Jill Kerby

WHAT A YEAR 2010 HAS BEEN:  AND WHAT AN OPPORTUNITY

I doubt that too many people are going to miss the year 2010 – at least not from a financial perspective.

Yet we’ve all come away from it with an important, life-changing revelation: that no matter who or what you are – like a bank, or even a country – wealth and financial security doesn’t come from borrowing and spending.  It comes from hard work, saving and investing. 

Next week I’m going to look at the key personal finance actions that you should consider to get through what will still be a very gruelling 2011 for many people. These will include some very practical steps you, your family and your close friends can and should take to make sure that no-one you know falls through the financial cracks.

Until then, these post Christmas days can be used to reflect on not just what happened over the past year, but on how we can benefit from what has happened, and maybe even take away a few ideas that will re-energise our own finances and those of our communities.

At least the blinkers are off and we can go forward with a more realistic view of the future.

We all know now that the Irish banks have failed utterly. The fact that they don’t exist in a vacuum is also well known by now:  the entire European banking system is in serious trouble and 2010 revealed just how interdependent and vulnerable they are to each other’s debt problems.

Most people who read this column regularly know by now that leaving all their wealth in shares, or in property, or in paper euro, (or any other fiat currency backed by a country that is also heavily in debt), is not a good thing.  They’ve shifted their money to solvent, non-Irish banks and shifted some of their euro cash to other stronger currencies (or currency funds) and even to ‘real money’ like gold and silver.

There will be no surprises in 2011 about the failed nature of our political state. Handing over our lives to inept, amateur politicians and faceless bureaucrats and expecting them to act in our best interests has been shown to be as foolish as thoughtlessly handing over our money to a bank manager, stockbroker or investment manager and expecting them to act in our best interest.

2011 will  - hopefully – be the year the Irish people grow up.  No more ‘social partners’ protecting their vested interests. The €20 billion budget deficit that we built unaffordable and unsustainable welfare, public service, health and education structures.

And it isn’t just us. Margaret Thatcher’s famous quotation, “Socialism only works until you run out of other people’s money,” has been proved correct in every indebted, social democratic state from here to Greece, back to the UK, France and Germany and even to the much envied Scandinavian countries.

The events of 2010 has forced all of us (some, like spendthrift politicians and trade unionists -  who are still kicking and screaming) back to the realisation that in the real world you need to live within your means.  End of argument.

As for business opportunities that have arisen in 2010, I’m looking at one right now: snow.

By the time you read this, The Great Thaw of 2010 may be underway – or not – but as someone who spent the first half of her life living in the greatest winter city in the world – Montreal, Quebec – believe me when I say there’s money in snow.  There is a whole new industry of retail and service opportunities for this country if “Winter, the Season” really is back: 

-       Winter tires. Duh.

-       Snow boots. Ditto duh. The latter need to be warm, light and waterproof. We (me, the husband and child) bought our latest ones in January and these are even lighter, warmer and more waterproof than the old ones. The brand is ‘Vista Pro-Tex’ and they are made in Italy.

-       Spiked cleats.  These mini-crampons clip onto shoes and boots of all sizes. They have steel plates ridged with sharp teeth and are perfect for walking on icy surfaces. Shoe shops, outdoor and hardware stores stock them.

-       Lightweight, sharp bladed aluminium snow shovels. These come in all sizes to clear everything from narrow footpaths to driveways.  My family in Canada swear by the 24 inch Jackson Aluminium Ribbed shovel. The Irish hardware stores that gets these in stock will make a fortune.  (Check out these reviews at http://reviews.canadiantire.ca/9045/0596934P/jackson-jackson-24-in-aluminum-ribbed-snow-shovel-reviews/reviews.htm)

-       Canadian Tire (the Canadian equivalent of Woodies DIY) also carries a brilliant winter safety kit ($39.99). It comes with a collapsible shovel, jumper cables, gloves, hand warmers, flashlight, whistle, candles, matches, etc.

-       In Montreal, every landscape gardener has year round work - in the winter they fit a heavy snowplow shovel to the front of their trucks and clear suburban side roads of snow, both on contract to the city and/or separately to resident’s associations that want an extra service.

-       Enterprising young Montrealers make spare money through the winter shovelling footpaths and driveways.  They also deliver newspapers groceries on sleds and I’ve seen kids selling hot chocolate from thermoses for a buck a cup from little stands they set up outside their houses.

-       Montrealers can’t use conventional baby strollers for six months of the year so they invest in little sleighs with plastic covers. Baby goods suppliers take note! (See the Pelican Baby Sleight Shield at www.canadiantire.ca)

WILL OUR HEALTH INSURANCE PLAN STILL OPERATE IN CANADA?

PR writes from Wicklow:  We are moving to Canada at the end of January. My husband was offered a transfer to a partner company of the one he works for here.  We were told it could be up to six or eight weeks before we can be registered for the Canadian medicare system.  Before then, will our Quinn Health Insurance plan still be in force. Someone told me that if they know you are emigrating they cancel your contract immediately. I was hoping you could tell me before I contact them.  Also, we each have life insurance policies (with Irish Life).  Are these still OK if we keep making the payment every month. I am 32 and my husband is 35. We have three children.

According to the Canadian Immigration Service, there is a three month waiting period in the provinces of British Columbia, Ontario, Quebec and New Brunswick before new immigrants with permanent residence status can become eligible for Canada Medicare. The healthcare system in Canada is operated by individual provinces, which operate different rules, but wherever you live you will need to immediately apply for insurance cards for everyone and register with a family medical practitioner. Temporary health insurance can be purchased from Canadian insurance providers and the Immigration Service will even pay for the cover for those immigrants who cannot afford to pay the private premiums. 

Temporary insurance is important since your Quinn health insurance policy is only valid if you are a resident of the Republic of Ireland, says health insurance advisor Dermott Goode (www.healthinsurancesavings.ie).  The international travel cover in your policy is also restricted to medical emergencies only during short stays abroad and membership of a scheme will end immediately if the member stops living in Ireland for more than six months per calendar year” said a company spokesperson.

 “Strictly speaking your readers should cancel their policy when they leave Ireland and claim any pro-rata refund if they have paid up to their renewal date.” Goode said that temporary international health insurance can be purchased here from the likes of BUPA International, VHI, AXA or Allianz, but you should compare the price of these policies with the Canadian ones.

As for your life insurance policies, you can keep your Irish policies but all benefits would be paid tax-free in euro, says Irish Life but there could unfavourable tax implications in Canada so you need to check with a Canadian tax advisor.

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New Currency Debt 

HO’D writes from Dublin:  You mentioned in your column last week that if Ireland had a different currency to the euro, mortgages would be valued at the euro equivalent of the new currency at the time of the split. I wondered about this as inflation over time normally reduces the real value of debt, the pound paid back is worth less than the pound borrowed. Also what if the euro was retained for the "lesser" countries and valued much less than the ‘super euro’ of the richer countries. Would the mortgage now be valued at the super euro value at the time of the split?

Inflation always eats away at the value of debt (and savings), but it works regardless of the currency.    This question of what existing euro debt would be worth if Ireland left the euro and switched to a new, devalued currency against the euro, is a different matter. If we owed another euro country €100 million, but left the euro and reverted to a punt currency, whose value was set at say, 20% less than the euro, it would cost us the equivalent of 120 million new punts to repay the €100 million owed.  The only way we could pay them less is if they forgave us a portion of our original debt. 

If the eurozone broke into two new zones of richer and poorer countries, we could presumably continue to pay the other countries in our zone with whatever value euro we assumed, but if it was worth less than the other, richer zone’s euro, the final bill to them would be higher.   Since most Irish mortgage lenders had to borrow from the rich eurozone members in order to sell their homeloans, it could be presumed that such personal debt would cost more if it was being repaid in the devalued second tier euro currency. 

Many people question whether our huge state and personal debts can ever be repaid, and suggest instead that, aside from a new currency, what this country and many individuals also need is a large serving of debt forgiveness.

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COVER FOR CHILDREN 

CD writes from Waterford: Myself and my husband are looking for some advice regarding savings that we started in the credit union for our children, a 16 yr old and an 11 yr old. They have savings of  €4,500 and €3,500 respectively. We are considering taking most of their money out of the credit union and putting it somewhere "safer".  We are worried that Ireland will default and we will leave the euro, thus devaluing their savings. We were thinking of moving it to Rabo Direct or the Post Office, we just don’t know what to do for the best.

The security of your savings is important, but unless you are worried about the solvency of your credit union, you should keep in mind that your €8,000 falls under the €100,000 bank deposit guarantee, which also applies to credit unions. Post Office savings bonds and certificates are entirely State guaranteed and DIRT free.

The Dutch bank, RaboDirect is certainly one of the safest banks in Ireland, but it is not clear whether all deposits will remain in euro or convert to a new Irish currency in the event that Ireland did leave the eurozone.  A spokesperson for Rabo said, “        .

 If you need access to this money anytime soon, the cost of converting the children’s savings into a non-euro currency in a bank, which would protect them if we left the euro, may not be worth doing. Foreign currency accounts often have minimum deposit amounts for one thing, and can carry exchange costs and other charges. All paper currencies are at risk of devaluation. As a longer term hedge against both that and inflation, you could consider switching some of the children’s savings into gold or silver – real money – or another tangible asset - some people opt for oil shares, others a piece of art or an antique - as a hedge against both the risk of devaluation and inflation.

REGULATOR MUST COME CLEAN ABOUT THE STATE OF BANKS

As you contemplate which of your Christmas presents doesn’t fit, doesn’t work or doesn’t ring the bells or whistles it advertises, at least there is now a consumer protection code in place that allows you to bring the item back for refunds or exchange or to go to someone in authority to make a complaint.

It wasn’t always so in this country.  Ten years ago, there wasn’t anywhere near the protection available now even for the most expensive purchases you could possible make – for a house, investment funds or policy, a pension.  Regulation up to 2000 was incredibly ad hoc in this country with consumer regulation in financial services in particular, left pretty much to the banking and investment firms themselves.

Those regulations have tightened up since the consumer division of the Financial Regulator (now back under the umbrella of the Central Bank) was set up in the mid-2000s, but it’s only been since the new, Central Bank regulator Matthew Elderfield was appointed a year ago last October, that the financial service companies of Ireland are finding out what it means to have a proper watchdog patrolling your turf.

I wrote an open letter at the time to Mr Elderfield, a former CEO of the Bermuda Monetary Authority, reminding him that Irish consumers were, ultimately, the people to whom he should be answering. A year after he began trying to come to grips with the disaster zone that his predecessors left him at the Central Bank, it is still a major work in progress. 

Despite the thousands of hours that he and his new team of regulators have clocked up in making sense of what happened in the Irish banks, by their input into Nama and the negotiations with the IMF, the EU and European Central Bank on the debt crisis, the new Regulator has been able to amend and construct consumer protocols and regulations, including a major review of the Consumer Protection Code.

I noted back in October 2009 that his ex-colleagues at the UK Financial Services Authority had produced a review and protocol for the mortgage market and how important a similar protocol was needed here, even if curtailing the worst of the banks’ lending practises after the mortgage market has collapsed, was very much in the ‘horse, bolt and barn door’ category of reform.

Nevertheless, that new Irish mortgage protocol is also now in place.  Some day, when people do start buying homes again, chances are, because of this piece of regulation, fewer people will end up borrowing themselves into lifelong penury or insolvency. The strict new lending rules will make it harder to buy their first home but it should also help stop property bubbles being blown up and mortgage lenders imploding.

The emergency mortgage arrears measures that Elderfield has facilitated this past year with the cooperation of the Irish Banking Federation and consumer groups, has temporarily postponed the repossession of thousands of private homes.  But the Regulator, and his expert group ruled out debt forgiveness on the grounds of moral hazard risk. 

Was it really his or their job to make such a judgment?  He must know that the massive personal debt and arrears problem in this country has only been deferred and could ultimately make things worse for the banks, not better.

The other pressing issue that I suggested the new sheriff tackle – the loss of confidence in the banks by ordinary people – hasn’t been adequately dealt with by anyone in authority. (The Regulator’s new team has been successfully in strengthening and improving the supervision and regulation of the credit unions, which should be very reassuring to all credit union members.) 

Irish bank guarantees of varying duration have come and gone and come again, but the people of Ireland continue to worry, with good reason, not just about the return on their funds from the insolvent, but the return of their funds.

Billions in deposits have been taken out of Anglo Irish, AIB, Bank of Ireland, Irish Nationwide and the EBS by institutional investors (who know when the game is up) but also by big and small savers, much of it held the elderly, who simply cannot afford to lose their life savings and may be the only people in their families who remain solvent.

Will the Regulator address this genuine fear in 2011?  Is it within his remit to say what might happen to the savings and investments of ordinary Irish people if our sovereign default deepens?  Or if the crisis in the eurozone gets to the point where our membership of the euro is in doubt?

Back in late 2009, there were all sorts of financial consumer issues that I felt needed a good examination by a proper regulator who had the interests of the people of Ireland foremost in his sights, such as the abuses inherent in commission remuneration and the lack of general financial education.

Events overtook Elderfield.  Like our roads and footpaths, the money supply of Ireland has nearly frozen solid and those other issues are not so pressing.

 Instead, Matthew Elderfield will do this country a great service in 2011 if he just manages to tell us the truth about the position of our financial institutions, the currency we use and how safe it is to save, invest and spend. 

NEW INSOLVENCY, BANKRUPTCY PROPOSALS WILL GIVE HOPE TO THOUSANDS ...BUT WILL THEY BE ENACTED?

It’s still a big ‘if’, but if last week’s report by the Law Commission on Personal Debt Management and Debt Enforcement is actually adopted by the new government and its proposals turned into law, then it could mean that there will be some genuine hope for many thousands of Ireland people whose finances have been devastated by this great recession.

With at least 200,000 mortgage holders in negative equity, and at least 70,000 (at the end of September) either in arrears or having made refinancing provisions with their lender, mortgage debt is by far the most serious issue.

The 400 page Law Commission report, with its 200 plus recommendations, addresses non-secured personal debt in particular, but mortgage debt (which is secured) is also dealt with by two of the three insolvency/bankruptcy proposals at the heart of their findings.

First – an outline of the non-judicial reform proposals:

At present in Ireland aside from formal High Court bankruptcy proceedings which are seldom invoked because the law is so inflexible – it takes 12 years to be discharged -  the terms so onerous and the cost so high - there is an unofficial, form of dealing with serious personal debt that often involves MABS, the Money Advice and Budgeting Service, the Free Legal Aid Centres and the debtor’s creditors, mainly the banks, but often also utility providers and retailers.

Creditors are called together and if a majority are willing to cooperate, and the debtor is also willing and able, a new debt repayment arrangement is made which usually also includes the writing off of a certain amount of the debt.  The debtor is left with a seriously impaired credit record.

Under the aegis of a new Debt Enforcement Office, the likes of MABS or FLAC may also have a role, but a new, licensed, Personal Insolvency Trustee will be appointed to the debtor with relatively modest personal debt, or with small business related debt. (Neither amounts are quantified in the Report.)

The individual’s insolvency can then be subject to either a Debt Arrangement Settlement of a Debt Relief Order.

In a case where the debtor, who has fully disclosed their position and acts in good faith is in a position to realistically pay some portion of their debt, they will be subject to a Debt Arrangement Settlement.

This involves at least 60% of their creditors agreeing to participate in this non-judicial, but legally binding (on both parties) process in order to try and redeem at least some of what they are owed.   At the end of the agreed term of up to five years, all going well, the agreed debt would then be seen to be paid in full and the debtor can make “a fresh start” with no damage to their credit rating.

Mortgage debt can be included in the Debt Arrangement Settlement if the bank/lender is willing to convert it to a non-secured category of loan, says the Commission, though that is more likely to happen where the outstanding mortgage balance is relatively modest.

Where it is obvious to everyone that the debtor has no chance of repaying any of their debt, say perhaps they have no income or assets, then a Debt Relief Order would be issued in which the debtor is discharged from all their debt.  Such a person, however, will be left with an impaired credit record and will find it difficult to secure new credit.

Finally the Commission addresses the reform of our bankruptcy laws.  It suggests that bankruptcy continue to be a judicial, High Court process involving larger and more complex amounts – at least €50,000 worth – but once a settlement is reached with creditors, that the period of discharge be reduced from 12 years to three to five years. The Report covers many other related issues and recommends that the jailing of debtors be abolished in all cases and that a new licensing system be introduced for the purpose of regulating the debt collection industry.

When combined with the provisions of the new Mortgage Arrears and Personal Debt protocol introduced by the Financial Regulator, this report could be the base for a very good new body of law, if it is enacted. 

Too bad it wasn’t introduced sooner. The fear now is that widespread debt forgiveness or bankruptcy, could negatively impact on the efforts being made to recapitalise the fragile Irish banks.

Who, in the end, would ultimately pay for the surge in the banks’ domestic mortgage and personal debt liabilities?

You guessed it – all of us.  Again.

IF WE LEAVE THE EURO WHAT HAPPENS TO THE MORTGAGE?

GR writes from Dublin:  In response to the letter from KP from Kildare (Sunday Times Money Supplement, 4th Dec 2010) you don't seem to have answered his last query, namely "What would happen to mortgage debt if Ireland leaves the euro?"  

If we were to be forced out of the euro, or left it voluntarily, the debt you hold in euro, like a mortgage, would, most probably, be expected to be paid back in the new, Punt Mark II equivalent. Even if a second tier eurozone was created for heavily indebted member states like ourselves, the Greeks, Portuguese and Spanish, the original euro debt would have to be repaid.  Expecting it to be repaid and actually getting the money, is not the same thing, however. If the Irish state were to default, there would probably be a certain amount of debt forgiveness, and the same would, presumably, have to apply to the vast amount of personal debt Irish people carry. New repayment rates and terms would also be worked out with creditors – who might be new owners of your bank. 

Would it be enough to avoid repossessions?  Perhaps, but no matter what level of restructuring  – and this applies even now as we labour under our new ECB/IMF overdraft facility – there is a pressing need for a formal personal insolvency process in this country.  People with massive, unsustainable debt need a chance to have the all or most of their debt to be wiped clean and a chance to discharge their bankruptcy in a short few years.

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I can't repay loan

AB writes from Co Longford:  I have a personal loan with PTSB which is distressed, I have been paying as much as I can over the past four months. I approached PTSB before it became distressed but they were not open to discussion.  The loan balance is 16,000; repayment was €420 per month, and for the past four months I have paid a total of €950 in payments (€50 per week) but they are assessing penalty interest of up to 11% per month and as a result interest has taken €700 of the €950 and the principle just never seems to reduce, is there anything I can do?

 There is still no formal arrears protocol from the Central Bank regulator for personal debt, despite one coming into force from next January for mortgage arrears to which your bank is a signatory.  What you need to do is to write a formal letter to your lender clearly setting out why you cannot meet your full loan repayments, that €50 a week is all you can afford and request a meeting to discuss a formal debt restructuring. In order to back this up, you should also arrange a visit to your local MABS (Money Advice and Budgeting Service) who can help and advise you in putting together a proper budget statement that you can then submit to the Permanent TSB loan officer.

 “The reality is that too often banks won’t accept the word of their customers when they say they can only repay part of their loans, but they will accept it if it is backed up by a MABS intervention,” says Brendan Burgess, the founder of the financial website, www.askaboutmoney.com .  “I think getting MABS to help your reader work out his outgoings and expenditure and coming up with a repayment that he can meet is a good strategy.”

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Pensions poser 

RL writes from Dublin:  I am 48 and a sole trader and have a small internet/mail order business that I started about 10 years ago from home.  I had been making small pension contributions every year until about three years ago when I turned I turned 45, and had a chance to bump them up. Last October I made a payment of €14,000, which represents about 25% of my gross earnings. However, I’ve been reading a number of reports that I may have to make another payment before the end of this month because of some backdated income rule. I can’t make head nor tail of the explanation.  Can you explain how it works and whether I will have an extra payment to make? I don’t actually have any spare money at the moment.

The Budget has indeed revised the terms under which self employed, sole traders like yourself can make annual pension contributions, but you can relax says Suzanne Fogarty, a partner at the Dublin accountancy practice, DLS Partners:  “The income restriction or backdating option does not apply to your reader as her earnings of €56,000 fall well below the new income limit - €115,000 instead of €150,000 which has applied up to now – and on which pension contribution tax relief can be claimed.”

Had your earnings been in excess of €115,000 in 2010, the backdating of the lower income limit to 2010 would have meant that you would have to bring forward your 2010 pension and tax payment to before the end of this year, rather than wait until the end of October 2011 to make those payments, or face a higher tax bill.  Unfortunately, not that many people have the money (having just paid their 2009 pension contribution and taxes this past October) or can borrow the value of their 2010 pension contribution.

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€50,000 Question

JK writes from Carlow:  I have €50,000 to invest for the next three to five years. Where in your opinion would be a secure place to invest and gain some interest at the end. I have savings bonds and savings certificates already.

Three to five years is a very short period of time to be investing, especially since so many life assurance based investment funds has upfront charges and monthly administrative and annual management fees.  I am going to assume you don’t have outstanding expensive debt to pay off, but If it is security of your capital that you want above all, then stock market based investing is not for you.  To beat deposit rates, however, you need to take some well-informed risks with your money.

Since you already have cash in Post Office fixed term accounts, you could consider putting some of your €50,000 into ‘real money’, like gold and silver as a hedge against the continuing devaluation of paper currencies and the risk of future inflation (see the Dublin bullion dealers www.goldcore.com for different ways in which to buy gold and silver.)    You could also investigate short term government or corporate bonds; contact a good financial advisor or consult a stockbroker. 

MAKE UP BUDGET SHORTFALL WITH CANNY PRICE COMPARISONS

It will take some time before the effects of Budget 2011 sink in – I expect the vast majority of us will only really feel the pinch at the end of January when not only will the effects of social welfare cuts be felt by recipients, but when the new 11% (total) Universal Social Charge and higher PRSI rates (if you earn more than €75,000 or are self-employed) kick in.

You can check how the tax/PRSI/ USC changes will affect you here, in the budget annexes: www.budget.gov.ie/budgets/2011/Documents/Part%20C%20-%20Annexes%20to%20SBM%20FINAL.pdf .  In the tables section, find your income category – say, ‘married couple, two children’ or ‘single person’ or ‘pension’, scroll down the left hand column to your income level and then work your way across the columns to where it shows the total amount of new tax/social insurance charge you will pay in 2011.  Most people should expect at least a 4% drop in income next year.

How you will cope with the loss of income is another thing.

One company that was set up a couple of years to help households of every income level cope with the onset of the Great Recession is Bonkers.ie a financial price comparison site. I had a chance to meet its managing director, Dave Kerr last Wednesday when we shared a panel answering viewer’s Budget questions on RTE’s The Afternoon Show and The Daily Show. 

Bonkers.ie has produced a list of savings that should offset the average family’s losses:

“An average family with two kids and a €45,000 salary will lose €60 per month from their income,” says Kerr. “Spending just 40 minutes on household finances can help consumers claw some of that money back.”  Here are his top tips:

• Switching Gas Suppliers - €8 per month savings: An average household spending €727 per year on the Bord Gáis standard tariff could save €92 per year by switching to the Flogas standard deal.
• Saving on the cost of Electricity - €10 per month savings: Switching to the best deals from Bord Gáis or Airtricity will save the average household €116 over the course of a year.
• Credit Cards - €24 per month savings: For customers with good credit, it makes sense to switch balances to a new card. Switching a typical Irish balance of €1,246 to a six month 0% introductory offer could net €141 in savings over six months.
• Current Accounts - €8 per month savings: Switching to a no-fee current account could save up to €72 per year. There are even rules to make the switch as straightforward as possible.
• Home Communications - €20 per month savings: Many consumers are still getting phone and broadband services from separate providers, and paying line rental. Costs for broadband and home phone can be reduced by over €20 per month, with some bundles offering broadband, home phone and free call bundles for as little as €30.
• Mobile Phones - €15 per month – per phone – savings: There are now eight mobile phone suppliers operating in Ireland offering the greatest choice ever (and possibly greater confusion than ever) to Irish consumers. Costs and plans vary widely, but a basic bill-pay plan with 175 call minutes and 100 texts can be had for as little as €20 per month or as much as €35. Choosing the best bill-pay plan can save €15 per month - or much more depending on customers’ needs.
• Savings: Easy access accounts and strong interest rates of up to 3.0% are still available from responsible institutions (like Nationwide UK Ireland, NIB and RaboDirect), with good credit ratings.

You can compare many of these costs on the www.bonkers.ie site. 

Meanwhile, contact a good fee-based broker or advisor to try and cut back on big ticket health, life, car and home insurance deals.  Brokers that I speak to regularly insist they can save new clients at least 10% off their existing contracts, at least for the first year.

They do this partly by sharing their commission, but also by their insider knowledge about the terms and conditions in contracts.  “Most people don’t understand what they’re buying and how increasing the excess or even just correcting things like the replacement value of their house or car can reduce the premium,” one general insurance broker said told me last week.

Finally, remember you have until the end of this year to lock in your health insurance at 2010 rates, says specialist health insurer advisor, Dermott Goode (www.healthinsurancesavings.ie).

According to Goode, renewing now or switching to a more competitive health insurance plan before they increase their rates in the New Year “can save you hundreds of euro, especially if you lock in the ‘corporate’ rate which under our community rating regulations, is available to everyone, not just business customers.” 

MT writes from Dublin: Have bank depositors ever lost their money due to a bank collapse in the developed world? Or have the government always seen to it that deposit holders got their money back? (eg. Northern Rock, the first bank run in 150 years in the UK and deposit holders still got their money back). I understand all Irish deposit holders have up to €100,000 guaranteed but is there any chance the Irish government could run out of all money supplies and be unable to pay everyone’s deposit back?

Nearly 150 banks have already failed in the United States this year, up from 140 last year; their bank deposit guarantee only covers the first $250,000.  Any sum over that amount would has been lost by depositors foolish enough to leave the extra sums in those failed banks.  If an Irish bank, or any other bank in the eurozone failed, only the amount covered by the relevant bank deposit protection scheme would be repaid. It is unlikely that a failed Irish bank would have sufficient supplies of cash on hand to repay the €100,000 to every eligible saver under the deposit protection scheme.  However, if you have faith in this guarantee, you presumably, will also believe that your €100,000 will be ultimately refunded as quickly as possible with the assistance of the EU, ECB and IMF, all of whom have just extended an €85 billion loan facility to capitalise the banks and the state.

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BW writes from Cork:  I do feel that the Irish banks will fail and that the euro may not survive. Last Sunday you suggested Norway as a safe bet for savings, but what about changing my savings to a sterling cheque and putting that into a British Government controlled bank/society e.g. Nationwide U.K.?

There are any number of non-euro currencies into which some of your euro savings can be transferred.  Ask your bank about its terms and conditions for setting up a foreign currency account - they may not pay any interest, for example. Under UK building society regulations, you cannot open a Nationwide UK building society account unless you are a resident of the UK, but you can open an account with their international operation in the Channel Islands.  Nationwide UK Ireland does not open sterling accounts here. One way to shift some of your money out of euro and into a wider basket of currencies is to buy into a currency investment fund. Check out the Insight Alder Capital fund see www.brokerfirst.friendsfirst.ie/ole/investments/documents/Weekly%20Fund%20Performance.pdf) which is available from Friends First. In the year to December 3, 2010 this fund has recorded a 13.07% return; over five years it has produced an annual return of 7.69%.

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LM writes from Cork:  In reply to SG from Dublin you mentioned that readers could "subscribe to financial newsletters". Could you suggest which newsletters might be worth subscribing to? Also, one of your correspondents raised an issue in a letter that I noticed you did not answer, ie what would happen to mortgage debt if Ireland leaves the euro?  I think euro mortgages taken out since joining the single European currency would increase proportionately if we adopt a new devalued currency, but my husband thinks that mortgages would be re-calibrated on a one-to-one basis into the new currency.  As savings would devalue automatically if we leave the euro and default on our debts, this is an important point to clarify; there is little point in saving at all if we should be trying frantically to pay off as much of our mortgages as possible.  Can you shed any light on this issue? In the same letter, the correspondent asked what would happen to one's mortgage contract if AIB is acquired by an outside agency.  Can you answer this as well, please?
 
I personally subscribe to a number of specialist newsletters from the international Agora Financial stable – Capital & Crisis, Special Situations, International Living (whose office is based in Waterford) and the excellent free, DailyReckoning.com as well as their weekly financial magazine MoneyWeek. I subscribe to the 12% Letter and S&A Digest from Stansberry and Associates, US newsletter publishers.  I also subscribe to one of the oldest UK financial newsletters, the Fleet Street Letter which is now owned by MoneyWeek. All of these publications can be ccessed on-line and they send daily and weekly e-mail prompts and updates.

As for what would happen to Irish mortgage debt if we left the euro and assumed a new, devalued Irish punt, the consensus view is that you would have to repay your euro denominated mortgage with the devalued new currency.  If, say, you had a €200,000 mortgage debt and the new punt was worth 50% of the old euro, then you would now have an equivalent new debt of 300,000 new punts. Only outright debt forgiveness for personal debt holders – or very high inflation – will reduce the value of your debts. Finally, any purchaser of AIB Bank would expect you to keep paying your mortgage, as per its original terms, in euro, punts or any other currency that became the new ‘coin of the realm’.

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SG writes from Kerry:  I’m considering opening a GoldSaver account with Goldcore.com and invest on a monthly basis but I’m a little sceptical about buying certificates as opposed to physical gold as I have heard lots of bad stories from people online about not being able to obtain their gold when they requested it. Do you have any advice regarding same?

Goldcore director Mark O’Byrne told me, “There is no truth in this. 
During the financial crisis in 2008 there were delays of some two weeks for clients who decided to convert to allocated gold or who wanted to take delivery of their gold. There has never been a delay in liquidating Perth Mint certificates for cash or in receiving payment as it encashes certificates and transfer cash immediately.”  If you are anxious about buying gold in certificate form, or in the form of an Exchange Traded Fund, another ‘paper’ backed version, I suggest that you buy coins or bullion and store them securely.

IS THIS THE FIRST BUDGET OF 2011…OR THE ENDGAME?

The first Great Recession budget for 2011 has just been presented – but too late for this column’s deadline.  However, with an election pending we shouldn’t discount the idea that the next coalition government may decide, if not to throw this budget out altogether when they get into power, to at least tinker around at its edges, subject, of course, to approval of our IMF/EU fiscal masters.

While the main tax categories and cutbacks were well flagged, you now have before you the devilish details. Try not to choke on your cornflakes as you work out how your personal or family budget will be affected. Case studies of single people, couples, families, pensioners and other social welfare beneficiaries are set out in the all the national newspapers.

The budget is, however, just one piece in the bigger jigsaw that includes our on-going bank crisis and the loss of confidence of international lenders and the European Union in our ability and a number of other countries to sort out their debt problems.

Can all the tinkering at the edges of this great debt leviathan – ours, that of Portugal, Spain, Italy, Belgium - actually stop national defaults or even the collapse of the eurozone?

I share a simple theory (with the classic Austrian School economists) about why the efforts of the European Central Bank and the EU isn’t working: you can’t solve a catastrophic debt problem with more debt.  Not if you are an individual who has too much mortgages, credit card and other personal loan debt; not if you are a construction company or a bank that borrowed too much to fuel a property mania and not if you are a country that has to borrow to keep paying for salaries and services and social welfare benefits that were never sustainable without the endless stream of property tax.

The tinkering is now moving into dangerous territory – the stealing of the future earnings of citizens who aren’t even born yet, or the printing of new money from thin air.  They call it ‘quantitative easing’.

Either way, the lenders – represented by the bond markets - are wising up and are now charging higher and higher interest. 

But the lenders are discovering that it isn’t just Irish banks and the Greek and Irish states that are bust. They know this great debt problem runs throughout the eurozone.

The proof of this loss of confidence is the soaring price of gold and silver – real money.  Even the greatest creditor countries – like China - have a pretty good idea they’re going to get stuck with increasingly useless fiat currencies like the euro and dollar, and are shifting this money they hold into tangible assets – coal mines and oil wells, fields of soybean and wheat, yield bearing real estate as well as precious metals.

In September 2008 I read a fascinating essay ‘Exponential Money in a Finite World’ written by an American scientist cum financial expert called Dr Chris Martenson. You can read it here: www.chrismartenson.com

 ‘He wrote: “Within the next twenty years, the most profound changes in all of economic history will sweep the globe. The economic chaos and turbulence we are now experiencing are merely the opening salvos in what will prove to be a long, disruptive period of adjustment.”

I think Martenson might now concede it could be a ‘short’, disruptive period of adjustment and that his theory of exponential debt growth is working even better than he predicted.

According to Martenson, when something keeps expanding by a percentage amount, “no matter how miniscule” it grows geometrically, or exponentially. A good example is a geometric growth sequence of numbers: (1, 2, 4, 8, 16, 32, 64, 128, 256).

When the same principal is applied to the accumulation of debt, fuelled by clever but hugely complicated forms of debt-based investment products, an amount of money, say a billion dollar pool of subprime mortgages, can rapidly turn into 10 million, then tens of millions, and then tens or billions worth of debt.  When enough of this bad debt accumulates, it can turn into trillions worth of debt and find it’s way onto the balance sheets of every major bank in the world.

That unraveling began in 2007-2008.  Poor little Ireland got caught up inadvertently, by grabbing big slices of all the cheap credit that became available. Anglo Irish Bank became a huge player and unbelievably, it may not only bring down a country, but maybe help to bring down a continent.

The game is up.  Time has run out. There is no silver bullet in the armoury of the European Central Bank and IMF to ‘solve’ the problem. With the help of the US Federal Reserve they can only ‘kick the can’ further down the road.

If Martenson’s theory is right – and it looks pretty sound to me – the endgame will happen sooner than later. We can either get to the top of the queue and try and negotiate a controlled default that will allow us to get the best debt forgiveness, debt repayment, currency devaluation, tax and trade arrangements so that we can rebuild the country and accelerate both exports and the attraction of outside investment.  (Time to brush up on our Portuguese, Russian, Hindi and Mandarin).

The budget may be our immediate concern, but that doesn’t mean you should take your eye off the bigger picture.  You might want to add Chris Martenson’s essay to your post-budget reading list. 

OVERPAYMENT CAN KNOCK MONTHS OFF A MORTGAGE

MC from Wicklow:  We have about 15 years and €190,000 outstanding on our 2% tracker mortgage. We have approximately €10,000 saved and were thinking of paying off some of our mortgage. One of your co writers recently commented that we would be better off investing the money in a high interest account (no time period suggested). I would appreciate your opinion.

The first thing to check is whether you can pay off a lump sum from your tracker mortgage without penalty – under no circumstances do you want to endanger the continuation of the tracker and end up being switched over to a variable rate contract. 

High yielding deposit accounts are short on the ground these days, but the conventional view is that if you can achieve a superior, low risk, net return from a deposit account or investment fund, compared to the rate you must pay on your mortgage, it makes sense to opt for the higher return. A good advisor can help you identify deposit accounts and investment options that may fit that parameter.

However, this also only makes sense if you don’t have any other, higher cost outstanding debts, such as credit card balances, hire purchase payments or personal loans.  Credit card balances that typically attract 18% plus compound annual interest rates should be prioritised, especially if you’re in the habit of only paying off the minimum monthly repayment. 

Finally, before you make any decision, make sure your lender or your advisor shows you just how much interest you will save if you do pay off €10,000 capital from the €190,000 mortgage balance. You may find the lump sum  capital payment is a very good, guaranteed, no risk, no cost (hopefully) way of saving a lot of money. 

A once-off overpayment of €10,000 on a mortgage of €190,000 at 2% interest, for example, should save you €3,360 in interest and shave 10 months off the 15 years left on your mortgage. Ask your lender what would happen if you need to get back the €10,000 in future, perhaps to cover a financial emergency. MOst banks treat it as a mortgage top-up, which is increasingly difficult to get as house prices fall, reducing the equity in your home. 

Some lenders, including KBC Homeloans, give you the right to take mortgage overpayments whenever you wish. This flexibility makes the overpayment a lot more attractive. 

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Fixed risk

KP writes from Kildare:  I have been offered a two, three or four year fixed rate mortgage from AIB for a €450,000 mortgage and I’d like to know, first, if you think a fixed rate is a good idea and for how long and then, what will happen to mortgage agreements if AIB is sold.  Finally, what happens to mortgage debt if Ireland goes off the euro?

I asked Karl Deeter of Irish Mortgage Brokers for his view and he thinks the  three year 3.89% fixed rate you’ve been offered by AIB “is a very good deal” and at just 0.2% higher than the two year rate is a premium worth paying.  According to Deeter, ECB interest rates can only go upwards and since they are determined by the state of the German economy and not ours, chances are they will be going up sooner than later as the German economy strengthens and price inflation becomes more of a concern.  Even tracker mortgage holders will have nowhere to hide if that happens. He also suggests that all the Irish banks will be raising their lending rates as a consequence of the latest capitalisation measures and fixing a loan is a way to at least achieve some peace of mind for a few years. 

You do need to consider the consequences of having to revert to a higher variable or tracker rate at the end of the fixed period.  Your lender can project your mortgage cost on a lower capital balance, but at a higher rate, in three years time. You cannot overpay a fixed mortgage if you find yourself with some spare cash. You may also be hit with steep redemption penalties if you need to break out of the fixed deal because the rate is uncompetitive or you decide to move.

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Foreign affairs 

UB writes from Dublin: Further to a query in last week’s Sunday Times regarding transferring savings to another country - what steps are involved in this process?  Is residency a condition of repatriation of funds?  Who would be able to advise as to how to go about this?

There is nothing to stop you from transferring funds from your Irish bank account to a bank account in any other EU country, so long as you have all the access codes for the foreign bank account and you do not violate any money laundering protocols.  Opening that foreign account in your own name is another matter.  Again, there are no EU regulations preventing you from opening the account, (see http://ec.europa.eu/youreurope/citizens/shopping/banking/faq/index_en.htms), but individual European banks can set their own deposit terms, including residency requirements.  You need to check with the specific bank. 

Perhaps the easiest way to open a non-Irish, and non-euro bank account is to cross the border to Northern Ireland and open an account there.  Bank of Ireland, AIB, Ulster Bank in the north, will all open sterling savings accounts for Irish residents who fulfil the correct ID and money laundering conditions.  The main Irish retail banks, including National Irish Bank, can also open non-euro accounts for customers.

Nationwide UK (Ireland), which last week opened its first high street branch in Ireland at Merrion Row in Dublin (it has a drop-in customer centre at the IFSC) says that British building society legislation prevents its branches in Northern Ireland from opening accounts for non-residents.  Like most deposit takers though, it has a branch in the Isle of Man that will open offshore accounts for non-residents. Interest on such accounts is liable to tax at your marginal rate. 

WHERE’S THAT CRYSTAL BALL WHEN YOU NEED IT?

What I wouldn’t give for a genuine, functioning crystal ball. 

I’d love to see how 2011 evolves:  after all the tax hikes and spending cuts, will it be enough to restore bank lending, consumer confidence, jobs growth?  Will there be a global trade war?  Will the dollar and sterling keep devaluing? Where is gold going?

The economists at the Department of Finance, the ESRI, various stockbroking firms and the world’s central banks all claim to have crystal balls, hence their endless forecasting.  But either they’re telling more porkies or there is a mass malfunctioning of crystals. What other explanation could there be for how every prediction they’ve made has turned out wrong?

No, I’d just like one of the old-fashioned crystal balls, like the wicked Witch of the West had in The Wizard of Oz, or the ‘Red Eye’ that Sauron kept at his lair in The Lord of the Rings.  Each of them churned with stormy, sulphurous clouds that eventually cleared to show exactly where Dorothy and her companions were on the Yellow Brick Road, or where Frodo and Sam were hiding from the Ringwraiths on their journey to Mount Doom.

Since no one seems to have any genuine route map to get us from here to the end of our perilous economic journey, a crystal ball would be such a help.  Or, come to think of it, maybe all we need is a pair of ruby slippers or a gold ring.

Now there’s an interesting thought.  The good Witch of the North, Glinda, gave Dorothy the ruby slippers to protect her from the evil witch, but, unbeknownst to Dorothy, they were always her means to getting home, so long as they stayed on her feet.

Gandalf, the good wizard, gave Frodo the last gold ring forged by the elves and he too would be lost if he parted from it, no matter how heavy the burden became.   These were rare, precious things and when in the possession of ‘good’, innocent wearers or bearers, they became instruments not just of their personal salvation, but of those they loved.  

As pop philosophy goes, this isn’t bad stuff.  I’m a sentimental old movie fan so Dorothy’s ruby slippers and Frodo’s gold ring appeals to me a lot more than the X-Factor or National Lottery school of salvation that so many of our young adhere to and the IMF one that some cynical, older people, who should know better, favour.

Even without a crystal ball, it’s clear to me that this country’s salvation lies in only one direction and along one path:  debt repayment/forgiveness, hard work, self-sacrifice, prodigious amounts of saving, investing and risk-taking (as opposed to borrowing, spending and speculating) and an acknowledgment of personal, not just collective responsibility for every decision taken.

Where mistakes were made, they must be corrected, even if it means the dismantling of every state institution, every line of our flawed tax code and the monolithic welfare state that permits and rewards indigence and a universal sense of ‘entitlement’. It also means reforming our peculiar form of democracy, which encourages and highly rewards otherwise stupid, unsuccessful people to achieve public office, while entirely discouraging intelligent achievers in the private sector from ever considering a period of public service.

I could go on for hours here, but try to imagine a government run like a really great business with a product of essential services that people both at home and abroad voluntarily want to buy or use, with a tight group of well trained and rewarded staff who enjoy their jobs.  Because we are still talking about government, this service is unlikely to ever produce a profit – it still requires the collection and redistribution of a portion of the people’s earnings - but ideally, it won’t generate layers of losses either.  Meanwhile, the people who own this great company of state, get to keep the vast bulk of their own money to spend as they wish, not as the company of state dictates. 

Since none of the above has any chance of happening -  the vested interests are just too great and voter intelligence just too small -  I am going to guess (for that is all any of us can do regarding the future) that the year 2011 will end up looking pretty much like 2010, and 2009…only worse. 

Where does that leave us?  The vested interests are still everywhere and include the political morons we keep electing; the-overpaid, over-pensioned civil servants that prop them up to keep their own rice bowls full; the super-rich and rich whose government-gifted privileges, like 183 days worth of non-residence status and most of the quangos they run, are still with us too. 

Let’s not forget the last bastions of the corrupt Social Partnership process.  The wage-setting cartels – the employer groups and trade unions and their labour sector agreements - are still in place. So are the ‘entitled’ recipients of the great welfare state, from the third generation unemployed teenagers happily collecting their dole, to working parents getting child benefit, to wealthy pensioners who will fight to keep every state entitlement, even at the cost of losing productive younger workers already indebted by the massive transfer of wealth (in higher property values and pensions) that happened during the so-called ‘boom’ years. 

Benefits may have been reduced, but the entitlement mindset remains, even as the state continues to go broke. 

I love a happy ending.  Dorothy clicks her heels three times and finds herself back in Kansas.  Things are not perfect back home on the farm, but the tornado is gone, the sun is streaming through her bedroom window and she has survived her great adventure in Oz. 

Our adventure continues.  Like Dorothy and Frodo, we will need love, courage and intelligence, represented by our families, friends and communities to get us through the worst times. 

And ruby slippers… and a gold ring.

BUILD AN ARK IN 2011

Those of you running your own businesses know what you have to do to keep trading. On the personal front you should be building an Ark for yourself and your family as well this year: 

-       Try to reduce personal debt.  So long as the country is tied to EU debt requirements that raise personal taxation and cut services the domestic Irish economy will remain depressed. This means asset values and incomes will continue to fall.  Your capital debts remain the same but servicing those debts could rise. 

-       Prepare for price inflation.  The massive escalation of the global money supply and debt and rising demand for commodities in developing countries that are not indebted, means that we will see more price inflation here, especially for those goods that are oil-based or are foodstuffs.

-       If you have savings or investments, review them now. Don’t leave all your personal wealth in a single asset class.  Diversify.  Consider a mixture of cash, precious metals (‘real money’), value equities, bonds (some of which should be inflation-linked), commodities and property. Use the services of a good, independent, fee-based advisor.

 Ensure your personal savings is in a secure deposit account in a solvent bank.  These days it pays to think not just about what kind of return you can get on your money, but also the return of your money.

-       Keep in mind the effect that rising DIRT rates and inflation could have on your cash holdings.

-       Learn about emerging investment markets in developing countries.  Invest in them for the long term. Start teaching your children Chinese, Hindi, Malay, Spanish and Portuguese.