Opinion What is the point of a rainy day fund?

Discussion in 'Budget 2019' started by Duke of Marmalade, 9 Oct 2018.

  1. Duke of Marmalade

    Duke of Marmalade Frequent Poster

    Posts:
    2,227
    Don't understand the rainy day fund. Why not just pay down the debt. Or is this a geared investment in equities?
     
    TheBigShort and odyssey06 like this.
  2. Zenith63

    Zenith63 Frequent Poster

    Posts:
    141
    I'd assume it is a similar argument to not repaying your mortgage too early - if you repay the loan and need that money for an emergency it's already gone. You might be able to get another loan at the time of that emergency, but if it's something like a financial crisis you'll end up paying very dearly for it. For example sovereign debt interest rates hit 14% during the recent financial crisis, whereas Ireland's current average debt interest rate is around 3%.
     
    so-crates and Duke of Marmalade like this.
  3. Duke of Marmalade

    Duke of Marmalade Frequent Poster

    Posts:
    2,227
    So where will this rdf be invested? Why not go all in now that we have such low borrowing rates, set the rdf to 50% of gdp or whatever we can get away with?
     
  4. Opus2018

    Opus2018 Registered User

    Posts:
    27
    Hi Zenith63,

    I agree with you re the Rainy Day Fund - they might invest it in bonds or equities (more likely the former as they may want to keep it more liquid and get some sort of return).

    in relation to the debt matter, it is interesting to note that acctually most of our debt (170 bn or so) is at a low rate (most of it less than 2% or even less). Take for example, the last round of Debt issued as recently as last month was at 0.9% interest for a 10 year bond:-

    Link:- http://www.ntma.ie/business-areas/funding-and-debt-management/auction-results/

    The amount of debt repayments that are due in 2019 and 2020 should be fully financed in 18 months or so (see my note at the end in relation to net debt). Strangely enough, we pay nothing off in 2021 as things stand. The good news is that this means we should then be rid of our most expensive debt in 2020. (Source:- NTMA - debt profile annual reports).

    This more expensive debt, costs us around 5% interest per annum and amounts to around €30bn of the total €200bn right now. In other words that €30bn that we will retire very soon costs as much to service as €100bn of the QE era paper, every single year(!) :)

    The long term reality (we issue mainly 10 year paper nowadays, due 2028 in other words). This is an annual position comparing the pre financial crisis say, 2007 to 2020 onwards below.

    It is, of course entirely possible that we will pay higher interest on sovereign issues after 2020 when the QE effect wears off. But as we only refinance around €10bn a year in the 2020s that potential impact is somewhat limited (and limited again if we ran a surplus so we could redeem some debt as it fell due. Of our €200bn overall debt, in 2020, we then refinance nearly half by 2030.

    Generally speaking, we will then spend the 2020s paying off a mix of c.2% rated EU bailout funds and c.1% Irish sovereigns. We should not have to pay more than 2% interest on the new sovereign debt we raise even then....leaving us net same as at the end of the 2020s or maybe a little worse off.

    Even if interest rates go to 3% on all our sovereign issues after 2020 we would only be around one and a half billion worse off by the end of the decade in 2030 than we are in 2021 and which the annual amount is around what we pay now, in 2018. Currently we pay 6bn per annum or 16.5m per day. One last thing there is a concept of net debt (if we subtract off cash in hand, bond and loan assets - for example we had near 26bn in these assets at the end of 2017 (of which the majority will be cash I'd say), the picture looks a little better again.

    Of course, the picture becomes much better still if we actually started paying off the outstanding principal! ;)

    Hope this helps to clarify!

    Best,

    Opus 2018.
     
  5. Zenith63

    Zenith63 Frequent Poster

    Posts:
    141
    Not sure if you're asking could the government borrow at low rates to invest elsewhere at a higher return, or just why we are not putting more aside in the RDF while the economy is doing so well? If the former I'd guess it just comes down to the government being there to provide services for the people, not to take risky leveraged bets in the investment markets :). I assume you were more thinking the latter though, which really is the subject of this thread - the economy is in a great place, why are we paying more to social welfare and pensioners rather than saving up for the inevitable downturn. Some will say it's FG trying to ensure they get voted for in the next elections, some that a shift left holds back the rising SF, some will say the increases are modest and we're on the way to balanced budgets in the coming years and potentially larger RDF savings - pick your poison.
     
    Duke of Marmalade likes this.
  6. gnf_ireland

    gnf_ireland Frequent Poster

    Posts:
    1,276
    I do assume it is to cushion any minor shocks in the countries finances in a given year - a bit like income averaging approach.
    I am not sure we will ever have a sufficient rainy day fund to handle major shocks (nor should we while our current debt is so high).
    I also hope we can get to a stage where we will put away a decent 'locked-in' provision for future pension rights - to give the people working today some sort of comfort that there will be a pension entitlement when we get to the age of 68/70 !
     
  7. SBarrett

    SBarrett Frequent Poster

    Posts:
    2,766
    Agree. It's not like a household situation, govts live on debt and have bodies there to borrow for them. Would either prefer them to use it to pay down debt or to start up a pension fund to be used in the future.


    Steven
    www.bluewaterfp.ie
     
  8. TheBigShort

    TheBigShort Frequent Poster

    Posts:
    2,845
    My assumption is if debt is paid down there is really nothing stopping the next administration from borrowing it all back again. By having a rainy day fund, it somewhat restricts, or attempts to restrict further additional borrowing.
     
  9. Duke of Marmalade

    Duke of Marmalade Frequent Poster

    Posts:
    2,227
    Ok, I am gobsmacked that this is all it is. We can borrow 10 year money at 0.9%. Why don't we fill our boots with it? Why this slow build up of a rdf as if we were actually saving? Why not go all in and borrow, say, €20bn, ok at maybe a few bps more? It seems to me a publicity stunt.
    B/S it is the exact opposite. The next admin might be the looney left as opposed to the soft left we have now. The looney left would have to pay Venezuelan interest rates, what a boon for them to have a rdf to raid.:rolleyes:
     
  10. Ceist Beag

    Ceist Beag Frequent Poster

    Posts:
    1,077
    I posted this in another thread but I think it's more suited to this thread. Up until recently we had the National Pension Reserve Fund (NPRF) but it seems it was then renamed to the Ireland Strategic Investment Fund a few years back and the amazing thing is, this morning is the first time I heard about this! From reading the [url="http://isif.ie/about-us/history/]Ireland Strategic Investment Fund website [/URL]it seems not only was it renamed, but it's objective was changed from a fund whose "statutory objective to meet as much as possible of the costs of social welfare and public service pensions from 2025 until at least 2055" to a fund whose mandate is "to invest on a commercial basis in a manner designed to support economic activity and employment in Ireland".
    How on earth did that get through so quietly? Are they now trying to cod us that this Rainy Day Fund is basically the NPRF starting with a balance of zero again (as opposed to the €22.1 billion mentioned as being the balance on closing the NPRF)? Is there any difference in this Rainy Day Fund in terms of objectives or rules from the NPRF? Could they just reclaim this again in the future if the politicians of the day decide to do so?
     
  11. RETIRED2017

    RETIRED2017 Frequent Poster

    Posts:
    531
    The should have transferred the money the got from the AIB back into the last rainy day fund,
     
  12. Ceist Beag

    Ceist Beag Frequent Poster

    Posts:
    1,077
    Even then, if they can simply redirect the fund from being one which was to pay for pensions, into one which is to pay for current economic activity, what is the point of it? Is the new Rainy Day Fund locked in to provide for pensions in the future or can they simply raid it whenever they want, like they did with the NPRF?
     
  13. Zenith63

    Zenith63 Frequent Poster

    Posts:
    141
    I don’t know the answer, but honestly it would not make much sense to call something a ‘rainy day fund’ (implying it is there to help cushion a likely but unpredictable event) if it is actually to provide for probably the most easily predicted future government expenditure, pensions. My assumption based on the name is that it is absolutely there to be used (read: ‘raided’ if you want) some unknowable day when it is needed.

    While I think another fund for pensions would make a lot of sense, lambasting this one just because the other does not exist seems a little short sighted. The RDF seems like a good decision to me. Does it solve all the world’s problems, of course not.
     
  14. TheBigShort

    TheBigShort Frequent Poster

    Posts:
    2,845
    Thats why I said it "attempts" to restrict further additional borrowing.
    Anyway, if you read the posts on this site it would appear that the "looney left" are already in power.
     
  15. Duke of Marmalade

    Duke of Marmalade Frequent Poster

    Posts:
    2,227
    The Irish Times Editorial praises the decision to build up a RDF. The impression is given that this is some sort of current self sacrifice to be prepared for some future unseen setback. Yet the back page of the budget supplement states that the contribution to the RDF is one of the reasons we have a €2.9bn deficit - no self sacrifice there. All very confusing, I thought it was a balanced budget.
     
  16. Ceist Beag

    Ceist Beag Frequent Poster

    Posts:
    1,077
    Last edited: 10 Oct 2018
    What I don't understand then Zenith is what is the objective of this RDF versus the other fund (the one that used to be for pensions from 2025 to 2055) called the Ireland Strategic Investment Fund? Why do we need two funds and what are the guidelines protecting both? If we already have a fund with €8.9 billion in it (which seems like a health rainy day pot to me!) then why do we need a second fund? I'd love to know as well what the plan is for paying pensions from 2025 onwards now that the pot earmarked for that has been redirected!
     
    Last edited: 10 Oct 2018
    Zenith63 and TheBigShort like this.
  17. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    36,141
    That is a very good point.

    There is absolutely no financial justification for a rainy day fund when you have €200 billion of borrowing.

    So, is there some psychological advantage?

    I don't think that there is. It could be that the public thinks that we have a rainy day fund whereas we have borrowed money to put it in there.

    And Duke's point is very valid. An even more irresponsible government than the current one would find it easier to raid the fund than borrow on the international markets.

    Brendan
     
  18. Firefly

    Firefly Frequent Poster

    Posts:
    2,921
    This would be like a family with no savings but only loans and borrowing more money to keep on deposit just to "have a few bob in the bank"
     
  19. Ceist Beag

    Ceist Beag Frequent Poster

    Posts:
    1,077
    Worse, it's like a family which has a savings account but also has loans borrowing more money to keep on deposit in another different savings account because the few bob in the bank from the first account just ain't enough...
     
    Firefly likes this.
  20. Duke of Marmalade

    Duke of Marmalade Frequent Poster

    Posts:
    2,227
    Last edited: 10 Oct 2018
    I can't believe it is as simple as that, but that's what it looks like. The Irish Times lauds it as commendable prudence. It seems to me quite the opposite - get further in hock with a view that if we misbehave in future and our borrowing costs go up we can raid the piggy bank.

    Anyway according to Opus2018 we have to borrow €10bn a year just to refinance retiring debt even if we had balanced budgets. If our borrowing costs go to looney left levels the RDF will be a drop in the ocean.
     
    Last edited: 10 Oct 2018