Irish Bonds v Irish Deposits . .

NorthDrum

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As simple as it sounds, but I have yet to meet somebody who give a reasonable argument as to why a person shouldnt put their money into 1 year Irish government bonds versus 1 year fixed deposit with Irish banks.

If the Irish government goes under (or is financially crippled), then its guarantee to Irish banks doesnt mean anything so the 100k guarantee is gone , so where does that leave the safety of your deposits?.

So why would I take 4% from a bank underwritten by the Irish Government, when I could get 6% directly from the Irish government directly?!
 
Ireland isn’t selling bonds. But you can get a one year bond by buying a longer term bond that’s only got a year left. This would be via a broker not from the state itself.

One year seems to be trading at 5.11% right now.

My limited understanding is that these bonds tend to be sold in large amounts such as chunks of 100000e, your broker may expect 1% for his commission, probably at the buying end and selling end – so maybe 2%.

The tax will probably be a bit more complicated than DIRT, possibly a mixture of CGT and income tax.
 
Ireland isn’t selling bonds. But you can get a one year bond by buying a longer term bond that’s only got a year left. This would be via a broker not from the state itself.

One year seems to be trading at 5.11% right now.

My limited understanding is that these bonds tend to be sold in large amounts such as chunks of 100000e, your broker may expect 1% for his commission, probably at the buying end and selling end – so maybe 2%.

The tax will probably be a bit more complicated than DIRT, possibly a mixture of CGT and income tax.

I know in one stockbroking company that the comission is .5% (per trade) for anything under 100k and .25% anything over that! There is no minimal amount of Irish Government bonds you can buy. Remember, just because the government arent actively buying and selling Irish Bonds, it doesnt mean that there are no Irish Bonds available on the market. People who took 5 year bonds 4 years ago, might want to trade up etc.

Their view is that its mainly perception in terms of banks v gilts at the moment. That is, the perception that a bank, underwritten by the Irish Government, is somehow a safer haven then the government itself.

The taxes, I agree come into play. As far as I am aware, there is no CGT on Irish Government bonds, but they are taxed as income tax.

So, you have €50,000 -

  • Irish Government Bonds @6% = €52,735 Gross (minus comission)
  • Irish Bank @4% = €52,000
Assuming that you are liable for DIRT, you get a net return of €1,400 from your bank and if you are paying 40% income tax you get €1641.

I was really looking to see if anybody had any views on the risk of Irish Bonds v Bank deposit rates while the banks are guaranteed by the state.
 
(I misread the Irish 1 year rates – they’re now at 4.35%. http://www.bloomberg.com/quote/gigb1yr:ind)

The income tax is more likely to come to 52% (41% + 7 USC% + 4% PRSI). So that would be 1312e return on the bonds for the example given. However worsening deposit rates will give an edge back to bonds.

But if we imagine there’s a significantly better return in buying Irish bonds over deposit rates then you’ve got the issue that a government would find it politically easier to default on bonds instead of not paying out to depositors.

You just have to look to Greece as a euro area test case, nobody cried for bondholders when the Greeks decided to massively default on/restructure private bonds a few months ago – while their bank depositors were left unscathed. A Greek who’d thought his bonds were as safe as deposits would have been burnt.
 
Good post Ashambles. .

If you are on higher, marginal rate of tax, depening on the Bond rate, it may end up with lower net returns. Asides from that, its a case of what is more politically acceptable if disaster strikes.

I know this is all ifs, buts and maybes, but the question of whether or not the Irish government could afford to "payout" on guaranteed deposits would be the next concern (does anybody have any figures to show the cost of paying out on the guarantee?) . .

Either way, there is no full proof, definitive way of knowing for sure . .
 
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