Under a law passed in 1997 and refined in 2007, pension funds have to place 77 per cent of any surplus cash in a pool of “common capital” managed by the Bank of Greece. The law requires the common capital to be invested only in Greek government bonds or Treasury bills (T-bills). The remaining 23 per cent of funds can be invested in other assets, such as mutual funds, shares and real estate.
The aim of the measures, officials said, was to ensure that most of the money was safely tucked away for a steady return. In the good times, this worked. But it was to have disastrous consequences when the credit crunch that began in 2007 led to a crisis in sovereign debt.
When the incoming government of 2009 revealed Greece’s finances were far worse than previously admitted, ministers initially dismissed the idea of reneging on some of the country’s debts. But in some circles the prospect rapidly gained ground, according to a former Greek representative to the International Monetary Fund (IMF).
“The IMF … was more open to securing the sustainability of Greece’s debt via a writedown (than the euro zone countries),” said Panagiotis Roumeliotis, a former economy minister and Greece’s IMF representative at the time. Foreign investors were not slow to see the danger.
Many scrambled to sell their holdings of Greek debt, but officials managing pension fund money at the Bank of Greece did not. Mr. Pavlopoulos claims that while foreign investors dumped more than €100-billion of Greek government bonds from 2009 to 2011, the country’s pension funds actually raised their holdings by €9-billion.
The central bank disputes his figures. It says that between January 2009 and May 2011 it invested pension fund money in government bonds with a nominal value of only €1.18-billion, after which it stopped. It also said, in a letter to Mr. Pavlopoulos, that from the end of 2009 to the end of 2011 pension funds’ total holdings of Greek bonds fell by €2.5-billion.
Despite those figures, Mr. Pavlopoulos remains dissatisfied. “The Bank of Greece did nothing to protect the pension funds,” he said.
Amid the wrangling over exactly who bought what when, one thing is clear: when the financial storm struck, the pension funds remained heavily exposed. Bank of Greece figures show that the pension funds still held €19-billion of Greek bonds and €1.4-billion in T-bills as the country teetered on default in early 2012.
Mr. Mihalopoulos, the central bank investment manager, said selling the bonds would not have helped: “Had we liquidated the bond portfolio we would have realized a loss of €8-billion as prices had come down sharply.”
In the end, however, the pension funds appear to have suffered an even bigger loss. In March, Greece completed the largest-ever sovereign debt restructuring as part of its bailout by the “troika” of euro zone members, IMF and European Central Bank. In a move known as “private sector involvement” or PSI, Greece replaced old bonds with new ones worth 53.5 per cent less.
Bank of Greece figures show that by June the pension fund assets it controlled had plummeted to €11.1-billion, made up of €8.7-billion in bonds and €2.4-billion in T-bills. In the space of three months pension funds had lost about €10-billion.
Former Labour Minister George Koutroumanis told Reuters the losses were unavoidable. “How could we have asked to protect our own pension funds and let all the others take the blow, it could not have worked that way,” said Mr. Koutroumanis, whose former department is in charge of the pension system. “The billions of euros that pension funds lost because of the PSI was a significant hit. But it has to be weighed against the need to ensure the viability of the country in the euro and the system’s continued funding.”
That argument does little to stem the anger of those facing impoverishment. Before the PSI, the journalists’ pension fund had assets at the central bank worth €115-million; after the PSI they were worth €59-million, according to Bank of Greece figures.
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