Key Post Brendan Burgess explains: How to protect your deposits

Discussion in 'Deposits' started by Brendan Burgess, Nov 29, 2010.

  1. Brendan Burgess

    Brendan Burgess Founder

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    Since I wrote this post, I have written a specific Key Post to deal with how to protect your savings in the event of a collapse in the euro.


    The situation is changing all the time. This is written on 29 November 2010 just after the EU/IMF/ECB have agreed to lend money to Ireland to fund the exchequer deficit and the Irish banks.

    Many people believe that we are panicking unnecessarily, and that the ECB will never let Ireland or the Irish banks go bust.

    There is no way to eliminate risk completely. The best you can do is reduce it or diversify it.

    If you have a mortgage or other borrowings, consider using your savings to reduce these borrowings. If you have a cheap tracker, you may not want to do this.
    Don’t tie up your money for a fixed period in case things change and you need to move it. This includes products such as Savings Certs where you only get the full rate if you leave your money there for the full period.

    Is moving your money out of Ireland unpatriotic?

    What are the potential risks I should be trying to protect against?

    • The Irish government goes bust because it is unable to push through the austerity measures. Its guarantees on Irish banks deposits become worthless.
    • The Irish government places restrictions on deposits in Irish based banks.
    • The EU/ECB goes bust because it can’t afford to bail out Greece, Ireland, Portugal and Spain.
    • Ireland leaves the euro or the euro falls apart or depreciates dramatically

    How safe are the Irish covered banks?

    There is significant doubt over these banks. They are dependent on the Irish government guarantee. The cost of the bail out and the continuing state of the public finances mean that the Irish government guarantee has lost its value. As the ECB/IMF/EU have backed up Irish banks, they are safe for the moment.


    How safe are my savings with An Post?
    These remain dependent on the solvency of the Irish state which is doubtful. Discussed here

    How safe are the Credit Unions?
    There are 411 Credit Unions in the Republic and each one is separate. So one might be rock solid, while another is in trouble. 400 of them are members of The Irish League of Credit Unions stabilization fund, but this would not be sufficient to bail out a lot of Credit Unions if they got into difficulty or a few large ones. The fund is discretionary, so there is no guarantee you would benefit from it.

    The savings are guaranteed up to €100,000 by the Irish government.

    A big problem affecting the Credit Unions is that they all have surplus cash. This cash is invested mainly in Irish bonds and with Irish banks. So some Credit Unions will fail if the Irish banks fail and the Government guarantee is found to be worthless.

    Discussed more fully here


    How safe are the foreign banks in Ireland?

    The various guarantee schemes are summarised in this Key Post

    Rabobank would be about the safest as it is rated AAA and has a Dutch government guarantee as a backup.

    However, they are still subject to risks:
    The Irish government could impose some restrictions on movements of savings in “Irish” banks and this would include these banks.
    The euro could collapse or Ireland could be kicked out of the euro.

    Will Irish deposits in Rabo be devalued, if the euro is devalued?

    Opening a bank account outside the Republic

    Key Post on this topic
    Is it legal to open a bank account overseas and what are the tax consequences?
    Yes, it is perfectly legal to open a bank account overseas. It is a criminal offence to hide it from the tax authorities.

    The taxation of foreign deposit income

    What about opening a sterling bank account in Northern Ireland?
    This is discussed in this Key Post

    You would be exposed to depreciation of sterling against the euro and the costs of transferring and exchanging currencies.

    What about opening a euro account elsewhere in the eurozone?
    Most of the banks outside Ireland make it difficult to open banks accounts. One exception is Keytrade in Belgium which a lot of people have recommended on askaboutmoney. It is owned by Credit Agricole whose rating is .

    Obviously no bank is entirely safe and you are still subject to a problem with the euro.

    You can open a German bank account very easily without leaving Ireland

    Opening an account with KeyTrade Belgium

    What about investing in German government bonds?
    These are regarded as one of the safest investments by the international markets. Of course, they are denominated in euro so they will be affected by any such devaluation.

    You will find a full discussion on ThePropertyPin

    What about Irish government bonds?

    Irish government bonds are paying around 9% at present. These are not a substitute for deposits. But they could be considered to be like equities. There is a potentially very good return, but there is a significant risk of default cutting the underlying value of these bonds.


    So how can I protect myself against a devaluation of the euro?


    It's probably a good idea to have some assets in foreing currencies, but as stressed earlier, there is no risk free place for your savings or investments.

    You could open a bank account in sterling or some other foreign currency, but this is not risk free. Sterling could fall in value against the euro.

    You could buy shares directly in American or British companies or Irish companies with signficiant earnings in foreign currencies. But then you are exposed to the risks of the stockmarket.

    You could buy gold, but this is very risky as many people believe that gold is in a bubble stage so there is a risk of a significant fall. Of course, gold could continue to rise in value as well.


    What about tracker bonds with guarantees?
    These tracker bonds are, in effect, deposits with banks, so you have to look at the underlying bank to assess how safe it is.

    What about investing in Irish unit-linked funds?
    The Irish banks are in difficulty because of the difficulty in getting repaid on their bad loans.

    The fund managers such as New Ireland, Irish Life, Hibernian, Standard Life should be ok. A balanced fund will have a mixture of shares, property and bonds. It will also have investments in the euro, dollars and sterling.

    So the fund will not be guaranteed, but it should be well diversified and it might rise.


    How can I protect my money against inflation?
    The best way to protect against inflation is to hold real assets such as property or shares. There is a serious risk of inflation but it may be some time away. Make sure not to tie up your money in long term deposits in case there are signs that inflation shoots off again.
     
  2. cremeegg

    cremeegg Frequent Poster

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    1,900
    Excellent post. The third risk you identify, the EU/ECB going broke. Is this technically possible. After all the ECB can print Euros. This would cause risk 4, a dramatic fall in the value of the Euro, but it seems to me that the ECB wouldn't go broke as such.
     
  3. Brendan Burgess

    Brendan Burgess Founder

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    A country can't just print cash. Look at Germany in 1923 and Zimbabwe recently.

    One of the big risks for long term depositors is inflation. Hyperinflation would destroy all deposits.

    So yes, the EU and ECB could go broke.
     
  4. cremeegg

    cremeegg Frequent Poster

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    1,900
    I have to disagree with you here. A country can just print cash. Of course it will have negative consequences for that country via inflation.

    The first issue for a country that just prints cash is, are its foreign debts denominated in its own currency.

    The foreign debts of the US government are denominated in US dollars. This means that the US govt can legally repay its debts with dollars fresh from the printing press.

    The issue is much less clear in Europe with each country having its own debt.

    Printing money is only part of Zimbabwe's problems. They also destroyed their productive agriculture.

    The EU still produces a large slice of the worlds goods and services. Its currencies are going to hold value even if they print a few more notes.

    In 2002 a Euro was worth 80 US cent, today it is worth 130 US cent.. A 25% devaluation would only bring the Euro back to where it was before. Hyperinflation of the Euro is a distant prospect.

    In sum I don't agree that it is possible for the Euro to go broke, and I think that we are a long way from hyper inflation.
     
  5. Duke of Marmalade

    Duke of Marmalade Frequent Poster

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    1,679
    I agree with cremegg that, since we gave up the gold standard, printing money has been a legitimate monetary instrument. Printing money is in fact the main cause of inflation which was very high in the 70s. QE is a form of printing money. Of course Weimar and Zimbabwe give the practice a bad name.

    Of the risks identified in OP, IMHO the only realistic one to take on board is the value of the euro. One thing to note is that German 10 year bunds are on a lesser yield than US 10 year Treasuries which in turn are on a lesser yield than UK 10 year gilts. Since we can regard physical default as neglible in all three situations (because they can print their way out of a default) it suggest that over the longer term the euro will be stronger than the dollar will be stronger than sterling, exactly as it has been over the last 10 years.
     
  6. dockingtrade

    dockingtrade Frequent Poster

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    345
    Ive made a similar point before and valid response was an increase in the cost of imports.But the pros outweigh the cons. Costs will come down straight away, exports should go up. Value of deposits go down but stay on a par with 15 other countries. On imports alot of imports come from other euro countries. Its like they (EU/Germany) want to hit the PIGS hard without losing a penny to the point where they fire the silver "devaluation" bullet if they need to, also the British/Danish an swedish (who are giving us loans) wont want a devaluation so theyd want us to succeed without a devaluation.

    I think deposits are safe up to the garauntees, we're in the euro the ECB is our central bank we may face a devaluation of our savings.
     
  7. Marc

    Marc Frequent Poster

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    795
    [FONT=&quot]Rossie2010 has made some excellent points here which seem to have been lost to some extent in the cheerleading.[/FONT]
    [FONT=&quot]
    [/FONT][FONT=&quot]The danger with simply presenting the alternative options for moving one's money out of banks or even out of Ireland is the presumption that this is necessary or indeed desirable.[/FONT]

    [FONT=&quot]It is important to stress as Brendan has that “Many people believe that we are panicking unnecessarily, and that the ECB will never let Ireland or the Irish banks go bust.”[/FONT][FONT=&quot]
    [/FONT]
    [FONT=&quot]Whilst I accept that people are clearly worried about their savings giving "advice" to move deposits abroad or into foreign currencies because of the risk that the banks could fail, that the State could default and that the Euro could collapse is actually part of the cause of the problems that we ALL currently face.[/FONT][FONT=&quot]
    [/FONT]
    [FONT=&quot]The problem here is that it isn't possible for YOU to protect your savings in this way without potentially hurting your neighbour.[/FONT]

    [FONT=&quot]The way in which a fractional banking system works is really just based on trust. Trust that you will be able to make your withdrawals and I will be able to make my withdrawals when we both NEED to.[/FONT]
    [FONT=&quot]
    [/FONT][FONT=&quot]If there is a run on a bank, there simply isn't enough capital to pay EVERYONE and this is when the banks get into difficulty. A race for you to get your deposits out before me doesn’t make you better off. We ALL end up paying in the end through bank bail outs and ultimately higher taxation.[/FONT]

    [FONT=&quot]Comments made in the media and even on askaboutmoney, that we should act to protect our savings will just make matters worse for everyone.[/FONT]
    [FONT=&quot]
    [/FONT][FONT=&quot]To put this in perspective the following is from a House of Commons Treasury Committee report into the bank run on Northern Rock:[/FONT]
    [FONT=&quot]
    [/FONT]
    [FONT=&quot]"At 8.30 pm on the evening of Thursday 13 September 2007 the BBC reported that Northern Rock plc had asked for and received emergency financial support from the Bank of England.1 The terms of the funding facility were finalised in the early hours of Friday 14 September and announced at 7.00 am that day.2 That day, long queues began to form outside some of Northern Rock’s branches; later, its website collapsed and its phone lines were reported to be jammed.3 The first bank run in the United Kingdom since Victorian times was underway."[/FONT]

    [FONT=&quot]Whilst it was the flawed business model which created the liquidity problems for Northern Rock clearly the way in which events are reported, such as the BBC story in the case of Northern Rock, will clearly influence people's behaviour and therefore responsible commentators on such matters should not fan the fires.[/FONT]
    [FONT=&quot]
    [/FONT][FONT=&quot]I have posted a detailed commentary here http://www.askaboutmoney.com/showthread.php?t=148352 in response to this thread which offers a more objective assessment of the situtation.[/FONT]
    [FONT=&quot]
    [/FONT]
    [FONT=&quot]1 www.bbc.co.uk/blogs/thereporters/robertpreston/2007/10/16/index.html[/FONT]
    [FONT=&quot]2 Qq 580, 1668[/FONT]
    [FONT=&quot]3 Qq 345, 678[/FONT]
     
  8. elcato

    elcato Moderator

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    2,651
    I am in agreement that this is way OTT and is the root cause of the panic. Sometimes you can 'oversavy' people and make them think they are all experts. This is pure panic by Irish depositors but it is in sync with your average Oirish person. Let someone else suffer any consequences cos it's not my fault.
     
  9. UFC

    UFC Frequent Poster

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    278
    That's the problem right there. Why should anyone trust an Irish bank? They have proven themselves to be beyond incompetent.
     
  10. Tintagel

    Tintagel Frequent Poster

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    Those in the front of the queue will leave clutching their bank drafts and think that their bank drafts are better than those at the back of the queue.
     
  11. Kev

    Kev Frequent Poster

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    273
    Ireland will not go bankrupt as they are in the EU. Deposits are guaranteed by the government therefore there will be no queues outside banks in Ireland.
     
  12. CiaranT

    CiaranT .

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    4,546
    It's not as simple as that. Many people believe that Irish sovereign debt has reached unsustainable levels and that it will end in sovereign debt restructuring. This is quite conceivable, even with EU membership.

    The generosity of the German's can not be counted on indefinitely.

    The Irish state government guarantee is a good as the solvency of the Irish state. Deposit losses have already been very considerable at the 6 Irish banks.
     
  13. shnaek

    shnaek Frequent Poster

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    594
    Nonsense. Ireland could be out of the Euro within a year, and the government guarantee is worth precisely nothing. Then again, we could also be seeing massive growth within a year, the German people might send us loads of cash, and our government might lead us to nirvana. Just depends on how you think the game of chess will play out... ;)
     
  14. CiaranT

    CiaranT .

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    4,546
    If Ireland defaults then, money held in the Irish national debt, like NTMA State Savings, will ..
    1) Be totally gone or
    2) You will get a portion of your deposit (X cent on the EUR) or
    3) A default is managed in such a way as not to impact State Savings holders.

    State Savings products are very risky given the possibility of an Irish default in the coming years.
     
  15. Moose

    Moose Registered User

    Posts:
    31
    I can understand the panic and fear that is out there about the possibility of a default and its implications, and tend to be susceptible to it myself. I can agree with other posters that the panic contributes to the problem, whilst also realising that nobody wants to be a sitting duck.

    I've saved hard for a decade, until four years ago on a very small wage (17-19k net) during the height of the Celtic Tiger when any boom certainly passed me by. I now have savings of 20k (credit union), 14k (AIB), 2k (prize bonds) and 2k (trying to decide where to deposit). It's 'peace of mind' and 'emergency money' that I hope I don't have to access short-term.

    I feel despair that this kind of hard, old-fashioned saving - avoiding personal debt, not taking on a mortgage I knew I couldn't afford, even when people were pushing me to buy-with-a-friend or look into 'affordable' housing - could just be wiped out because of the greed and gambles of a few and the catastrophic financial decisions that have been taken.

    People can be slow to make changes, particularly if they worry that those decisions can contribute to the problem. Isn't moving money out of the country in effect a type of run on a bank?

    So I guess I'm wondering what is the worst that can happen? I know nobody has a crystal ball, but if you leave things be, can you simply lose all your money and never see a cent of it again - the bottom line for the ordinary deposit holder? Or if you do get some return - X cent on the Euro as mentioned above - what kind of LONG TERM outlooks are likely? What I mean is: people made property decisions based on a short-term outlook and I do not want to make deposit decisions based on a similar short-term outlook. For example, could the damage of an X cent on the Euro return likely be cancelled out by a long-term strengthening of a currency over ensuing years?
     
  16. davide

    davide Guest

    An Post Saving bonds

    Brendan,

    what about the following opinion, posted by another user on "boards":

    The government won`t default and the last thing they would do is to default to people with their savings in An Post. People must realise what powerful tools the government has in its arsenal.Even if the governments 500million weeky borrowing to cover their excess spending over taxation receipts was cut off by the international lenders ,the government could sort it by increasing taxes and slashing spending.They could introduce property taxes, slash welfare etc etc...all not very popular but if the money isn`t there people will just have to accept it. Raiding the savings of An Post would be pointless as the government has the use of this money anyway.

    What do you think?
     
  17. Rujib

    Rujib Frequent Poster

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    79
    BUT, haven't we already seen queues outside Irish banks in a big way. Not as lines of people lined up outside the door, but a people logged on to the banks online system, shifting money to foreign banks.
    If that online facility were not available, is it not safe to assume that a big proportion of those same people would line up at the counter and demand their cash!!
    Were it not for the discreet online system, I guess we would long since have seen the mass panic run on the banks, with queues at the doors:confused:
     
  18. pilotsnipes

    pilotsnipes Frequent Poster

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    Would have to say I agree with Rujib. I've moved 50K+ in the last few weeks, 5K at a time outside the country.

    I didn't fear the whole system collapsing inside the 1 1/2 weeks it took me to do it, so that's why I did it online. Also, it said me from having to even speak to a bank clerk and try to justify myself to them (which I can assure you - I would have eaten alive had they said anything).
     
  19. dewdrop

    dewdrop Frequent Poster

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    Is it correct to say that the only benefit of moving deposits into say, National Irish bank, from say AIB, is that in the event of the country going bust one would have the benefit of their parents guarantee. I have in mind that if our government introduced some restrictions on deposits this would apply to say NIB
     
  20. monagt

    monagt Frequent Poster

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    877
    Is there a bank "league" table anywhere? for example?

    Bank Guaranteer Guaranteer Safety Risk in chain of guar's

    Ulster (BOS) 85% UK GOV owner Safe UK Gov remainSolvent?
    AIB Irish Gov Nots o safe Irish Gov insolvent
    Keytrade Credit AG ??????
    Deutsche Bank
    Halifax
    Rabo
    N'Rock

    If you see where I'm coming from?