Prize Bonds,

[Duke of Marmalade]

It is an axiom of quantum physics that nothing is 100% risk free. Nonetheless, State Savings are the most risk free investments on the planet for an Irish investor. Let me explain. In financial markets German Bunds are priced as the least risky asset. But there is a small political risk in an Irish person holding Bunds. If Ireland had burnt German bond holders as many had called for, it would not have been a huge surprise if the German authorities seized Irish assets within their jurisdiction.
But what about Irish sovereign risk? People mistakenly think that if Ireland was forced to default it would have to behave like a private agent and treat all its creditors pari passu. Not at all. State Savings, representing 8% of National Debt would be the last obligations the government would welch on.
And as already been commented on, they are genuinely less risk than under the floorboards. Fires do happen, burglaries do happen, loss of memory does happen.

 

[NoRegretsCoyote]

Let me explain. In financial markets German Bunds are priced as the least risky asset. But there is a small political risk in an Irish person holding Bunds. If Ireland had burnt German bond holders as many had called for, it would not have been a huge surprise if the German authorities seized Irish assets within their jurisdiction.

This is wrong but even if it wasn't there are logistical and cost issues with holding German bonds for an Irish retail investor. For all practical purposes state savings and prize bonds are the most risk free option for someone who lives in Ireland and has €70k in cash.

But what about Irish sovereign risk? People mistakenly think that if Ireland was forced to default it would have to behave like a private agent and treat all its creditors pari passu. Not at all. State Savings, representing 5% of National Debt

State savings are now over 8% of outstanding Irish debt. They were very popular during the period about the health of the Irish banks.

would be the last obligations the government would welch on.

Debatable. I doubt our EU lenders would accept that.

 

[PMU]

I don't think it's wise to say that prize bonds carry a risk while not pointing out that the alternatives for a retail investor (bank deposits, state savings) rely on exactly the same state backing and are not any lower in risk.

I'm not certain this is correct. It is my understanding that currently EU deposit guarantee schemes are funded by the banks, not by the state, i.e. in Ireland each covered institution is required to maintain a deposit protection account with the Central Bank to fund the scheme. So the State, i.e. the taxpayer, is not funding the guarantee, the financial institutions are.

On prizebonds, you are basically buying a dream, i.e. that you will win a big prize, the cost of which is the risk your savings may be eroded by inflation. While inflation is and has been low since 2008 there is no guarantee this will continue. So by buying prize bonds you are betting that your prizes will be in excess of the ECB's target inflation rate of 2%. A better strategy might be to spread your capital over a series of deposits with different time durations based the fixed term deposits Best Buys https://www.askaboutmoney.com/threads/term-deposits-fixed-lump-sum-savings.101813/

 

[NoRegretsCoyote]

I'm not certain this is correct. It is my understanding that currently EU deposit guarantee schemes are funded by the banks, not by the state, i.e. in Ireland each covered institution is required to maintain a deposit protection account with the Central Bank to fund the scheme. So the State, i.e. the taxpayer, is not funding the guarantee, the financial institutions are.

The banks jointly pay into a deposit protection fund. In the event of a shortfall the exchequer would lend the fund the balance, which would then be clawed back from the banks over time. By "guarantee" I mean the institution that will protect the value of your deposits in extremis. This is the taxpayer. So in essence the same taxpayer is guaranteeing bank desposits (<100K) as is guaranteeing prize bonds and other state savings.

On prizebonds, you are basically buying a dream, i.e. that you will win a big prize, the cost of which is the risk your savings may be eroded by inflation.

Of course. But due to low rates at the moment (ironically) you have to accept negative rates if you want protection from inflation!

 

[PMU]

The banks jointly pay into a deposit protection fund. In the event of a shortfall the exchequer would lend the fund the balance, which would then be clawed back from the banks over time. By "guarantee" I mean the institution that will protect the value of your deposits in extremis. This is the taxpayer. So in essence the same taxpayer is guaranteeing bank desposits (<100K) as is guaranteeing prize bonds and other state savings.

While this is getting a bit away from the topic of the thread, depositors should be aware that under the EU's DGS regime it is the financial institutions and not the taxpayer that are the guarantors. That's the point of the scheme. Here's the regulation https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32014L0049&from=EN#d1e1291-149-1.

Of course. But due to low rates at the moment (ironically) you have to accept negative rates if you want protection from inflation!

According to the AAM's Best Buys for the State Savings 5 year savings cert issue 22 "A normal deposit account would need to be paying 1.46% to match this rate if your deposit interest is currently taxed at 35%*.” This is (ever so slightly) above the current 12 month inflation rate, so investors in State Savings are not into negative rates, not just yet. This guaranteed return and risk free investment (i.e. the risk is carried by the taxpayer) is one reason I think why state savings should be favoured over Prize Bonds.

 

[Duke of Marmalade]

According to the AAM's Best Buys for the State Savings 5 year savings cert issue 22 "A normal deposit account would need to be paying 1.46% to match this rate if your deposit interest is currently taxed at 35%*.” This is (ever so slightly) above the current 12 month inflation rate, so investors in State Savings are not into negative rates, not just yet. This guaranteed return and risk free investment (i.e. the risk is carried by the taxpayer) is one reason I think why state savings should be favoured over Prize Bonds.

Yes the longer term State Savings give a higher return than the State Savings Prize Bonds if you hold them for that longer term.
But Prize Bonds beat ordinary deposits. The best deposit (PTSB) pays €227 p.a. net for €70K. The same amount in Prize Bonds would carry an expectation of €350 p.a. net. True €100 of this €350 is the value of the dream win. I see this as merely the icing on the cake. The other €250 is the expectation of 5 €50 wins. Okay, that number is not guaranteed though it is fairly certain to be between 2 and 8 wins and if you hold them for several years these variations will smooth themselves out.
OP is well advised to consider only State Savings either of the term variety or Prize Bonds; a matter of taste and time horizons.

 

[NoRegretsCoyote]

While this is getting a bit away from the topic of the thread, depositors should be aware that under the EU's DGS regime it is the financial institutions and not the taxpayer that are the guarantors.

No. The banks are the contributors. The state guarantees that the funds will be there. For example, in the event of a DGS shortfall, the taxpayer guarantees that the funds are used to make good deposits up to €100k, and levies the banks afterwards:

Besides the funds currently being built up, Member States must ensure that DGSs have adequate alternative funding arrangements in place to enable them to meet any claims against them. These alternative funding arrangements can, for instance, include temporary State financing (which will ultimately be repaid by the DGS).

According to the AAM's Best Buys for the State Savings 5 year savings cert issue 22 "A normal deposit account would need to be paying 1.46% to match this rate if your deposit interest is currently taxed at 35%*.” This is (ever so slightly) above the current 12 month inflation rate, so investors in State Savings are not into negative rates, not just yet.

Inflation protection adjusts for inflation outturn over the lifetime of the bond, not expectation. A French bond which adjusts the coupon for inflation has a negative yield.

 

[PMU]

No. The banks are the contributors. The state guarantees that the funds will be there. For example, in the event of a DGS shortfall, the taxpayer guarantees that the funds are used to make good deposits up to €100k, and levies the banks afterwards:

Apart from the provision of deposit protection if a bank fails, the purpose of the deposit guarantee schemes is to ensure that the state does not become the guarantor of banks' liabilities, i.e. a repeat of our bank guarantee scheme of 2008. Otherwise banks' deposits would be regarded as liabilities of the state. If run correctly a DGS should never fail, but in the event of a temporary shortfall, a DGS can e.g. borrow from other DGSs in the EU, etc. and levy the financial institutions afterwards. There should be no need for state financing.

 

[NoRegretsCoyote]

If run correctly a DGS should never fail, but in the event of a temporary shortfall, a DGS can e.g. borrow from other DGSs in the EU, etc. and levy the financial institutions afterwards. There should be no need for state financing.

In an ideal world yes, but in practice there are legislative arrangements for the (temporary) provision of state financing if needed. So an arm of the state is 1) administering and 2) ensuring that funds will always be there in the DGS. This looks to me very like a state guarantee!

Likewise at EU level it is likely that the SRF will be allowed to borrow from the ESM if necessary to fund a very big bank resolution.

You can weaken the link between bank liabilities and the sovereign, but it is hard to completely sever it.

Apologies if anyone else is still reading.

 

[elacsaplau]

It is an axiom of quantum physics that nothing is 100% risk free.

Really?

 

[Duke of Marmalade]

Really?

I was being satirical. Boss says nothing is risk free. And the fact is that this is not contestable. But to all intents and purposes State Savings are risk free.

 

[elacsaplau]

Ah - I see. I guess I've been spending too much time in the US lately...…...my satireadar may be a bit off...…..(I genuinely thought that you were just making things up again).