Icesave: how safe are your savings? Facts and myths

Former_MSE_Archna

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• Updated Icesave Info: For the latest see the Icelandic Banks section of SAFE SAVINGS

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coffeekid

I have savings with the two Banks mentioned, I have no problems with there system

goinggreyquick

thanks martin

i have an account with icesave

never had any probs but an informative reassurring article

thanks

pomcycle

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.

smala01

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?

Smala01

paulpaul1308

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.

cynic

Lets look at the bigger picture here.

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!

cynic

So what's changed?

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)

cynic

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.

cynic

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?

livelongand_prosper

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!!