Poland has decided not to pay a drop of compensation to the funds for the bonds taken — smacks not only of desperation but of a scorched-earth policy that will leave the next government scrambling to convince investors that Poland is a safe place for business and more importantly investment.
Many are asking the question pointedly: Why would I invest in you if you’re simply going to say you should never have let me do so in the first place?
Legal experts are also suggesting this runs afoul of European Union laws on human rights and business security.
It would be easy to make this a morality tale of the old Soviet ghosts rising from their graves, but it is not. It is instead a story increasingly prevalent in the Western world, a story of an incompetent leadership dealing with crises bequeathed them by their successors and failing each time. It is the same ineptness that led to the Cyprus debacle, and will lead to more as time ripens and the promises of the past become unsustainable.
These are hard days to invest in Europe. Poland is merely demonstrating this for us all.
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