Jill Kerby

Bank Guarantees?  They’ll Do Your Head In

Not only has our bank bail-out proven to be the most expensive of its kind in the world, but we also have the most complicated deposit guarantee system, thanks to the government’s decision back in October 2008 to throw a two year, 100% blanket guarantee over all the deposits and debts of the six main Irish banks: AIB and Bank of Ireland, Permanent TSB and the EBS and Irish Nationwide and Anglo Irish Bank and the now defunct Postbank.

That infamous two year deadline runs out at the end of this month (September) and it should come as no surprise that many ordinary bank users and depositors are completely baffled as to what security provisions exist now for their hard earned savings. 

So here goes. 

First, find a comfortable seat.  Then put on the kettle.  Try to keep the background noise and interruptions to a minimum for the next few minutes.  Break out the aspirin… the tangled web of Irish bank guarantees is enough to do your head in. 

 Guarantee Number 1 

Before all hell broke loose on what was a sunny September morning in 2007, Irish depositors were probably blithely unaware that their savings came under an EU-sponsored Deposit Guarantee Scheme that safeguarded just €20,000 of their money per person, one of the lowest deposit security rates in Europe. 

All the financial institutions that were authorised by the Irish Financial Services Regulatory Authority to operate in Ireland were covered by this guarantee. Up to September 2007, there hadn’t been a bank failure here or in the UK for 150 years and in an ironic sort of way, the €20,000 sum under guarantee here was a vote of confidence in our banking sector. 

And then the unimaginable happened.

The UK deposit taker, Northern Rock went wallop on that sunny September 14th as a consequence of the interbank credit crisis; a bank run then started in Northern Rock branches in the UK and here, and suddenly everyone was interested in the terms and condition of the Bank Guarantee Scheme.  The UK government, meanwhile, stepped in and nationalized Northern Rock, ensuring that ordinary depositors would get their money back.

The excitement was over…for the moment. But Northern Rock was a tipping point and the international banking and financial situation deteriorated throughout the remainder of 2007 and into the Autumn of 2008 with spectacular slides in bank share prices.  Then it was Lehman Brothers’ turn to implode.

Irish savers were now only too aware about how vulnerable the banking system here was to the toxic effect of the US subprime market, overheated property values and the hundreds of billions worth of complicated derivatives investments that were hived off from the mortgage bonds that had been sold on by the banks.

In early September, 2008, the Irish government, conscious of the growing unease about the banks raised the Deposit Guarantee Scheme sum from €20,000 to €100,000. We’ll call it Guarantee Number 2. Once again, all the financial institutions under the regulation of the Irish Financial Regulator plus the credit unions were included.

 Guarantee Number 3

 In reality, this rise in the guarantee and the growing awareness of how dependent the Irish banks – and Anglo Irish Bank in particular – were to the fast-freezing inter-bank market stoked up peoples’ fears.  As queues of worried savers started to form outside a number of Irish banks, on September 29th a two year, blanket, 100% deposit guarantee was declared: the Credit Institutions (Financial Support) Scheme (CIFS) was born and it effectively guaranteed over €400 billion worth of loans and deposits in the Irish banks.  The rest, as they say, is history.

 So where do depositors now stand as the 100% CIFS scheme runs out on September 29, 2010?

 First, all deposits up to €100,000 in Irish institutions supervised and regulated by the Financial Regulator remain guaranteed up to that amount with no end date.  The guarantees that apply to deposits in non-Irish banks by their own regulators – the Dutch Financial Regulator in the case of RaboBank’s €100,000 guarantee - also continue to apply.  But after that date, sums over €100,000 in Irish banks are no longer guaranteed under the CIFS scheme.

However…and this is why I suggested you make that nice cup of tea, the Government introduced yet another deposit scheme last December 2009 known as the Credit Institutions Eligible Liabilities Guarantee (ELG) Scheme 2009.

Further amended on June 28th, 2010 and last September 8th, this Guarantee Number 4 now guarantees all retail deposits in the participating Irish banks until December 31st, 2010.  It may also be significant to small and medium sized companies that the September 8th amendment also extended the ELG scheme to short term bank liabilities, including corporate and interbank deposits as well as debt securities, but only until December 31st, 2010.

Meanwhile the balance of personal fixed rate deposits over the €100,000 limit of the main Deposit Guarantee Scheme (DGS) for a period of no more than five years or until 2015, and then, only if the deposit was made after the bank joined the ELG scheme, but before December 31, 2010, when the current six month rolling approval of the ELG scheme by the European Commission is up. (The dates on which the Irish institutions joined the ELG are below.)

You might want to read that again.  Slowly.

In normal English, what this means is that if you have €150,000, for example, which you wish to leave with an ELG participating bank for, say, the next three years, the first €100,000 will be guaranteed under the DGS scheme with no end date.

The entire amount – all €150,000 - is also guaranteed under the CIFS scheme until the end of this month.  Finally, the €50,000 balance over the €100,000 will be guaranteed under the ELG scheme until the deposit term matures in September 2013. (Had you wanted to, the €50,000 could have been under the ELG deposit scheme for up to five years until 2015 when the ELG scheme comes to an end.)

Just keep in mind that if you had put more than €100,000 into a fixed term account before your bank joined the ELG scheme, the amount in excess of that €100,000 is not guaranteed.

So many promises

For what it’s worth, in the real world that most of our fellow Europeans inhabit and conduct their banking, 100% deposit and debt guarantees worth hundreds of billions of euro, just don’t happen, for the simple reason that no one is dumb enough there to believe that such a promise could ever be delivered.

Life is complicated and stressful enough these days.  So here’s a novel thought:  keep your money in a solvent bank.  Then enjoy the reassurance that a plausible deposit guarantee is in place.

Leave the fairy tales to the politicians and central bankers.

The dates at which the Irish banks joined the ELG scheme:

Source:  NTMA

RECOVERY?  WHAT RECOVERY?

So, how was the recession for you? A few bank recapitalisations here, and some spending cutbacks there, and hey, presto, all gone. Just like all the previous recessions.

No really.  The nation’s senior politicians and economists, with the exception of a certain red-headed one, are all falling over themselves these days to say the recession is over, and so it must be.  The ones on the government payroll are even in agreement with the ones on the payroll of banks, stockbroker and insurance companies’ payrolls.  So they must be right. Right?

We all know how awful the ex-recession was:  it started in 2007 (but only became ‘official’ in late 2008) after interest rates rose and people, especially young people, stopped spending borrowed money on new houses, and on the stuff that goes into, onto and around new houses.  Then their parsimony spread to electrical stuff, clothes stuff, reading stuff and even foodstuff. 

This anti-spending and anti-borrowing madness then spread to the rest of us:  we stopped spending on investment property and new cars and private golf and gym memberships, dining out and then even private school fees. Hell, some people – even employed ones - stopped spending on their life and health insurance, despite still being among the living and unhealthy; on car insurance, despite still being drivers, and on their house insurance, despite the continuing risk of fire, flood and theft.  

Some people even stopped paying their underwater mortgages!

The consequence of all this non-spending and inability to pay off debt – aside from bankrupting the banks and their biggest clients - was that the companies that produced all these goods and services had to lay off workers they could no longer afford to employ.

Then they sold their inventory at cut-down prices.  Then they cut their remaining workers’ wages and benefits, amended or abandoned their pension schemes and even lobbied for, and in some cases, got, government handouts to keep selling their already cut-down priced goods (like cars).  A lot of companies still went bust.

The recession-that-was, was hard on people working in retail, but devastating to those in the construction and property-related trades and services.  Thank goodness it’s over and all those workers will be back at work again building and selling us lovely new apartments and houses.

The recession-that-was also made the government do the silliest things:  it set up a giant property company called NAMA to take over all the bad loans of all the developers and their bankers.  (But they did it for our own good.)

It then raised taxes and levies, cut public sector wages, pensions, public spending on schools, hospitals, social welfare payments and infrastructure. The politicians even took a pay cut themselves!  How drastic a reaction was that to a recession that is now over?

Anyway.  Happy days.  The recession is dead.  Long live the out-of-recession!  (From a personal perspective it means that I can stop being “so melodramatic” as one reader described me, by constantly referring to ‘The Great Recession’, or even to ‘The Depression’.)

And so, we move to ‘the recovery’.  No wait, I stand corrected – again.  We move to a ‘jobless recovery’.  This, say the nation’s economists, is a sort of economic recovery in which most businesses (except big exporters or multinationals) don’t hire any new workers because there isn’t very much demand for their goods because people are still paying off their debts and not spending.

No new goods to sell at full price, means no new profits. No profits mean the business does not grow and does not generate any new tax revenue for the state.

Jobless recovery, indeed.

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“Ha ha. Very funny. But what is your point,” asked my husband as he hovered over my shoulder, reading (uninvited) the above. “Your sarcasm is utterly transparent.”

Gee, that hurt. 

But he’s right.

I doubt that any of you haven’t seen through the mendatious, mealy-mouthed spoutings of the economists and politicians who say the recession is over and dare to suggest that we are now on Recovery Road.

As a nation, I think we are on Bankruptcy Road, along with all the other countries that can no longer pay the interest on their soaring national debt, without more borrowings.  With a €20 billion budget shortfall, we can’t meet the state payroll, let alone free education and health care, unemployment and social welfare payments plus state pensions for increasingly long retirements.

Nevertheless, I am a pessimistic optimistic.

This ex-recession may have some years to run in the guise of a Great Recession, and maybe even as a Depression, but it will end some day. 

Until then, try to ignore the politicians and economists.  The vast majority of them have never had to meet a payroll in their lives, or negotiated a line of credit at the bank or struggled to replace a broken machine part in the middle of a production run.  I doubt if any of them would know where to buy a loaf of bread let alone know the price of one.  Juggling groceries and car insurance, school uniforms and doctor’s bills – are for the little people.

However, the controversial decisions they’ve taken - to recapitalise the banks and to set up NAMA in particular, but to also keep borrowing nearly €400 million a week to meet the budget tax shortfall could just prolong, not shorten the Great Recession. 

My guess – and that’s all it is – is that there is no ‘solution’ to our economic woes.  During the boom years all that cheap money that became available in the western world mistakenly drove up prices beyond any reasonable level. We borrowed too much and spent too much and in the case of the government, also made too many long term spending commitments based on what they thought would be a never-ending stream of property related taxes. 

Now that the cheap cash has stopped flowing, the value of all the stuff we bought and invested in during the boom years are all deflating. Deflating and devaluing.  With 450,000 out of work, our inflated wages and incomes still have some way to fall.

Some recessions just need to run their course.  The ones in which the creative destruction process is interrupted and manipulated by government – say, by pouring all the available capital into insolvent banks – will take rather a longer time to end. Just ask the Japanese.

But as for a genuine recovery…well, you won’t need an official announcement when it happens.  It will be right there, staring you in the face, on your bottom line.         

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