Very worrying stop press news re Anglo Irish

bendipa

masonic wrote: »

It is far more likely that they have realised that it is not in their best interests to keep a load of angry, panic-stricken customers in fixed rate accounts that are now paying a lot more interest than they really need to. I'm sure even Anglo can borrow money more cheaply than the >7% it's paying out on some of these accounts. In that situation they'd be pretty silly not to let people break these fixed terms. Not only do they save face, they save money as well!

It makes good sense. Get rid of the panickers and borrow the money more cheaply..

Midnight_Cowboy_2

bendipa wrote: »

It makes good sense. Get rid of the panickers and borrow the money more cheaply..

There is no doubt that the 7 odd percent AIB was offering a few months was an exceptionally good rate. Now that the FSCS guarantee has been replaced by the Irish government's backing, things have changed.

Concerned about my own savings in AIB, I did a lot of research today.

In Ireland's defence, they went into the current crisis in a good fiscal state. They had a national debt of 25% of GDP, the lowest in Europe bar Luxembourg (http://www.bloomberg.com/apps/news?pid=20601085&sid=appWcwqgv23Y&refer=europe).

However, their present liabilities outweigh their tax revenues. Government spending this year is estimated at €55bn, on tax revenues of just €37bn (http://www.herald.ie/opinion/columnists/dan-white/enough-of-the-talk-taoiseach-act-now-1615908.html) and GDP of under €200bn. The problem is, who will lend the Irish Government the missing €18bn? The nation's credit rating has just been downgraded by the Moody's and S&P credit rating agencies.

Secondly, the 100% guarantee that the Irish government offered amounted to €400bn (the value of savings in Irish banks). Looking at the size of their economy (above), how on earth could they honour this guarantee if disaster happened?

I had the misfortune to discover what credit default swaps were in October when I was trying to find a bank that wouldn't default for my savings. Basically, they give you an indication of how risky lenders think you are. Ireland now has the highest CDS rating of any nation in Europe(http://www.bloomberg.com/apps/news?pid=20601085&sid=appWcwqgv23Y&refer=europe).

Where does all this leave savers? Well, not panicking I hope, but definitely concerned. It seems unfeasible that the Irish economy will be left to go bankrupt. But who will lend to them to make up their budget shortfall? I think the biggest concern is that if people lose confidence in Ireland, there will effectively be a run on the country. That could end in a self-fulfilling prophecy.

I haven't yet decided about my savings with AIB. If I leave them there, I will probably get the very healthy 7%+ return on them later in the year. Ireland will probably get through, and even if they fail there will probably be a bail-out, either from the ECB or the IMF. The UK goverment might even guarantee my savings like they did for savers in Iceland. The problem is, the risk may be small but it is definitely present. And (for me) cash savings are meant to be a 100%, non-risk proposition. So I may yet be drafting a withdrawal letter.

And finally, an interesting aside which I think nicely demonstrates the Irish government's attitude to public finances: the Irish public sector average hourly rate is 49% higher than the average private hourly rate. 49%!!! (http://www.irishtimes.com/newspaper/opinion/2009/0129/1232923372242.html).

bendipa

Midnight_Cowboy wrote: »

However, their present liabilities outweigh their tax revenues. Government spending this year is estimated at €55bn, on tax revenues of just €37bn (http://www.herald.ie/opinion/columnists/dan-white/enough-of-the-talk-taoiseach-act-now-1615908.html) and GDP of under €200bn. The problem is, who will lend the Irish Government the missing €18bn? The nation's credit rating has just been downgraded by the Moody's and S&P credit rating agencies.

Secondly, the 100% guarantee that the Irish government offered amounted to €400bn (the value of savings in Irish banks). Looking at the size of their economy (above), how on earth could they honour this guarantee if disaster happened?

My guess is the EU will enforce stringent fiscal requirements on the Irish government. I'd expect the Irish finance minister to announce Draconian public expenditure cuts within the next 3 months. They are going to be forced to do this sooner or later. The longer they dither the worst the scenario will be for them, and they may even be forced out of the EU altogether should they fail to comply. Watch this space.

gozomark

cuts have already started - €2bn announced yesterday

gozomark

The problem is, who will lend the Irish Government the missing €18bn?

the "markets" are lending Ireland money, and 260bp over German bunds is the price the "market" asks to cover the extra risk

savings in the UK are not 100% risk free (nor are ones in Ireland) - in both cases there is a very small risk. With Ireland in the Euro, I'm not so sure Ireland is a higher risk than the UK

Midnight_Cowboy_2

gozomark wrote: »

savings in the UK are not 100% risk free (nor are ones in Ireland) - in both cases there is a very small risk. With Ireland in the Euro, I'm not so sure Ireland is a higher risk than the UK

Why does being in the Euro make Ireland safer? Or do you mean being the EU? Being in the EU enhances the chance of being bailed outby the ECB/IMF, I would have thought.

I have seen reports that Ireland may leave the Euro.

gozomark

Midnight_Cowboy wrote: »

.I have seen reports that Ireland may leave the Euro.

why would they do that ?

being in the Euro means their currency won't go into meltdown a la Iceland

Andrew64

gozomark wrote: »

being in the Euro means their currency won't go into meltdown a la Iceland

The head of BP says that the only thing stopping Ireland doing an Iceland is the Euro - and he's only repeating what the head of the European Commission said.

http://www.irishtimes.com/newspaper/finance/2009/0131/1232923378749.html

gozomark

exactly - they would be nuts to leave the Euro

Midnight_Cowboy_2

gozomark wrote: »

exactly - they would be nuts to leave the Euro

Not saying I support, just citing what I've read. As well as the Irish Times article from the previous poster, http://www.telegraph.co.uk/finance/globalbusiness/4285331/Help-Ireland-or-it-will-exit-euro-economist-warns.html argues the case for leaving unless they get more help from Europe.

This article http://online.barrons.com/article/SB123336877483535797.html?mod=googlenews_barrons about the greater banking problem is one to read if you want to understand just how serious the situation is.

Having done all this research, I'm feeling ever more bleak! The conclusion I've reached is: everything's *%$£ed. Run for the hills!