There is no doubt Ireland is facing an unprecedented sovereign debt crisis, says Jonathan Williams, but is cannibalising its own safety net the best way to solve the problem?
IRELAND - For several years now, Ireland's National Pension Reserve Fund (NPRF) has been something of all-purpose saviour. First, funds were used to recapitalise the ailing banks, then it was tapped for Ireland's bailout agreement with the EU and the IMF, while simultaneously having to contribute a substantial sum toward installing water meters across the country.
In light of these investments, the NPRF's future has been uncertain, with the latest accounts for 2010 showing that only €4.9bn of €24bn is left in its discretionary portfolio, and even that has already been earmarked for various stimulus measures, including the acquisition of Irish debt.
Not many people would argue against the cash injection that led to the NPRF's holding a 93% stake in Allied Irish Bank or injecting several billion euros into Bank of Ireland. However, with future public pension obligations at well over €100bn, the question is whether the scheme's long-term prosperity is being sacrificed for short-term survival.
Industry figures have said for months now that the scheme's purpose has changed irrevocably, with the financial crisis doing away with the notion that assets should not be drawn down before 2025 to help address the public sector pension deficit.
Indeed, the recent Credit Institutions (Stabilisation) Bill granted the minister for finance - currently Brian Lenihan - additional powers over any of the NPRF's funds, giving him (and future governments) free rein to use the assets for job creation measures or infrastructure products.
The National Treasury Management Agency (NTMA) seems to acknowledge this leaves the scheme with very few options. After revealing the remaining assets are likely to go toward growth-creating projects, it said: "The implications of these developments for the fund's operations and investment strategy are being considered by the NPRF Commission."
The question now is what the future will hold for the NPRF. Its assets have been all but drawn down, with what remains likely to be spent in the near future by an incoming government, elected on a mandate to tackle the country's deficit and unemployment following the demise of Taoiseach Brian Cowen's coalition government. The pressure for a quick solution will be immense, and those politicians who set out to improve the country's fortunes in, say, 15 years are not apt to win much airtime.
But Ireland's reserve fund could recover if given the chance. Its discretionary portfolio saw growth of more than 11% last year, and while the NTMA is unlikely to adopt an investment strategy that would see the remaining €5bn grow to more than €25bn over the next 15 years, a steady hand could help an already indebted country from avoiding further debt in future, at a time when its pension obligations threaten to overwhelm it.
Instead, it appears that a scheme originally designed to be out of bounds has instead become a very big political football - and it is about to land an own goal for the Irish people.