Key Post State savings and deposits in irish banks are not risk-free

Brendan Burgess

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In many posts on askaboutmoney and elsewhere, people are advised to split their money between different banks, keeping the amount below €100,000. Alternatively, they are advised to put their savings into State Savings as they are "guaranteed by the government".

This is often in response to someone who says "I don't want to take any risk with my savings" or someone who says "investing in shares is too risky for me".

It's just taken for granted by many people that deposits are risk-free. Even if the bank goes bust, the state will cover any deposits up to €100,000. In my opinion, people simply do not understand the risk they are taking with this assumption.

The purpose of this thread is to wake people up so that they understand just how risky bank deposits and government savings are. If any of these risks transpire, the impact could be huge.

There are at least three significant risks which savers should be aware of:
  1. Ireland leaves the euro/the euro collapses
  2. Inflation erodes the long term value of your savings
  3. The bank or the state defaults
It's very difficult to quantify any of these risks. In the short-term, they are probably very low. But for someone who is investing with a 20 year time-frame, there is a risk that any one, or indeed, all three of these, could happen during that period.

Ireland leaves the Euro
I might think that this is unlikely, but some economists say that it is inevitable. I don't really know whether it is inevitable or not, but it's certainly a risk.

We have no idea where Irish depositors or State Savers would be if this does happen. I suspect that they will be left with punt nuas which may well purchase a lot less than the Euro.

Inflation erodes the long term value of your savings
It looks as if we are in an era of low inflation, but economists are terrible at forecasting. We simply do not know what will happen in the future. We do know that it the past, many Irish savers have seen the real value of their savings cut in half by inflation over a long period. In some exceptional circumstances, e.g. Germany in the 1920s, the value of the currency was totally wiped out.

The bank or the state defauls
While the Irish economy and budget deficit have improved over the last two or three years, we still face significant risks
  1. We still have government debt of over €200 billion
  2. We have a further €100 billion of accrued liabilities for Public Service pensions
  3. We are still spending €5 billion more than we take in from tax each year
  4. When interest rates rise, the cost of servicing our debt will increase
  5. We have a very uncertain political outlook. No one knows what sort of government we will have after the next general election. Many of the parties who are doing well in the polls are publicly advocating reneging on our government debt
  6. The eurozone is still very weak economically
There is some risk, even if it's only a small one, that at some stage in the future, the government will simply go bust and not be able to meet its liabilities.

There could be a triple whammy
The Euro falls apart
and, as a result,
Inflation takes off
and no one is prepared to lend to us to finance our overspending and low taxes.
 
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Brendan Burgess

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The purpose of this post is not to say that people should not have money on deposit. It's to point out that, if they do, they are taking risks which they might not be aware of.

Nowhere is completely safe.

It's probably best to have a diversified portfolio of cash, bonds, equities and property, denominated in euro and other currencies.
 

Brendan Burgess

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43,750
It's very feasible. It's easy to buy shares and property directly. Bonds are probably better off bought through a fund.

Brendan
 

Brendan Burgess

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43,750
Deposits are especially risky for those whose income depends on the state e.g. public sector employees and people whose main income is the Old Age Pension. If the state goes bust, their income and their savings will be hit. They should definitely have their savings in some place not dependent upon the continued solvency of the state.
 

North Star

Registered User
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224
Another small consideration Brendan, the Irish Deposit Guarantee Scheme which provides the €100k per per person per institution guarantee is not fully funded, as the banks that are covered by this scheme only have to hold 0.2% of their deposits in the DPA ( Deposit Protection Account ) with the Central Bank. German private banks for comparison have been contributing 0.6% of deposits per annum for many years , building up a substantial fund to call on if required.

These are low probability but high impact risks which you are right to draw readers attention to. Always best to be well informed and have a range of strategies/approaches to protect against these risks ... if ever required.
 

jobseekr1

Registered User
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20
Brendan,
I have a query re the above, what would be the situation with a UK based Irish Bank, namely Nationwide, in a worst case scenario?
Would it be the Irish 'pillar' banks which would stand to suffer the most? (This may be a question that no one could answer).
Thanks
 
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