Key Post What is the risk to State Savings?


Countries generally don't unilaterally default, they negotiate with creditors. A future government would of course negotiate a haircut with the institutional bondholders first. Institutional investors hold 70% of Ireland's national debt, state savings is only 8%. No Irish government is going to default on hundreds of thousands of voters who hold less than one in euro in 12 of its debt.

Greece in 2012 reduced its debt burden by around half but left retail investors untouched. The institutional investors took the hit. That's a pretty good precedent.

PMU said:
Note that State Savings are part of the Central Fund and not held separately. To say that the state would treat such creditors differently is just speculation.
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The government accounting treatment of state savings products is utterly irrelevant.
 
One would hope you're correct, NoRegretsCoyote, but the precedent of the raid on pension funds is not encouraging.

I could easily see a situation where a hard-pressed government might introduce a temporary levy on the capital value of State savings. Say 1 - 2 % per year for 5 years and/or a withdrawal tax of 10%. It wouldn't be called a default, of course, or a haircut, and the government spin machine would go into overdrive insisting it was merely a teeny weeny little tax on people who could well afford it, and, sure, wasn't it done before for pension funds?
 
Another neighbouring example is that of Cyprus. There, the 2012 financial crisis led the Cypriot government to confiscate its citizens’ savings, obviously without asking first. Everyone with a bank account containing over €100,000 had to contribute 9.9% to the empty coffers of the State, and those with less paid 6.75%.
 
@Baby boomer - nothing is impossible. I don't think it's likely though because sums raised would be tiny relative to the political blowback from hundreds of thousands of holders of the products.

Also, government would be shooting itself in the foot as it relies on citizens to buy these products forever more.

@jpd the Cypriot example is inaccurate. The government didn't confiscate deposits, it wrote them down and converted them to equity in same banks.
 
NoRegretsCoyote said:
The government didn't confiscate deposits, it wrote them down and converted them to equity in same banks.
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Hi Coyote

Would you know how this worked out?

Say I had €100k on deposit. After the exercise, how much were my shares in the bank worth?

Roughly speaking will do. Did I lose nothing? Did I lose 20% or did I lose 80%?

I am talking about the immediate aftermath as soon as I was free to sell the shares. The shares might have gone up or down since then.

Brendan
 
If an economic situation develops where there is a risk to State Guaranteed Savings, surely there is also a likelihood that the tax payable on Stock and Property related gains will increase substantially.
 
Biggles said:
surely there is also a likelihood that the tax payable on Stock and Property related gains will increase substantially.
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Absolutely.

In the event of the government being unable or unwilling to meet the repayment of State Savings, a lot of other investments would be impacted as well.

Brendan
 
OK, it looks as if the depositors in the largest bank lost 47.5% of their savings over €100k

USA TODAY

Government announced depositors will lose 47.5% of savings exceeding $132,000
eu.usatoday.com
 
Which is fair enough. And it should have happened here. In Ireland, Anglo was nationalised and all deposits, creditors and speculators were made whole.
In effect, people with very little money, through USC, wage cuts and reduction to public services, ensured those who had over 100k in cash deposts were paid in full.
 
It's an interesting discussion but you should not avoid state savings imo. Your money is always at risk to a certain degree but if we get to a stage of state savings anywhere else you left your money is also likely to be effected.
We cannot risks unfortunately , I cycle to work it would be less risky getting the bus or driving but I get a time and fitness return on my cycling.
If state savings pays out 1% interest more than keeping cash under your mattress then it's worth it because there's less than 1% chance of a default on state savings. I can't quantify it as a % chance but my best guess is it's a 1 in 100,000 chance of default.
But I mean if you get to that stage a whole host of other events probably happen first or around the same time , the euro could be worthless , banks have failed . It's really not worth your while trying to proper for this Armageddon of events.
 
NoRegretsCoyote said:
I think that is what @PMU is saying. I'd love the link to the law or contractual provisions that are explicit on this point.........
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Of course, the Government can default/restructure sovereign wholesale debt without an equivalent treatment of widows and orphans. Even if there was some rule that all creditors would be treated equally the Government would easily get round that by saying that the first 250K of all individual debt would be honoured.
I had cause recently to apply for UK Premium Bonds. They knew I was a Paddy. They read me whole speil about the downside such as 25,000 to 1 against big win, the risk of inflation, the interest rate might change etc. But they stated categorically that my money would be 100% safe.
 
I’m actually thinking of buying more state savings certificates with money in some savings accounts which are decreasing by the month.
 
So the national debt will rise to €220 billion while the economy is at risk of a serious decline.

During the last few years of booming tax receipts and low interest rates, we increased our national debt, when we should have been repaying them.

Wolfey sums up the problem well in another thread:

I wouldn't be overly concerned, it's all make-up money these days. The whole global economy is on the hook for unimaginable and unrecoverable amounts of debt.
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Not sure that people should be lending to the Irish government (i.e. buying Savings Certs) if there is an alternative.

Brendan
 
Brendan Burgess said:
So the national debt will rise to €220 billion while the economy is at risk of a serious decline.
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Yes but debt interest costs will fall from €3.85bn this year to €3.55bn next year.

Even with more debt you are paying less interest as the cost of new debt is so much lower than the debt that is being retired.
 
NoRegretsCoyote said:
Yes but debt interest costs will fall from €3.85bn this year to €3.55bn next year.
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You should be underlining this year and next year

This madness is probably not going to affect me too much. But our children and grandchildren and their children and grandchildren will be paying for this.

Brendan
 
Brendan Burgess said:
Not sure that people should be lending to the Irish government (i.e. buying Savings Certs) if there is an alternative.

Brendan
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For emergency fund storage (the larger part vs the smaller absolute-immediate access part), is there an alternative?
We'd been recently using PTSB's booster bonus which added 0.2% but has been now reduced to 0.01% and therefore pointless against our savings accounts in other banks / CU.
My view is if there's a Government or EU issue, there's definitely a bank issue so you wouldn't be any worse off..
 
Brendan Burgess said:
But our children and grandchildren and their children and grandchildren will be paying for this.
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There was borrowing in my grandfather's time to build pipes to carry water that I drink out of now, and to build roads I drive on.

Of course I'm paying for this in taxes, but I'd rather the pipes and roads were there because they support a robust economy.



If you come at this from a narrow accounting perspective your country will balance its books but won't be very rich.
 
A century ago they were issuing war bonds with very long maturities, the buyers and savers who bought those bonds a century ago were wiped out by the inflation of the 20th century, they were paid back the nominal value of the bond and the interest payments but look how much the buying power of money declined during the 20th century, there was no precedence for this in the nineteenth century where everything was tied to the gold standard. Beware of very long dated bonds
 
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