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



## Duke of Marmalade (24 Jul 2011)

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%


Wrong, wrong, wrong. 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.


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## RMCF (24 Jul 2011)

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.


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## Chris (26 Jul 2011)

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.


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## Duke of Marmalade (26 Jul 2011)

_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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## Brendan Burgess (26 Jul 2011)

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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## Duke of Marmalade (26 Jul 2011)

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.
> 
> ...


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.


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## The Ghoul (26 Jul 2011)

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.


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## Chris (26 Jul 2011)

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.



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.


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## Duke of Marmalade (26 Jul 2011)

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.
> 
> ...


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.


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## Duke of Marmalade (26 Jul 2011)

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.


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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## capilano (26 Jul 2011)

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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## Chris (26 Jul 2011)

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.


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.



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.


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## Duke of Marmalade (26 Jul 2011)

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?


_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


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## capilano (26 Jul 2011)

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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## Duke of Marmalade (26 Jul 2011)

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.


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


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## Marc (26 Jul 2011)

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.
> 
> ...




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.


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## Marc (26 Jul 2011)

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.


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## Brendan Burgess (27 Jul 2011)

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.
> 
> ...



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)



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.


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## Marc (27 Jul 2011)

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.


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## Bobby1 (27 Jul 2011)

Duke of Marmalade said:


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


 
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,


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## Duke of Marmalade (27 Jul 2011)

_Marc_ Point of clarification (not being combatitive), is the first 100K more guaranteed than the rest?  Is it funded or is it also merely a government promise like the ELG?

I still think that the availability of selective default to the government greatly changes the picture and that neither the rating of either the bank or the sovereign is very relevant to assessing the safety of deposits.  You really have to examine the socio/political dimension rather than the mere national accounts.  Of course, into this mix comes thoughts like do depositors with more than 100K have the same implicit political protection as your widow with 50K.  It is this latter thought, rather than concerns about ratings, which makes me agree that you should spread it around, though one wonders would Pearse Doherty distinguish between a "fat cat" who had 5 x 100K deposits and one with one 500K deposit.

It is populist to call for burning of bondholders.  But deposits seem sacrosanct and as for An Post savings well "hands off" would be the univeral clamour from our elected representatives.


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## JoeB (4 Aug 2011)

_moved from another thread_
 I don't see any clear evidence there that the Post Ofiice is untouchable. I'm a cynic, and I believe our Gov would wipe out elderly savers, and apologise afterwards. Not even a clear statement by Enda would change my mind.. that's the problem with lying in the past,.. Ernda lied before the election, so now he is forever tainted.. in my view he is untrustable,.. especially on this type of iissue. So no, I don't believe that the Post Office is somehow safe.

I think our politicial system is flawed, as no responsibilty is ever taken by individuals, no one loses their job for lying and incompetence, and people can tell outright lies during electioneering. If policitions were fired for breaking election promies, that would be a huge start,.. although of course then no promises would be made.


This is the contributor from newstalk (most likely)
[broken link removed]


			
				above link said:
			
		

> Niall Brady, Money Editor with the Sunday Times will be in studio tomorrow morning [Thursday August 4th] on Newstalk Breakfast with Ivan Yates and Chris Donoghue to answer your queries. If you have a question you would like to put to Niall, ...





He did make an error in my opinion, . .when he said that credit card companies would charge interest for cash withdrawals, EVEN IF the account was in credit.. I think he's wrong on that.


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## JoeB (4 Aug 2011)

I don't accept it.

I can easily imagine our Gov clouding the issue with technical language, and claiming they had no choice, and refusing to answer straight questions. (Similar to the bank bailout for example, which did happen, for bad reasons, at exceptional speed, behind closed doors, and was then 'irrereversible'). They may have the IMF or the EU announce the PO burning measure.. but however it's done, I can easily see a situation where savers are burned, and our government apologise profusedly. But so what the money would be gone, and you can't eat apologies.

Anyone leaving money on deposit in Ireland is exposing themselves to the way things work here.. which is often dysfunctional, and mostly unfair.

I can easily see a situation where the Gov is on radio saying that on advice from the Attorney General they had to burn all debts equally, .. and well, they're very sorry, but it's now done. I wouldn't trust them at all, and they can hardly complain, they have lied and lied. 

There is no perception that our government is genuine and honest, at least not to me. It'd be similar to the RC church saying that they took child abuse seriously.. well, there is no evidence for that, and much evidence to the contrary, so I believe the RC church condones and facilitates child abuse, regardless of what they might say.. their actions speak louder than words. If our government had any courage the Papal Nuncio would be gone, or in prison.. and our embassy to Rome would be recalled, I can't believe it's still there. My point being that our Gov makes strong statements on this issue, but doesn't take any strong action... so it's just words.

Post Office Savers are at risk in my view.


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## Chris (4 Aug 2011)

Duke of Marmalade said:


> I still think that the availability of selective default to the government greatly changes the picture and that neither the rating of either the bank or the sovereign is very relevant to assessing the safety of deposits.



OK, so let's assume that the government were forced into default and they decided to try and spare private residents with various types of post office savings and other bonds. Sovereign defaults in the last 20 years suggest a payout of about 30c on the Dollar.
Does anyone have the numbers of how much private Irish resident money is in state issued debt? If this is a small amount then a selective default would be easier to achieve. But if you have following scenario then I think there would be insurmountable difficulty (note I'm just picking numbers for convenience):
Total debt: €100bn
Privately held: €30bn
In this case the state would have to default 100% on all non privately held debt in order to pay out 100% to private citizens.


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## Black Rock (5 Aug 2011)

*NTMA State Savings*

The term _"__Post __Office __Savings__"_ is not accurate as An Post do not retain or manage any Government savings money. The post office is a collection agent of the NTMA (National Treasury Management Agency) in respect of personal savings with the Government. All such money received each day is handed over to the NTMA. This savings money from individuals and families is known as *NTMA State Savings,* is managed by the NTMA and it forms part of the National or Sovereign Debt of Ireland*.*

*NTMA State **Savings* are accounted for in the annual accounts of the National Treasury Management Agency (NTMA) and at end 2010 amounted to €12,680 million representing 14% of the National Debt of €93,445 million. See page 10 of the Annual Report 2010 (within the pdf it is page 11 of 123). 
Web Link to http://www.ntma.ie/Publications/2011/NTMA_Annual_Report_2010_English.pdf
 
That page shows the breakdown of the amounts in each of the NTMA State Savings products [ Savings Bonds, Savings Certificates, Instalment Savings, Deposit Accounts (such as the Ordinary Deposit Account and the Deposit Account Plus) National Soldidarity Bond and Prize Bonds ].


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## rover (9 Dec 2011)

Marc 

Would it be possible for you to expand on the possible conservative alternatives?


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