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Icesave: how safe are your savings? Facts and my...
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I have found Icesave quite a good account to use and they even gave me £25 John Lewis voucher to introduce a friend. Also good for larger amounts of money as other high street banks like HSBC aren't as good for that.
Ive got saings with Kaupthing so very interested in this article.
Its the first time I heard any write about speed of payments from the compensation scheme. I understand when BCCI went bust a decade a ago some savers had to wait five years for their money!
Do we have any idea how long it would take to get paid out via the compensation scheme in its current form?
I have an ISA with them, but am worried. The Icelandic banking system is in trouble. The charges that Icelandic banks are having to pay to insure against default are increasing, and threats to destroy the Icelanding banking system are common knowledge.
I was considering moving my other ISAs to my Icesave ISA at the start of the financial year, after they received interest. Now I am not so sure. Despite Martin's rosy claims of compensation, if the Nordic banking system does go down the pan it will be impossible to get the money for months - as they say, there is no pot. That would mean months without any interests.
To give you some idea of the crisis in Iceland - where the banking system has been described as a massive hedge fund - interests rates were recently raised to 15% to try to prop up the currency, which has plummeted 30% against the Euro this year, and fell by 20% on March alone. The cost to Icelandic banks of CDSs (Credit Default Swaps, which are basically insurance against bad loans) is TEN TIMES the average cost to other European lenders. Towards the end of last week, CDS contracts for the main Icelandic bank - Kaupthing - cost 1.5 million in advance plus .5 million a year to insure just 10 million euros of debt for 5 years. On those prices, it seems that the market has decided that the debt won't be repayed.
Iceland has a population of just 300,000 people, and it's banking system has recently grown through hedge-fund like speculation on the internation markets rather than a strong savings base (a la Northern Rock). A chain breaks at its weakest link, and in the internation banking syste, Iceland is looking very weak indeed.
Last edited by paulpaul1308; 02-04-2008 at 10:23 AM..
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Icelandic banks have been aggressively setting up saving accounts in this country. They pay top rate, well above the BOE base rate. Question is how do they "afford" to do this? Net they must be paying cash into these businesses to attract customers - it's simply a loss-leader strategy like a supermarket might employ. Egg was the first online bank to do this years ago and all us rate tart savers have been enjoying this competition for deposits for a few years now! Hoorah!
Lets be clear- I think we can all agree it generally costs the banks offering these loss-leaders some hard cash to do so.
These banks find the money to fund these expansion plans with some of their own capital AND by raising debt on the capital markets...just like a buy-to-let-landlord might get a loan in order to buy a property to start a rental business.
Now as any would-be buy-to-let-ers know - it all depends on getting a good mortgage i.e. being lent ENOUGH money and at a LOW enough interest rate!
Well the capital markets have had a shock which means people are being much more cautious about how they lend money. These so-called tighter credit conditions are reflected in TWO ways - the amount people will lend and the price they will lend at i.e. the interest rate that they will lend at.
Let's look back at Northern Rock. It's business model was to be v.aggressive in the mortgage market, it achieved this by borrowing an unusually high amount in the capital markets, rather than through taking deposits. This worked great as long as it could borrow easily at decent i.e. quite low interest rates, but when that rate went up suddenly it's business model was looking shaky.
Yes it was probably shoved around a bit by some bullyboy speculators, yes it all became a vicious circle and yes then there was a run, BUT the inescapable fact is that at the end of the day their business model no longer worked in this new tighter credit world.
(Look what the new bosses are doing to rectify this - slimming down mortgages, attracting deposits)
Now back to Iceland - the price at which Icelandic banks can borrow money has been rising dramatically (try adding 5% a year to your borrowing costs in the last month alone!)
Now to be fair to the banks they say they don't care as at least a couple of them say they have already borrowed enough money to fund themselves for over a year so (unlike NR) they are in no rush to come to market to borrow any more money. They also point out that they have quite a lot of deposits i.e. it's like they took out a nice handy fixed rate mortgage with a good LTV well BEFORE things hit the fan.
(In fact of the three big banks you can rank the effect on them according to these two things).
Bully boy speculators have been noticing (helping cause?) this and last week were starting to get very carried away selling the Icelandic currency. Why so?
Here's the twist and the snag. We are talking about foreign banks from a small country listed on that foreign country's stock market. It's a bit tricky to (short)-sell shares in those banks so why not just sell the currency of that small country? You would be doing it anyway to sell the bank shares so it seems a reasonable proxy especially as the financial sector represents a large part of the economy. Plus most people agree it's over-valued anyway!
The snag is that if you pummel a country's currency it wont be long before the central bank steps in and says "one for all and all for one".
This is exactly what happened last week as the Icelandic Central Bank raised it's interest rates to 15%. This persuaded a lot of speculators to call off the hunt (for now?) and things have been calmer since then.
An amusing side issue is that the three Icelandic banks apparently may have made some money too! As their expansion plans involve putting money from Iceland into the UK i.e. over time they need to sell ISK and GBP. They know their currency quite well, knew it was over-valued and so already had some hedging trades on that would benefit if the ISK fell in value (to protect their future investment plans), but a nice little earner in this currency wobble.
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BUT AND HERE'S THE RUB - the big question remains unanswered,
will the banks be able to ride out this credit crunch i.e. will they not need any money for long enough for things to return to a place (i.e. lower borrowing costs) where their business model works again?
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well, not having much dosh, it took me long enough to decide to invest my paltry minimum isa, having taken martins advice and the downfall over here. so what do i do now, as the song says ' should i stay or should i go'. grandma used to have her savings under the mattress, am wondering if that's the best place with all this uncertainty!!
This is the discussion to link on the back of Martin's “Don’t mess with da MoneySavin’ Family…” blog. Please read the blog first, as this discussion follows it.
Have just moved last years isa from Bradford & Bingley due to drop in interest rates to Icesave, and intend to put this years allowance in also. At a steady interest rate i'm prepared to take the risk. No doubt which ever bank your in if a collapse happens you are going to have a wait for your money, and the way the big banks perform in this country it could be a long process
I withdrew my substantial deposits from Icesave (Iceland), FirstSave (Nigeria) and ICICI (India), following an alarming TV report. At least I tried to... Firstsave initially gave me back less money than I'd actually deposited, and no interest. They said it was something to do with it being a leap year! They did send a little more, two days later, following my query, but I wasn't convinced by their explanation, nor entirely sure that I did eventually get all my money back. Presumably they don't have leap years in Nigeria.
I've got a question I've not seen an answer to anywhere. If the Icelandic scheme ran out of money and could not pay the full amount, would the UK scheme pick up the slack, and cover upto £35,000.
I'm not in agreement with Martin's comment about Northern Rock or Bear Sterns(BS). While Northern Rocks problems weren't about losses, the liquidity situation is that the Government is currently loaning 106BN to them to keep them funded and be able to run down their mortgage portfolio. If I remember correctly their total deposits were under 10BN... even if there was no 'run' on the bank they didn't have the cash to continue and certainly wouldn't now as the credit crunch is even worse. BS blew up a couple of hedge funds to start the credit crunch process off.. they chomped down as many mortgage backed securities as they could in the heydey and were leveraged up to the hilt.. my opinon as a man that previously built risk models for banking institutions both these companies believed that 'this time it (risk) is different' and were v. v. wrong... with BS see Ben Bernankes comment today.
Icelands situtation is not good. I'm no expert, but they are (from the hedge funds and global economy) small enough to allow to fail... see the 80's for last set of bank failures and housing crisis' in the Scandies. Hedge funds are going to want to tear them apart for a quick buck. BUT.. the CDS rates are irrelevant; the banks are NOT buying their own CDS's so its not a cost to them... sorry Paulpaul1308 but the only relevance of CDS rates are that the world is worried that these banks are in trouble.
I've pulled my parents money out of these banks. I don't want to be reactionary but its a scary world out there. The fact that these folks (sound like they) need the deposits to survive makes me not want to be the one holding the can when everyone else has played safe.
Icelandic banks have been aggressively setting up saving accounts in this country. They pay top rate, well above the BOE base rate. Question is how do they "afford" to do this?
Easy. They take your money and invest in the krone, which currently pays 15%.
It used to be the case that a very easy way to make lots of free money was to borrow stable yen - which was practically interest free - and buy krone, which paid top whack interest and was also stable. Now the falling krone doesn't make that attractive.
I found the article and discussion very interesting . At present I am considering opening an Icesave ISA and transferring previous years savings into it. Although its good to know our savings are protected up to £35k, if the bank was to go under for some reason would I be able to pay the compensation amount in to another ISA? I know its seems like a minor point but after 5 years of tax free build up it would be good to know.
Pls be nice to all MoneySavers. There's no such thing as a stupid question, and even if you disagree courtesy helps. Take care over copyright. Use excerpts and links rather than copying long text. This site asserts copyright on all comments posted on the board.
Pls be nice to all MoneySavers. There's no such thing as a stupid question, and even if you disagree courtesy helps.
Icesave: how safe are your savings? Facts and myths
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