A valuable lesson missed

The most valuable lesson from the so-called «bonds scandal,» involving purchases of Greek government bonds by some pension funds, is the one the government does not seem to get. You cannot employ traditional political means to deal with a mainly technocratic problem such as the management of the pension funds’ assets. It is no wonder therefore that the ruling conservative New Democracy party has seen its lead over the main opposition socialist party PASOK be trimmed over the government’s handling of the scandal which has helped create deep internal divisions among Cabinet ministers. In addition to hurting the government, the scandal has also revealed a great deal about the lack of knowledge of more advanced financial products, such as structured bonds and the various asset pension fund management systems, among politicians, commentators and others. Financial products such as bonds issued by the Greek state offering a variable coupon rate in future years depending on the difference between the 10-year and the two-year euro swap rate or the 10-year swap rate under certain specified conditions have been demonized and condemned by people who do not really understand what they are all about. In a show reminiscent of the Dark Ages, some trade unionists have waged a war against the structured bonds and even called on the state to exchange the structured bonds with fixed coupon bonds. Perhaps they think the bond exchange can take place at favorable prices without thinking that such an act could have provoked similar demands by other structured bond holders, costing the Greek state much in money and reputation. Deputies from the opposition political parties have found another way to gain points by waging a war on structured financial products in general. Given such reactions, it is no surprise that high-level government officials have used an internal ministry memo, describing the private placement process followed by issuers of structured bonds, to strike against other Cabinet members instead of using the memo as a basis to educate the general public. Some call it poor communication, some misjudgment. Whatever it is, it is another demonstration of confusion and poor crisis management.   Nothing new Still, everybody in town who has been involved in the bond market knows that this «industry» of bond purchases by pension funds at sometimes extraordinary prices has been around for at least a decade. According to insiders, including brokers and bankers, it was not uncommon for the boards of some social security funds to approve purchases of straight Greek government bonds, not structured bonds, at high prices in the 1990s. Purchases slowed down when the central bank’s secondary electronic trading system became available because it was easier to compare bond prices. Before that, it was a bonanza for some gentlemen sitting on the boards of pension funds. It is no coincidence that the same insiders claim that the sale of more complicated bonds has flourished in the last few years when the previous window of profit opportunity closed a good deal. This simply means that purchases of overpriced bonds are not anything new and the government should have been able to document old cases by now, as the same antiquated fund management method has been around with few amendments for decades. Moreover, no one seems to mention that about half of the assets of social security funds worth some -30 billion are managed by the Bank of Greece, the country’s central bank, and are in the form of Greek government bonds. The fact that the central bank calculates the semi-annual returns in a rather peculiar way does not seem to bother anybody. Public debt reduction Account also has to be taken of the fact that the stock of government bonds which have been purchased by state social security funds is subtracted from the general government public debt, helping to reduce the country’s public debt as a percentage of GDP. This in turn explains why Greek pension funds are allowed to invest up to 23 percent of their assets only in stocks and real estate after notifying the appropriate authorities and the remaining 77 percent in Greek government bonds and cash. It should be noted that up to 60 percent of the 23 percent quota can be put into stocks with the remaining 40 percent in real estate. It is obvious that the country’s public debt to GDP ratio would be adversely affected if pension funds were allowed to allocate a much bigger portion of their money to stocks, real estate and other forms of investment instead of government bonds. No wonder the benefits of portfolio diversification for social security funds has been a low priority for officials of successive governments and others who have been bringing up the argument of safety to counter calls for a drastic change in the asset allocation rules away from local government bonds.   This is undoubtedly a mess for which both the ruling conservative party and the main opposition should be blamed – because they have kept the same rules of the game for pension funds in place for decades. The best way to clean up the mess now is to allow technocrats with international experience in pension fund management systems to write the new rules of the game as soon as possible, bring to light all abnormal bond purchase cases and prosecute those who are found responsible for wrongdoing. In the meantime, the best thing the government officials can do is to stop treating this problem, which they do not really comprehend, as another classical political toy. Government considering a counteroffensive The government is said to be preparing to go on the counteroffensive on the issue of the overpriced bonds sold to social security funds, which has taken on serious political dimensions. Prime Minister Costas Karamanlis today is due to discuss the matter with his finance minister, Giorgos Alogoskoufis. Meanwhile, the Finance Ministry is still looking into the labyrinthine way in which the 280-million-euro structured government bond which sparked the uproar ended up being bought by four pension funds, including the Public Servants’ Supplementary Pension Fund (TAEDY) which placed 100 million on it. Some officials are reported to be arguing that one of the intermediaries, investment bank JP Morgan, must be persuaded to repossess the bonds as part of an effort by the government to regain the initiative. Bank officials, however, counter that this is impossible. Meanwhile, according to other sources, the head of the independent authority against money laundering, Giorgos Zorbas, has asked for the lifting of the confidentiality of the bank accounts of about 20 people connected with the affair. Yesterday, investment bank Credit Suisse said it had not issued structured Greek government bonds that were sold to Greek state pension funds. «Contrary to recent press reports in Greece, Credit Suisse has not issued any structured products linked to the Hellenic Republic placed with pension funds in Greece,» the bank said in a statement. (Kathimerini, Reuters)

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