Jill Kerby

No danger with bonds but beware a euro exit

CC writes from Dun Laoghaire: I have €70,000 in An Post savings bonds and €40,000 in prize bonds. In the event of the bank guarantee being "called in" (save us all!) would both amounts be honoured, or would these be viewed as belonging to one institution, in which case would there be a shortfall of €10,000?

All state savings products continue to be 100% guaranteed by the Irish State, so the €100,000 bank deposit guarantee that applies to banks, building societies, credit unions is not relevant to you.

That said, if Ireland defaulted on its debts and/or we were to leave the euro and revert to our own currency, I don’t believe it is unreasonable to expect that the State would honour its contract with its own people regarding the money that the people lent the State in exchange for these savings products.

However, if we did return to the punt as our currency, your savings and prize bonds would most likely no longer be denominated as 110,000 euro but as 110,000 new Irish punt and that the new punt would not remain at par with the euro for long. A devaluation would mean that the value of your savings products  would purchase far less goods and services than if they had remained denominated in euro.

Going Dutch

JG writes from Dublin: I recently queried RaboDirect about whether my deposit and investments with them would be considered Dutch euro in the event that Ireland reverted to the punt.

They replied that “This is an unlikely scenario” but “If this situation did arise it would depend on the legislation that would be adopted by the Irish Government to resolve the issue.” They added that they comply fully with Central Bank of Ireland codes of practice, “So if new legislation is passed by the Government to affect all banks operating in Ireland, RaboDirect could potentially fall within the remit of that legislation.” In other words, RaboDirect could come under Irish legislation and deposits could be devalued similar to any Irish Bank.

I would imagine the same would apply to other European Banks registered in Ireland. I do not think this is generally understood.

I have pointed out many times over the past two years that no one is entirely certain what the outcome would be to euro deposits in non-Irish (but Irish licensed) banks if Ireland left the euro and reverted to the Irish punt.

Neither those banks that operate within the eurozone – like the Dutch-owned RaboDirect, nor NIB, the Danish owned, but non-eurozone bank that operates here - have been able to give equivocal guarantees that all deposits would remain in euro.  You’ve now received a similar reply.

If you are concerned that the money you placed with RaboDirect with the idea that it would remain a euro deposit might revert to punts, you could try and arrange to open an account with them in Holland.  NIB customers can open savings accounts with their Danske sister bank, Northern Bank in Northern Ireland.

Do your homework before you shift your savings to another jurisdiction or into another currency other than the euro. You will need to satisfy money-laundering regulations and there may also be transaction costs and a potential tax liability. You must declare any offshore account to the Irish Revenue.

Offshore options

RK writes from Dublin: I recently retired. I have €100,000 lump sum savings and a €100,000 tracker mortgage. I am considering paying off €50,000 of the mortgage in the fear that if the euro collapses, which now seems increasingly possible, my debt could be doubled and my savings halved. Is this wise in your opinion? Experts differ in their views about what will happen with debt and with savings in the event of a collapse. What is your opinion? Is there any point in holding some euro in cash if the notes originated in Ireland?

I’m a big fan of paying off mortgage debt sooner than later. No matter how difficult your financial position may become, at least the roof over your head is your own (or in your case, most of the roof if you just pay off half of the remaining loan.)  Before you do anything, however, check with your lender to see if making a capital payment forfeits your right to keep the tracker for the duration of the loan.

Sorting out euro debt contracts will be a nightmare for any country that leaves the euro and you are correct to wonder if, assuming the worst does happen and we leave the euro and revert to the punt, your mortgage will remain a euro denominated liability.

One way to mitigate the risk is not to leave the remaining €50,000 in an Irish-based savings account after paying off half your loan. Moving it to a ‘safer’ eurozone country (where it would still be worth more than the devalued punt even if that country reverted to its own currency some day) means that you will not suffer as great a loss in the spending value of your original savings once you repatriate it back to Ireland.

This, of course, also assumes that whatever offshore bank you choose (and its guarantee scheme) survives the fall-out of any country leaving the euro or that currency controls are not introduced that might keep your offshore money marooned.  Meanwhile, absolutely no one knows whether your Irish euro in the ‘safer’ offshore bank (or Greek or Spanish euro) will be singled out for different treatment if these countries revert to their own currencies.

I don’t have much faith in the long-term survival of the euro but I don’t expect it to collapse in the next few weeks or months. I think the EU technocrats will try more desperate measures to save it before that happens.

That should give everyone some time to consider their options, to get some expert advice and then to do what they believe needs to be done to protect their financial interests and those of their families. (See comment).