Private pension grab risks liquidity drought
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Emerging Markets

Private pension grab risks liquidity drought

Government attempts to reclaim money from private pension funds could severely squeeze liquidity in CEE equity markets, leading experts warn

Moves by cash-strapped governments in central and eastern Europe to claw back money from private pension systems are draining liquidity from the region’s securities markets and could leave it exposed to a second shock, analysts have warned.

During a time of sluggish growth and declining tax revenues, the substantial pots of cash in the region’s private pension funds have looked increasingly tempting.

Most recently, Poland has passed legislation diverting a portion of employees’ pension contributions to the state pension pillar. Hungary passed legislation to nationalize E10bn in private pension assets late last year. Similar moves have been mooted in Romania and Bulgaria, both of which face budgetary constraints.

But pension funds are among the largest players in their respective countries’ securities markets, and there are fears that their departure from the marketplace could lead to a catastrophic decline in liquidity.

“If we look at liquidity, while we can’t show that it’s a one to one correlation. There has been a 20% fall in turnover on the equity market compared to last year on the Budapest stock exchange,” said Michael Buhl, chief executive of the Vienna Stock Exchange, which owns four exchanges in the region, including Budapest.

Bond turnover in Budapest has declined precipitously since the start of the year: total bond turnover in January stood at E75.1 million, which had fallen to E3.41 million by April.

But Buhl said the impact on liquidity had exceeded expectations. “We had been anticipating a decline of some 5% in equity volumes, but it turned out to be 20%.”

But the loss of liquidity could have an impact on government funding in the case of an economic shock, warned Peter Attard Montalto, an analyst at Nomura. “It will be interesting if there is another periphery shock in the third quarter, for instance,” he said.

In Poland, where the cutting of contributions to private pensions has been accompanied by measures to encourage funds to invest more in equities, the drop in demand will be acute.

Countries throughout the region introduced funded pension systems to complement their state pension throughout the 1990s and 2000s at the urging of the European Union and the World Bank.

Since funding for the new schemes was diverted from state pension contributions, countries were left with budgetary shortfalls that were not plugged during the 2000s when credit was cheap.

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