How safe are your savings?
BY the time you read this, the fate of Cyprus will have been settled: from my current vantage point it looks like its depositors will be taking a substantial loss on their savings (perhaps only over €100,000) as well as the citizens sacrificing some of their gold reserves, their private and semi-state pensions, accepting a higher corporation tax and making other concessions.
What the Cypriot parliament overwhelmingly rejected they may now very well accept with some amendments, since the alternative would probably be to have to leave the euro zone, though not the EU itself.
Whatever the outcome, the Cypriot banking and financial services industry (a less successful version of our own IFSC) is finished. Trust and confidence, the linchpins of banking, no longer exist there.
The capital controls that I expect to be imposed in Cyprus to stop a rush to transfer savings out of the country mean it will take a long time to restore that confidence. Faith in the sanctity of the euro itself and in the credibility of bank deposit guarantees will certainly be shaken throughout the rest of Europe too.
It is this element of the Cypriot crisis that savers need to address here, especially those with sums over €100,000 in AIB, Bank of Ireland, EBS and Permanent TSB. Many of them now have their own critical deadline to consider: the end of the Eligible Liabilities Guarantee on this Thursday, March 28.
Money left in term accounts for up to five years in qualifying ELG-covered bank deposit accounts have been 100% guaranteed and will continue to be until their five-year term ends.
However, those with funds that are no longer under the ELG from Thursday must act to otherwise secure them as well as they can.
The standard €100,000 Deposit Guarantee Scheme (DGS) is still in place but (as in bankrupt Cyprus) the Irish State does not have sufficient money in the Central Bank’s €388 million deposit insurance fund, to which banks make a paltry 0.2% contribution every year, to honour losses of up to €100,000 if an Irish bank ever did fail. There are currently €102 billion in household deposit accounts.
Also, it has now emerged that thousands of depositors in IBRC (formerly Anglo Irish Bank) who invested in tracker bonds with capital guarantees which had not matured before the recent liquidation of IBRC have discovered that the guarantee for the first €100,000 of their money has not been honoured. Other investors who bought Anglo Irish 5-6 tracker bonds (some as pension products) and even invested far more than €100,000 have lost huge sums. Total IBRC deposit/tracker bond losses could amount to €93 million, €15 million lost by credit union members who bought the trackers through their local CU branch.
The ELG will end on Thursday but the following options should be considered by all depositors:
• Be aware that all deposits and pension funds could be targeted as part of future EU bailouts for insolvent banks or member countries.
• Capital and currency controls could be imposed in any EU country, not just in Cyprus, to stop people transferring out funds (despite the EU principle of free and open trade).
• Aim to leave your savings in the most solvent or highest investment-grade institutions possible. No Irish banks qualify, but investment-grade deposit takers include Danske Bank, RaboBank, Nationwide UK and UlsterBank.
• The €100,000 deposit guarantee is only as good as the ability of the bank or the Irish State to stand over it, as IBRC depositors/tracker holders have discovered to their cost.
• All savings are at risk from taxation. Since 2009 DIRT has risen from 20% to 33% and from next year will be subject to 4% PRSI, increasing the total tax to 37%.
• All savings are vulnerable to inflation: the spending value of your savings falls as inflation rises (this is a hidden tax).
• Most financial advisors consider a 5-10% holding of gold/silver will act as a hedge against the risks of taxation and currency/capital debasement by central bankers to save bankrupt institutions and savings (check out www.goldcore.com).
Worried savers in Portugal, Spain and Italy as well as in Slovenia and Malta (also due bailouts) have been already moving their money out of the reach of their politicians/central banks. Yet there are few currencies considered particularly “safe” now and all banks are lowering interest rates. Bonds are not particularly safe either, warn advisors, as that price bubble intensifies.
Anyone concerned about the safety of their cash or of their pension funds should seek an independent, fee-based, financial review from an experienced advisor and aim for a solid, long-term, diversified asset and maybe even geographical solution that suits their age, risk profile and needs.
If there is one rule we should learn from Cyprus, where the bank crisis has been festering for a year, it is that procrastination is the worse response of all.