Do Savings Certs have the same (non) safety as Irish government bonds?

Jill Kerby in today's Sunday Times said:

only the certifiably insane would hand over their hard earned savings to the Irish state for a gross return of 4.37% when the free market version of the same 10 year bond is yielding more than 13%

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Wrong, wrong, wrong.:mad: She is making the terribly naive mistake of regarding the state as the same as say a corporation. Yes, if a corporation defaults all creditors line up pari passu. But a state can chose who to default on. There is a big political will to burn German and French bondholders, there is absolutely no political will to burn widows holding 50 grand in An Post savings. An Post savings will be the very last to be burnt. They amount to €11bn, if the state, having defaulted on the first €100bn of sovereign debt is unable to pay the last €11bn we are in pretty calamitous conditions indeed. An Post savings would be rated AAAAA++++.

Look at Greece. There is sort of a default there, but has there been any demand to burden share with its equivalent of An Post savers?

While I am bashing Jill let me point out that in the same paper she repeats her mantra that Ireland is going to leave the Euro. I have demolished this nonsense elsewhere in this forum. Anybody who followed Jill's advice a year ago to get out of Euro and into US dollars would be down 20%.

Either Jill's boss, Rupert, has his mind on other things or more likely he is encouraging this anti Irish, anti Euro inanity.

Don't follow her, but I assume she is some sort of financial journo, or 'expert'?

If so, shows you that many of them haven't got a clue really.

I'm not as convinced as you are about a country being able to selectively default. While this is now being tried with Greece, it is quite a small amount of default. Any significant default would bring in a bigger selective group of bond holders. The recent weeks also show that governments are not willing to default without ECB/EU "approval", and I am not sure that they would not look at all bond holders equally.
While I do not follow Jill Kirby's writings, I think you are mistaken that she suggested moving from the Euro to US$. I remember a thread about this about a year ago, and if I am not mistaken she had advocated hard and commodity currencies like CAD, AUS and CHF.

Chris, she stated quite clearly that the US$ was heading for parity with the Euro, it was then 1.20, it is now over 1.40. That was wrong in my book. She may have also recommended other currencies, the main mantra was "anything but the euro".

I think one of Jill's target audiences are widows with 50K in An Post savings. Is she seriously telling them they are the same as bondholders and will be treated the exact same as bondholders? She does not understand our democracy if that is what she is saying.

She appears to be asking that same widow to buy gold at its current historically high price. That is gambling.

Hi Duke

I actually started drafting a question on this issue yesterday in response to Marc's similar assertion in this post.

So saviings certs are safer than government bonds - ok, I will go along with that.

What about deposits in, say, Bank of Ireland? Is the recapitalisation sufficient that Bank of Ireland is now safer than the Irish government?

Brendan Burgess said:

Hi Duke

I actually started drafting a question on this issue yesterday in response to Marc's similar assertion in this post.

So savings certs are safer than government bonds - ok, I will go along with that.

What about deposits in, say, Bank of Ireland? Is the recapitalisation sufficient that Bank of Ireland is now safer than the Irish government?

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Interesting widening of the discussion. One purpose of the bail out was to put so much hard cash into Irish banks that they could scarcely possibly fail. And it had to be hard cash. None of your promises, they are ok for dead banks like Anglo. Remember that the bail out was bounced on us way before we would need it, that was to try and wean the banks off the ECB support.

So yes, it was proposed to make the banks look safer than the sovereign. Along the way though another totally irresponsible fear has been stirred, that Ireland will leave the euro and redenominate deposits in confetti money. No matter how solid BoI is, how do you cope with this fear? Deposits will not flow back any time soon.

Now this is all on top of the point I am making about Jill. Many people are making the mistake of seeing this as a binary situation - either the government will default on all its debts or it won't. That is what we are used to for normal commercial agents, but what I am trying to point out is that a government can selectively default. I suggest the following hierarchy from most vulnerable down to least vulnerable:

1) Foreign bank bondholders with an Irish Government guarantee
2) Foreign holders of sovereign debt
3) Domestic non regulated holders of s.d.
4) Domestic regulated holders of s.d. (eg insurance companies)
5) Deposit guarantees
6) An Post savings

Now, to enact this differentiation might need a bit of fancy footwork. For example it might default on all s.d. but then, as a supplementary, compensate, say, insurance companies to prevent a financial collapse.

Kerby has occasionally recommended the 3 and 5.5 year NTMA products but has been mauling the Solidarity Bond for a while - the headline on Sunday was

"The NTMA savings products are aimed at prize idiots"

She repeats something I've hear stated quite often - that it's idiotic to put money into NTMA products @ around 3.5% when sovereign bonds return 12% or whatever. Overly simplistic stuff, in my opinion you are correct about the potential for a selective default.

"Burning" An Post savers would be political suicide and would bring people out on the streets. Remember the medical card fiasco? Multiply that by 100.

Duke of Marmalade said:

Chris, she stated quite clearly that the US$ was heading for parity with the Euro, it was then 1.20, it is now over 1.40. That was wrong in my book. She may have also recommended other currencies, the main mantra was "anything but the euro".

I think one of Jill's target audiences are widows with 50K in An Post savings. Is she seriously telling them they are the same as bondholders and will be treated the exact same as bondholders? She does not understand our democracy if that is what she is saying.

She appears to be asking that same widow to buy gold at its current historically high price. That is gambling.

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I can't say for sure whether she recommended US$, as I don't really follow her commentary, but I have heard her mention CHF, AUD and gold before, more importantly I remember her stating that people should hold a portion of their assets in foreign denomination. Let's say that she did recommend US$, then that would of course be down in the last 12 months, but CHF is up about 20%, AUD is up about 12% and gold is up 23% in the same period. In 2008 and 2009 gold was lingering at the historical high of €800 per ounce, and look what has happened since. Just because something is trading near an all time high does not make it a bad investment or even remotely near gambling.

Brendan Burgess said:

Hi Duke

I actually started drafting a question on this issue yesterday in response to Marc's similar assertion in this post.

So saviings certs are safer than government bonds - ok, I will go along with that.

What about deposits in, say, Bank of Ireland? Is the recapitalisation sufficient that Bank of Ireland is now safer than the Irish government?

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As stated earlier, yes, banks could look stonger than the sovereign itself, though traditionally rating agencies had a rule of thumb that a bank's rating couldn't be higher than its sovereign's.

One caveat, the banks still hold lots of sovereign debt. Also they hold NAMA bonds guaranteed by the sovereign, though these latter are asset backed. An informative exercise would be to stress test a bank for sovereign default. So far, none of the well publicised stress reports, even Blackrock, have dared do this. Sovereign default just must not be considered in front of the children when these official stress tests are performed.

Chris said:

In 2008 and 2009 gold was lingering at the historical high of €800 per ounce, and look what has happened since. Just because something is trading near an all time high does not make it a bad investment or even remotely near gambling.

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Replace 2008/2009 with early 2000's and replace gold with either property or bank shares and re-read this quote.

Gold may well continue to rise. But advising vulnerable people that their salvation is in gold could equally finish up in the same tears as all those gullible and vulnerable people who trusted their pensions to property and bank shares. An Post savings are "safer" than gold for these people.

Whilst Jill Kerby and the Sunday Times may have their own agenda for the euro, Shane Ross on last Sunday week's paper, said that there were rumours in financial circles that the Central Bank were printing an alternative currency. I find it hard to believe that Shane Ross would be so irresponsible without some foundation. A lot more Irish people read the Sunday Indo than the Sunday Times and a lot of people are scared for the future of their savings and willing to take on the risk of currency in order to maintain the security of their savings. Lose a little or a lot?

Duke of Marmalade said:

One caveat, the banks still hold lots of sovereign debt. Also they hold NAMA bonds guaranteed by the sovereign, though these latter are asset backed. An informative exercise would be to stress test a bank for sovereign default. So far, none of the well publicised stress reports, even Blackrock, have dared do this. Sovereign default just must not be considered in front of the children when these official stress tests are performed.

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I agree, but according to a German radio report I heard last weekend, the stress test data was published which will allow for other scenarios, including sovereign default, to be calculated. The way it was done now definitely stinks of hear no evil, see no evil, speak no evil.

Duke of Marmalade said:

Replace 2008/2009 with early 2000's and replace gold with either property or bank shares and re-read this quote.

Gold may well continue to rise. But advising vulnerable people that their salvation is in gold could equally finish up in the same tears as all those gullible and vulnerable people who trusted their pensions to property and bank shares. An Post savings are "safer" than gold for these people.

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The big difference that you do not highlight though is that nobody on main street is buying gold. Despite my talking about diversifying into gold, none of my friends or colleagues own gold, not one of them.
Numerous cash for gold shops, stalls and websites have popped up, but they are asking people to do precisely the opposite of what people did when it came to buying property and bank shares. If gold is in a bubble then it is the calmest bubble in history.
I also do not believe that anybody, including Jill Kerby, is advocating that "vulnerable people" should put all their money into gold or other currencies. I think it is far riskier for them to have everything in Euro cash, as this gives them zero protection in case of a severe devaluation of the Euro.

capilano said:

Whilst Jill Kerby and the Sunday Times may have their own agenda for the euro, Shane Ross on last Sunday week's paper, said that there were rumours in financial circles that the Central Bank were printing an alternative currency. I find it hard to believe that Shane Ross would be so irresponsible without some foundation. A lot more Irish people read the Sunday Indo than the Sunday Times and a lot of people are scared for the future of their savings and willing to take on the risk of currency in order to maintain the security of their savings. Lose a little or a lot?

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Capilano, Shane Ross' rumour was utterly irresponsible as I have addressed elsewhere. 10 days later and this rumour has gained no legs. The theory seemed to be that Dame Street was on a solo run, printing punts nua secretly, that Greece, Portugal, Italy, Spain, Germany etc. were not secretly preparing for the break up of the euro, or maybe the rumour was that they all were and this was the best kept secret (except from Shane) across 17 countries in Euroland. Givuz a break, luv

Duke, In that case, Shane Ross was totally irresponsible and perhaps he should retract it. Unfortunately, a lot of people who read the Sindo believe him.

capilano said:

Duke, In that case, Shane Ross was totally irresponsible and perhaps he should retract it. Unfortunately, a lot of people who read the Sindo believe him.

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Yes he was. Brendan Burgess has ceaselessly exposed Mr Ross for the chancer that he is.

Brendan Burgess said:

Hi Duke

I actually started drafting a question on this issue yesterday in response to Marc's similar assertion in this post.

So saviings certs are safer than government bonds - ok, I will go along with that.

What about deposits in, say, Bank of Ireland? Is the recapitalisation sufficient that Bank of Ireland is now safer than the Irish government?

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Brendan

To be clear I wasn't suggesting that bank of ireland and An Post have the same ranking in terms of default risk.

An Post is equal to NTMA which is equal to the Sovereign state whereas Bank of Ireland is a listed corporation with a deposit guarantee provided by the state these do not appear to have an equal footing in terms of default risk.

To be clear the State could cast BOI to the wolves and choose to protect An Post in a selective default.

My criticism was aimed at accepting a guarantee from BOI without questioning the risk of default.

I do not believe that the same risk exists with An Post and I agree with most of Duke's comments although to be fair Jill is a well respected personal finance journalist and she is just trying to draw attention to very real questions that many of her readers would never think to ask for themselves.

If this leads to more informed investment decisions then it is a good thing.

But the point remains that risk and expected returns are related.

If An Post is safe the investors will receive a low expected return and in the case of products like prize bonds this return will bear no relation to the commercial realities of the bond markets.

Think of it this way. It is very patriotic of savers to put their money with An Post as they are saving the State a fortune in the interest it would have to pay in the bond markets.

You get a low return in An Post since you are taking a low risk.

Marc said:

Brendan

To be clear I wasn't suggesting that bank of ireland and An Post have the same ranking in terms of default risk.

An Post is equal to NTMA which is equal to the Sovereign state whereas Bank of Ireland is a listed corporation with a deposit guarantee provided by the state these do not appear to have an equal footing in terms of default risk.

.

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I misread or misunderstood your post so - sorry.

Your counter party to the contract is Bank of Ireland so you have a promise of your money back based on a BBB+ credit rating (that attaching to the Irish State)

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I read this that the Bank of Ireland's credit rating is dependent on the rating of its guarantor. And, by the way, I have made the same point myself in the past. What I am wondering now is whether the massive overcapitalization of the banks in general have improve the capital rating of the banks over that of the sovereign?

The Duke's point is interesting. If the sovereign defaults, it is not all or nothing. Some, such as An Post, will be protected.

What if BoI defaults? Will it be all or nothing? I presume not.

Brendan this is the crux of the question.

It is theoretically possible for BOI to have a better credit rating than the State but the rating agencies have historically deferred to the rating of the Sovereign as Duke points out.

S&P currently rate BOI as BB+ (junk) on a long-term outlook. Which is lower than the BBB+ currently assigned to the State.

For practical purposes from the point of view of a depositor BOI is therefore rated BBB+ as the deposits are backed by the Government guarantee.

The real question savers should ask is the one you raise. "How safe am I in the event of a default"? The answer should be that €100,000 is guaranteed but above that there is some theoretical risk. In practice in the event of the failure of BOI, the deposits would almost certainly be acquired by another bank.

I have consistently argued that deposits with Irish Banks therefore should not be considered at risk.

However, a prudent investor should restrict their position in any single bank to €100,000. Why would you take on a risks (however small) that you don't need to take and for which you are not being compensated by the markets?

There are plenty of conservative alternatives for cautious savers with more than €100,000. There is no need to leave millions on deposit with the Irish Banks and spend all night worrying about your savings.

Duke of Marmalade said:

Yes he was. Brendan Burgess has ceaselessly exposed Mr Ross for the chancer that he is.

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Dont forget this is the same Shane Ross who put Michael Fingleton on a pedestal and sung about how great INBS/Anglo Irish was right up to 2007... For a "financial expert" and editor of the business section of the Sunday Indo no one should ever take advice from this total con-man. and as for the Sindo, this is the biggest rag around,