Key Post What is the risk to State Savings?

Brendan Burgess

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I have copied this from another thread where two retired public servants had a substantial part of their savings in State Savings.

Rather than take that thread off topic, I will start a new thread as it will affect other cases.

I do not expect the Irish Exchequer to default. However, you should not ignore the risk that it might happen.

We are in strange times.

We had €200 billion of national debt at the start of 2020 and another €300 billion in unfunded pension liabilities.

We now have the taxpayer spending billions on the response to Corona Virus - probably €30 billion and possibly more.

We are very dependent on the artificial Corporation Tax receipts of foreign multinationals.

Whatever form of government we end up with, it will be financially irresponsible.

Apparently the draft FF/FG programme for government promises to increase spending, not increase pension age, and not increase taxation.

The implications of this

I see no need to take the risk of investing in State Savings.

In particular, people who are depending on the continued solvency of the state for their public sector pensions should diversify away from this dependence and should not have State Savings certs.
 
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PMU

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It's important to understand that State Savings are not 'guaranteed' by the State. State Savings become part of the National Debt of Ireland. https://www.statesavings.ie/about-state-savings. So if the State were to (or was forced to) 'bail-in' creditors, a proportion of such savings (i.e. debt owed by the Irish State) would be written-off.
 

NoRegretsCoyote

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It's important to understand that State Savings are not 'guaranteed' by the State. State Savings become part of the National Debt of Ireland. https://www.statesavings.ie/about-state-savings. So if the State were to (or was forced to) 'bail-in' creditors, a proportion of such savings (i.e. debt owed by the Irish State) would be written-off.

Not so.

They are different products. The very last thing state will do is default on several hundred thousand citizens.

First they would default on the faceless hedge funds in New York.

Even Greece in 2012 and 2015 didn't default on retail bonds held by citizens.

Anyway with ECB hoovering up every government bond in sight the much greater risk is INFLATION.
 

PMU

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Not so. They are different products.
I'm sorry but this is incorrect. You really should have followed the link. The State Savings web site clearly says: "Funds invested in State Savings Fixed Term products and Prize Bonds are placed in the Central Fund of the Exchequer and are used to fund Government expenditure. They form part of the National Debt of Ireland. The repayment of all State Savings money is a direct and unconditional obligation of the Government of Ireland."

Note that State Savings are part of the Central Fund and not held separately. To say that the state would treat such creditors differently is just speculation.
 

Baby boomer

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I would very much agree with Brendan. The simple fact is we don't know how safe or risky State savings are right now. Think back to 2010. There was a serious risk of default then. It doesn't look as bad this time but we're in uncharted waters, so who knows? It's guesswork at best. We have no idea how things will pan out in the medium term. The economy might or might not bounce back sharply. Mass unemployment might or might not persist. A vaccine or cure might or might not be developed. We don't know the extra costs of delivering public services like health and education in a Covid world. We don't know the long term trajectory of tax revenue. We don't know what will happen to interest rates, inflation or property prices or rent. We certainly have no idea of what the public finances will look like in 2021, 2022 and 2023.

And these are the known unknowns. Channeling my inner Donald Rumsfeldt, we may be further hit with unknown unknowns. A mutated, virus, more contagious or more deadly?

Putting it all together, we can't say with any degree of certainty that State savings are secure. There is a non-zero risk of a "haircut" being imposed on retail investors.

It is only sensible to factor this into one's financial planning. In the case in point, if one has exposure already through being a state pensioner, one should diversify out of Irish State Savings. Distribute the eggs over other baskets.
 

Saavy99

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What other baskets???? Banks are paying negigible interest rates. Investing in equities is not for everyone. If there's a run on people withdrawing their the state savings, what will be the consequences for the state...
 

Sarenco

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So if the State were to (or was forced to) 'bail-in' creditors, a proportion of such savings (i.e. debt owed by the Irish State) would be written-off.
Are you alluding to the EU's bail-in requirements?

Those rules relate to the resolution of failed banks and have no application whatsoever to State savings products.

You are correct that State savings products represent direct obligations of the State (as opposed to a guarantee) but nothing turns on the distinction.

The risk of the State defaulting on its obligations under these retail products is vanishingly small, to the point of being theoretical.

Frankly, I think Brendan's conclusion in the OP is sensationalist nonsense.
 

Baby boomer

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What other baskets???? Banks are paying negigible interest rates. Investing in equities is not for everyone. If there's a run on people withdrawing their the state savings, what will be the consequences for the state...
Well, if you're worried about a run on State savings......:oops:
 

PMU

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Are you alluding to the EU's bail-in requirements? Those rules relate to the resolution of failed banks and have no application whatsoever to State savings products.
No. Another poster raised these issues in post #6. I never mentioned bank bail-in. I am dealing with the risk on state savings products in a situation of sovereign default (i.e. where the Irish exchequer defaults).

You are correct that State savings products represent direct obligations of the State (as opposed to a guarantee) but nothing turns on the distinction..
Actually everything turns on it and if you can't understand it you can't properly evaluate the risk to investing in state savings products in conditions of high uncertainty.

The risk of the State defaulting on its obligations under these retail products is vanishingly small, to the point of being theoretical.
The risk of the state defaulting on state savings products is the same as the risk of sovereign default.

Personally, I think the major risks to a holder of state savings products are (a) a break up of the eurozone (which I judge likely); (b) Ireland leaving or being forced out of the eurozone (likely but remote); and then (c) sovereign default (which would follow a eurozone breakup). The risk here is thath you invest in euro but your returns are redenominated into Irish pounds. That is the risk you take.

So, simply put, does the current rate of return on state savings products provide you with (a) your required return and also (b) an adequate premium for investing in such products in a time of high uncertainty?
 

Sarenco

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Actually everything turns on it and if you can't understand it you can't properly evaluate the risk to investing in state savings products in conditions of high uncertainty.
Do please explain why a direct obligation of the State is more risky than a guaranteed obligation of the State.
 

Baby boomer

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Yes, but now isn't the time for someone with significant existing exposure to state default (a state pensioner) to increase that exposure by investing in State savings.
 

Gordon Gekko

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The risk of the state defaulting on state savings products is the same as the risk of sovereign default.

Personally, I think the major risks to a holder of state savings products are (a) a break up of the eurozone (which I judge likely); (b) Ireland leaving or being forced out of the eurozone (likely but remote)

No it’s not. The State would naturally view its own private citizens differently versus international investors.

Neither of those events could be classed as “likely”.

We’re entering tin-foil hat territory now.
 

jpd

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If the State tried to default on overseas holders of its bond and not on it citizens holding of State Savings there would be an almighty uproar and court writs galore
States that renege on debt do have a tough time getting new debt - not impossible but it would takes years to recover the credit status we now enjoy

Greece did confiscate some of its citizens savings, if I remember correctly.
Argentina and brazil?, had to fight court cases that ran for years in New York on the same sort of issue
 

Allpartied

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The risk to state savings is significantly lower than the risk to savings in Irish banks. If the state is failing, then the banks will have long gone, with every penny.
 

Brendan Burgess

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The risk to state savings is significantly lower than the risk to savings in Irish banks. If the state is failing, then the banks will have long gone, with every penny.

Good point. Maybe I should amend the thread title to "What is the risk to state savings and state guaranteed savings?"

Brendan
 
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