Perhaps youve noticed something a bit odd lately in
Europe... that even the most financially challenged countries
seem to have large sovereign wealth funds. Consider
- Portugal has the Social Security Financial Stabilisation
- Ireland has the National Pension Reserve Fund;
- Italy has the Strategic Investment Fund;
- Greece... yes, Greece ... has the Hellenic Republic Asset Development Fund;
- Spain has the Social Security Reserve Fund.
(Cue confused look and bewildered mutterings.)
Hows that even possible, you ask? There's talk about a
break-up of the Euro as a result of fiscal profligacy... and
these countries are sitting on big pools of capital in the form
of sovereign funds? Say what?
Yeah, those are some fair questions and Ive
found myself answering these more than once over the past few
months. So lets talk this through.
These funds exist to help the sponsoring governments
mobilize and maximize their (meager) state assets in order to
meet their (monstrous) state liabilities.
The pension reserve funds were set up to try to use the
'power of finance and compounding' to take some short-term
surpluses to meet long-term unfunded pension obligations. It's
a neat idea, which hasn't played out as hoped. For
example, Ireland used its fund to bailout Irish banks,
Portugal has tapped its Fund to the tune of
6 billion to meet its fiscal obligations, and Spain has
used its Reserve Fund to prop up its bond market. You get the
As for Greece and Italy (and Slovenia and France),
these funds are more akin to holding companies whose job
it is to extract the maximum economic value possible from the
array of state assets. For a bit more understanding, lets
take a closer look at Greece's HRADFL:
The sole mission of the Hellenic Republic Asset
Development Funds (HRADF) is to maximize the value to the
Hellenic Republic from the development and/or sale of
The assets transferred to the Fund can be grouped
in three categories: real estate; company shares and
The Fund is not a public entity and is governed by
The Fund is governed by its Board of Directors.
The General Assembly is not empowered to adopt any decision on
privatizations. Two observers have also been appointed to the
Board; one from the Eurozone and one from the European
The Board has the absolute authority on
privatisation decisions. The CEO is fully responsible for the
operation of the Fund and introduces the privatisations to the
Board of Directors for decision making.
The Fund is staffed with seasoned professionals
from the banking, consulting and legal sectors assisted by a
Council of Experts and employs experienced international
advisors for each project. It has state of the art project
management systems and a very flat organizational structure to
facilitate speedy decision making.
In short, this fund is an attempt to professionalize,
commercialize and indeed monetize state assets with a view to
transforming the state-run economy into something
resembling an efficient market. In short, the HRADFL isn't a
sovereign wealth fund... it's a 'sovereign asset-management