This is Money Blog

Will Tesco buy Northern Rock and why would it?

Will Tesco buy Northern Rock? A report in today’s Times claims the supermarket giant has expressed ‘provisional interest in buying the bank’.

There's nothing really in the report backing up the story, so essentially it's a rumour, although a Treasury source is there giving a steer on offloading the Rock.

But it would certainly make sense for Tesco to nab itself a bigger slice of the UK banking pie, as it is pushing hard to expand its bank having bought out RBS’ 50% share of joint venture Tesco Personal Finance.

But will this latest report turn out to just be another 'Northern Rock to be bought' red herring?

There have already been plenty of rumours circulating about bidders for the collapsed bank, taken into state control last year after months spent trying to find a buyer. The list of those, along with Tesco, who reckon they could make a go of the bank includes Sir Richard Branson and private equity groups.

But, if no one wanted the bank enough to take it over at a knock down price as it floundered early last year, why would they want it now?

Well, the Government is pretty much a distressed seller, it is strapped for cash and would dearly love to be able to turn around and say 'we made a success of the Northern Rock rescue' before the next election. This theoretically means a canny buyer could potentially name the price and conditions.

The problems our big banks still face is that they got too clever for their own good and rushed gung ho either into investment arms that they believed could never fail, or ramping up their mortgage books on foundations made of sand. But strip away these problems and retail banking is a highly profitable industry.

In April, Tesco revealed record profits of £3.13bn profits: to make this cash it has to run a colossal global retailing organisation.

In January 2007, before everything went catastrophically wrong for it, Northern Rock announced profits of £588m: it was just a UK-based mortgage lender.

Obviously, you would hope, Tesco wouldn’t be pursuing the madcap money market strategy that led to Northern Rock’s collapse, and it shouldn’t need to. It has increased the amount of savings deposits it holds from £2.5bn in mid-October 2008 to £4.5bn this spring, has struck a new insurance deal, and is priming itself for a launch into the mortgage market that should pick up steam as the housing market recovers and interest rates rise.

So that’s why Tesco could want Northern Rock, and why Virgin could too and others also reckon they could make a go of it. The UK banking sector is hamstrung by bad debts, taxpayer investment and a lack of trust, so there are potentially very rich pickings for any fresh blood entering the market.

The only problem is that surely the one lesson to learn from the crisis has been that banks mustn’t be too big to fail. And does a bank owned by the country’s biggest supermarket and retailer not also fall into that too big to fail pot?

- Simon Lambert, assistant editor, This is Money

- How Tesco and Virgin can be the new giants of banking

- Video: Supermarket banking - will it work?

Building society balderdash: 'We can’t raise savings rates'

Everybody hates a moaner, don’t they? This is especially true when said moaners are far from perfect.

The building society sector jumps to mind and, in particular, the words of Nationwide boss, Graham Beale, this week

The former has hit out at the Government for savagely slashing the Bank of England base rate, supposedly scuppering its ability to acquire new savings customers, while the latter hit out at just about everyone. As always, reality is a grey area somewhere in between.

Mr Beale threw his toys out of the playpen spectacularly when he lashed out at the Government for helping NS&I and Northern Rock to attract a disproportionate amount of the savings industry.

He then complained the bill for the Financial Services Compensation Scheme (FSCS), used to compensate savers in the event of another financial services collapse, was unfair. Why? Because building societies may hold a large amount of the savings market, but they are not inherently unstable like banks.

He is miffed because payments to the FSCS cut a £241m swathe into his society’s profits. But let us not forget provisions for bad debts cost £394m. In layman’s terms that’s what is usually labelled reckless lending. Who can you blame for that?

Yes, the compensation payments are onerous, but it’s not like the building society sector is rock solid, what with six societies going to the wall over the past year. Consolidation can only go so far; soon there won’t be anyone left to bail their peers out (and to be fair to Nationwide it has been doing most of the bailing out).

And yes, millions of savers flocked to Government-backed institutions since the fall of Northern Rock, but it’s not like your building society has the most attractive savings offerings in the world, Mr Beale.

Nationwide's e-savings account pays a princely 0.45%, its e-savings reward pays 2%, but only 0.1% for a whole 12 months if you make more than three withdrawals in a year. So, would savers really be flocking through Nationwide's door if the Government-backed option was not there?

What really gets my goat, however, is the mantra that the Bank of England has prevented societies from offering decent savings rates by lowering base rate to 0.5%, which the chair of the Building Societies Association complained about at its annual conference last week. Surely, this should only affect those organisations that borrow the majority of funding from the money markets - such as banks – since the rate at which they lend to each other, Libor, is heavily influenced by base rate.

But building societies secure the majority of their funding from savers' cash. So, if they just don't cut savings rates, they would pull in more of money as savers would flock to them. If societies stuck to their founding principles and simply lent money acquired from their savers out to their mortgage customers, they could set their own savings and loans rates – and then wouldn’t need to blame the Government for their woes.

The mutual's argument is that they have to cut savings rates as they cut standard variable mortgage rates and rates on new mortgages. But building societies' loan rates – chiefly the standard variable rate on their mortgages – have not come down any where near as much as the base rate, but their savings rates have fallen dramatically. (An exception to this is Nationwide, which had a clause saying its standard variable rate would be no more than 2% above the base rate.) 

As the spread between savings rates and mortgage rates widens building societies are earning more money from their members as a result. Yet they say they can't attract savers, so why can’t they just raise savings rates?

I put this to Adrian Coles, director general of the Building Societies Association, and, to be honest, he came up with an extremely rational, well-thought-through response. He pointed out that the average society gets 70% of its cash from savers and 30% from the wholesale markets, so they are always going to be affected by Government changes to base rate to an extent.

But what about those societies that say they are fully funded by savings deposits?

The explanation he offered is that all societies have to hold approximately 25% of their funding in readily accessible cash under industry guidelines. This money can’t be lent out to members, but has to earn money somewhere, so it is placed with other institutions at a rate dictated by the Bank of England base rate. The same is true for money set aside to cover FSCS payments and possible bad debts.

All very plausible. But something just doesn’t quite fit. Does this money really need to be lent on the money markets? Given the negligible rates on offer, surely societies would be better off lending the money to each other on an instant access basis at decent rates? Is it not beyond their wit and wisdom to give each other better savings rates too.

And, as some societies on rely on the money markets to a small degree, does this really prevent them from setting rates significantly higher than the miserable 0.5% base rate?

Are societies just spouting balderdash, or does their management sound like good business sense?

- Alan O'Sullivan, This is Money

Student loan interest rate decision is a disgrace

The Government's decision not to pay interest on student loans is disgraceful. Albeit, in the long line of current scandals it's not a massive one, but this is far more invidious than claiming you forgot you paid off the mortgage for expenses purposes.

We have always been told that the current student loan system is designed so that loans do not grow or shrink in real terms and that is why the interest rate is set at inflation.

The thing is though, what students don’t have properly explained to them before they are coerced into taking on £10,000-plus of debt is that the UK runs a bizarre inflation system.

This has official inflation regarded as the Consumer Prices Index measure but uses the old measure of the Retail Prices Index to set various things, including the student loan interest rate.

So the first problem with student loans is that Government is pushing students towards university and then encouraging them to start their adult financial life with £10,000-plus worth of borrowing that they don’t understand.

Quite why the student loan interest rate is based on the broadest inflation measure, which includes mortgages and housing costs and was therefore jettisoned as the official inflation figure, has never been properly explained.

Except of course, that this has worked in the Government’s favour for years, as RPI has been consistently higher than CPI.
 
Therefore the student loan interest rate, set at the March RPI figure and imposed for a year from September, has always cheated those students who foolishly believed a loan that tracked inflation would actually be set by the Government’s official inflation figure.

This problem came to a head in 2007, when March’s RPI figure spiked to 4.8% and the student loan interest rate was set at that level for an entire year.

This doubled the previous year’s rate and to give a personal example, I was now paying an interest rate just 0.19% below my fixed mortgage rate, on a supposedly low cost loan.

Protests followed this rate hike but the Government stood firm and confirmed student loan rates would always be based on the March RPI figure. That was of course, until suddenly RPI no longer worked in its favour.

The need to slash interest rates down to 0.5% to combat a deep recession has now pulled RPI down so dramatically that RPI for March 2009 was -0.4%. Deflation had arrived and so under the principal of keeping student loans stable in real terms and always using the March RPI figure, they should have started paying interest of 0.4% from September.

But, of course, they won’t. The Government it seems can’t and won't change the rules when students are being hammered with an almost 5% rate caused by inflation, but it certainly can when it comes to paying interest and ensuring the loan doesn’t increase in real terms due to deflation.

Oh, and just to make it a little bit more galling, that will be the Government full of MPs that had free university education and student grants.

Sure, it’s not a lot of money. At -0.4% deflation on a £10,000 loan, it’s only £40 a year, although the Budget has predicted -3% RPI by September and that would be £300 a year. But it’s the principle of the matter. If you make a rule that you refuse to bend on, then you should stick by that: and not just when it works in your favour.

And in a nation afflicted by its debt and driven deep into recession by it, you do not make daft statements justifying your decisions by saying the interest rate doesn’t affect monthly payments, implying that means it doesn’t really matter.

Such as this by the Student Loans Company: ‘The rate of interest makes no difference to borrowers’ monthly repayments. Borrowers repay 9% of their earnings over the income threshold of £15,000.  Whatever the rate of interest is, that monthly repayment will not change.

‘The repayment threshold will also remain at £15,000 for the next 12 months. Had the Government used a negative RPI rate to calculate this, the threshold would have reduced and borrowers would have started repaying earlier and ended up paying more. Setting interest at 0% has prevented this from happening.’

That mirrors a similar statement made by then minister for education and skills Bill Rammell, when the loan rate doubled to 4.8%: ‘It is crucial to note that, for the vast majority of borrowers with income-contingent loans, there will be no difference at all in their monthly repayments, which will continue to be deducted from their salaries at the rate of 9% of any income over £15,000 per annum. The interest rate affects only their outstanding loan balances.’

That is like saying that it doesn’t matter if your credit card company hikes the rate on a long-outstanding balance, because your minimum monthly payments won’t change, or it cuts your minimum payment. Of course it does, the size of your debt will increase and that’s the most important thing.

But then why would we need all the students that we are supposedly training to become the leaders of the future to understand how a £10,000 debt that they start financial life with works?

If we are going to encourage people into university on the premise that they will earn more than others rather than as a social good, as we currently do, then perhaps I agree they should pay: although I’m not sure on this.

What I definitely don’t agree with though is getting people into years of debt under a badly explained Government–sponsored system that changes the rules to suit itself.

- Simon Lambert, assistant editor, This is Money

- Interest rates: What next - news and analysis

- Property prices: What next - news and analysis

 

When even 'genuine' £1 coins are fakes

A recent study suggested as many as 5% of £1 coins are fakes - that's one in every 20.

Royal Mint figures previously suggested it was just 2%. So there's a fair chance you're handling a fake £1 coin every month.

Andy Brown, MD of Willings, a specialist coin validation firm, was the source of the story, which was widely reported.

I was invited on to ITV's This Morning - where I regularly talk about consumer issues - together with Andy Brown to help viewers spot fakes and understand their consumer rights.

However, while in the 'green room' afterwards he showed me a newspaper story that really summed up the extent of the problem. The Daily Express covered the rise of fake coins in January. The graphic to go with the story shows a 'fake' pound and a 'genuine' pound - only the one shown is a Queen's head from 2002. Andy Brown points out that the Mint only made pound coins with three lions in 2002 (click on the image below). So the 'genuine' is a fake. 

It's a stark reminder of the prevalence and high-quality of fake coins in circulation. Stay vigiliant.

>> See all pound coin designs for each year (Royal Mint)

>> How to spot counterfeit coins (Royal Mint website)

- Andrew Oxlade, Editor, This is Money

When will interest rates rise again? Ask a child

It’s a fairly safe bet that interest rates will be kept on hold at 0.5% by the Bank of England tomorrow – but when will the base rate rise again?

This is the million dollar question for those trying to make the most of their savings, or decide on a fixed or tracker rate mortgage.

The problem with forecasting what will happen is that no-one really has the faintest idea. Sure, there are plenty of economic forecasts out there, but commentators can’t even reach a consensus on whether deflation or inflation is the real risk.

The world’s governments have thrown so much money and effort at the problem, in a scattergun fashion, and its difficult to know whether it’s actually working or whether we’re about to end straight back in the hole we are trying to dig our way out of.

So what should you do? Voraciously read economic research, work out your own cunning interest rate predictor, flip a coin?

My suggestion would be ask a child. Try and explain the current situation to them simply and carefully and see what they say. You won’t get an answer. They’ll point out the whole situation is bonkers and eventually get bored. (If they don’t they will probably grow up to be an economist, so I’d be wary of any answers).

That solution will then remind you that in the current economic madness you might as well just make a choice and stick by it and not berate yourself when you get it wrong.

Alternatively, you could look at what a whole bunch of people who don’t really know what is going to happen are staking their cash on.

Spread betting firm Spreadex says its punters think we could be looking at very low rates until at least December 2010. It allows investors to bet on future Libor quotes and there is so little movement in future prices that some are heading as far as the end of next year for their bets – and still only predicting between 2.7% and 2.8%, compared to 1.4% now.

Libor measures the rates at which banks lend to each other, and while it doesn’t necessarily move in line with the base rate this indicates betting types in the City, don’t reckon rates are rising by much anytime soon.

Personally, I reckon we might start to see rises from the current 0.5% base rate at the end of the year and be back up to 2% to 3% by the end of next year, which if Libor returns to its normal relationship with the base rate means Spreadex’s punters almost agree with me.

But then I’m neither an economist or a child, so I wouldn’t recommend listening to me either.

- Simon Lambert, assistant editor, This is Money

- Interest rates: What next - news and analysis

- Property prices: What next - news and analysis

Has Nationwide lost its halo?

I like Nationwide. I have a number of its products. I like the notion of mutuality.

However, it seems to me that the UK's largest building society's may lose the shine from its halo.

So far this year it has slashed savings rates further than many of its rivals, 'simplified' overdraft rates (so that most people will see a rise), increased credit card rates (despite further dramatic falls in the base rate) and introduced some charges for foreign spending (outside Europe) on its credit and debit cards.

There's also some confusion about Nationwide's mortgage tracker. It cut the 'collar' or rate floor for many of its customers from 2.75% to 2%, which seemed over-generous. Now it seems to be failing to enforce even the 2% collar for some customers. The chatter online suggests it failed to spell out the collar in some 'key facts' documents and therefore can't enforce any lower limit on those mortgage deals. If widespread (a big If), the error could be coslty, paid for by less generous products elsewhere - so maybe lower savings rates.

Last year, Nationwide also had administrative issues. Its cash Isa delays frustrated customers, although some rivals were also guilty of the same. And now it emerges that it's also shutting a handful of its less profitable branches (Update 15/3: Full details).

Now, don't get me wrong. I think Nationwide is one of the UK's better financial services outfits, although given the shabby competition - RBS/Natwest, HBOS, etc - that's not a particularly great achievement just at the moment. And it is robustly defended by some members. There's a good example on our Nationwide savings article, which had an unprecedented reader comment response - albeit with most critcising the building society.  

Nationwide has a halo-effect brand, as its known in marketing circles. In these troubled times, it would be wise to protect it.

That's my view. Now tell us your thoughts on any Nationwide issue. Let's help the UK's biggest building society keep its halo...

- Andrew Oxlade, Editor, This is Money

(Enter your name, comment and email - no URL required - more explained here)

My open letter to the FSA

Dear Hector Sants,

Is it just me, or did anyone else find your speech yesterday as head of the City watchdog, the Financial Services Authority, hilarious and galling in equal measure?

It was like that of a child caught passing notes in class by their teacher:

Who gave you this? They did.
Why didn’t you pass it to me instead? You didn’t tell me to.
Why haven’t you done any of your homework by the way? Because they were distracting me. But I’ll do it now. Really, I will.

Apparently, you think the collapse of a myriad of financial institutions over the past 18 months was due to the following: a combination of social and cultural factors, a breakdown of the global regulatory framework, banks, compensation schemes, the inherent nature of financial markets and credit rating agencies. Not to mention individual investors themselves, who went off half-cocked and bought a load of financial products they didn’t understand. The idiots.

But the blame cannot be put at the feet of the FSA itself? Lordy, no.

The closest we got to a real admission of failure in your opening gambit, hidden deep in a stream of financial verbiage, was that there were ‘a set of regulatory drivers’ in the whole disaster.

To be honest, your excuses were as irritating as they were comic. For example, you basically pointed out the watchdog had a series of checks to keep banks in their place and outside of that, it just ‘relied on management to make the right decisions’. Yes, because we all know what a trustworthy lot bankers are.

Beyond enforcing its list of rules, it was not the FSA’s job to ‘question the overall business strategy of the institution or more generally the possibility of risk crystallising in the future’.

Am I living in an alternate universe or something? Surely even basic regulation of institutions as systemically important to the UK economy as the now-nationalised banks means looking at their business strategy? Surely there was an analyst buried somewhere in your plush City headquarters who could have realised RBS was pushing itself to the brink with its breakneck expansion plans, its willingness to dive headfirst into the disastrous takeover of ABN Amro?

Laughably, you then told us the FSA would be taking a much tougher line in future. An ‘intrusive’ line, a ‘direct’ line, based on a work ethic impressively called the ‘intensive supervisory model’.

This supervision is going to be so intensive, it’s going to be akin to a regulator version of the Eye of Sauron, of Lord of the Rings fame, casting its all-seeing gaze over the glass towers and chrome of our own financial middle-earth.

Somehow I'm not convinced.

Then came your warning: ‘There is a view that people are not frightened of the FSA. I can assure you that this is a view I am determined to correct. People should be very frightened of the FSA.’

Well, Mr Sants, people are frightened of the FSA, but for all the wrong reasons. Lax executive directors and the so-called heads of risk at banks are not frightened of the FSA, but ordinary people certainly are. Frightened of what it is not doing.

Finally, you rounded off with the point that people shouldn’t worry so much because, as worry-warts, we’re all part of the systemic problem: ‘The reaction of society as a whole has itself been a contributor to the severity of events.’

People are worried about their life savings? Well, they are just about the most selfish people alive. What is their problem?

We should just all sit back, stop panicking, stop asking questions and just let the regulator do its job. Which it will be doing.

From now on.

So you say.

I know you joined the watchdog just before Northern Rock collapsed in 2007 and the FSA's strategy before that point was not of your making. Nonetheless, you are the face of the organisation and we expect better than this.

Yours,

Alan O'Sullivan

Banking correspondent

This is Money

Tesco and Virgin: the new giants of banking

Market forces have fallen out of favour, to put it mildly, but the simple rules of supply and demand may yet rescue the UK economy.

Most banks, due to previous lending mistakes and the subsequent recession, have turned risk-averse and are less keen to dish out loans. The Bank of England's last Credit Conditions report suggested that in the three months to mid-December a net balance of lenders reported that they had reduced the availability of credit to households and companies. On the other hand, the industry body, the British Bankers' Association, says banks are lending more.

Either way, the people that count - would-be home buyers and small business owners - have complained of a struggle to get finance. In some cases, seemingly profitable and viable businesses run into trouble because lending dries up (this was particularly well reported on BBC radio's File on 4 last month).

So there are people who want to borrow with a good chance of repaying with interest - a profitable opportunity - but a vacuum of credit. Cue market forces. And who better than two modern icons of business and entrepreneurial success: Tesco and Virgin's Richard Branson.

We reported last summer how Tesco had bought out RBS in its joint venture and was ready to square up to the banks. And last week we reported that the retailer's plan was paying off  - it's offering decent savings rates to pull in money which it can then lend out at profit... what a radical idea.

Columnist Anthony Hilton also gave this insight in January...

'Unnoticed by many, Tesco recently bought out the banking partner that supplied the back-office skills for its limited range of financial services. that is as big a hint as you could get that it is planning to expand.  But it does so with the huge advantage of Tesco Clubcard data, through which it knows almost everything there is to know about its customers' spending habits. This will give Tesco a huge insight into what it can afford to save and to borrow. Chief executive Sir Terry Leahy is reported to have said that he sees the Tesco bank as his legacy - which is what he wants to be remembered for. Other banks had better watch out.'

Previously, established brands who operated in financial services just dabbled. They used existing banks to operate their service, lending merely their name and marketing muscle.

Now with Tesco's aim to be a fully fledged operator and Richard Branson mulling a move into banking, others may follow. Competition has increased and existing banks must either take a risk and get lending or face a rapid loss of market share to new and innovative players.

- Andrew Oxlade, Editor, This is Money

My child trust fund selections: An update

I have written several times on this blog* about my child trust fund selections. Once again, I'd reiterate that my choices shouldn't be considered a recommendation. My strategy is fairly high risk (as you can tell from recent, er, volatile performance). I just want to provide food for thought.

* My child trust fund (May 2007)
My child trust fund (Jan 2007)
My child trust fund (May 2006)

First off, here's how child trust funds work:

You are given a £250 voucher to invest on behalf of your baby. You'll get another £250 when they get to seven and there may be a further, as yet unspecified top-up, when they hit their teens. Each payment is £500 for families entitled to full tax credits. Parents, friends or grandparents can invest a further £1,200 a year in total.  So where should you put yours?

You have three choices:
- A savings account (It's not permanent. You can switch between providers as much as you like). Our tables have the best CTF savings rates.

- A 'stakeholder' account. Charges are limited to 1.5% a year and money is invested mainly in shares-based funds with a little bit in 'safer' investments such as bonds. More money is moved into the safer elements towards the end of the 18 years (it works similarly to a pension)

- A shares account. This is not a stakeholder so will probably have higher minimum investment levels but may have lower charges (especially on investment trusts). It's riskier than the other options as you may be able to pick more adventurous funds that deliver higher (or lower) returns.

What I did:
I have a son, aged nearly five, and a daughter, 18 months. For both of them, I wanted to take risks. I also knew that shares have beaten savings accounts over every 18-year period in the past four decades. In fact, you'd struggle to find any 18-year spell in history when deposit accounts came out on top. Past performance is only a guide (albeit a pretty good one) so I took the plunge and invested in two funds via F&C - the F&C Investment Trust and the Witan Pacfic trust.

The F&C Investment Trust spreads your money in shares around the world (but mainly in the UK) and has very low charges because it is so large. More on F&C Investment Trust.

I then wanted to spice up the portfolio. I have longed expected a downturn in western economies, starting 2008-2010 that may last a decade while tiger economies and the developing world step up the pace (read more on my view here and here).

So how is my eldest doing?

The F&C trust has lost 9.4% over three years and is down 21% over the past year. However, it has beaten its rivals - the average fund from the 'global growth' sector has lost 26% in the past year and 21% over three. Fortunately, it's still up 34% over five years. And that's the first point of stock market investing: taking a long-term view tends to pay off. 

Witan Pacific previously had a storming performance but due to a management change, it was no longer a CTF option so I was forced to sell and reinvest in other F&C funds. I opted for the Pacfic Assets trust and the F&C Global Smaller Companies trust, both of which have strong past performance.

Pacific Assets has let me down, losing 42% in a year against a sector average 31%, and 18% in three years. It turned a profit of 17% over five years, which is of little help to my little girl who only began investing 18 months ago. That's the second reality of stock market investing: you may lose a lot of money.

The F&C Global Smaller Companies fund fared better. It lost 18% against an average 26% in a year, or 22% over three years. Over five years, however, it has turned a 51% profit.

So what next? I'm going to keep the faith. Both CTF portfolios are spread around different stock markets of the world, which spreads the risk. Ok, it's little consolation in these turbulent times where all markets fall but the fundamental reasons for originally investing have not changed. I'm going to keep repeating a key Warren Buffett mantra like it's an incantation: 'Be fearful when others are greedy and greedy when others are fearful'.

What you should do:
I am happy to take on risk and monitor my CTFs every couple of months - and to also move the fund into safer investments when my children get close to 18. For parents who are not interested in finance (or who have lives to lead), the best bet is to probably pick a stakeholder that tracks a stock market index. Then you don't need to worry about changing managers affecting performance (it should mirror stock market performance).

For parents who are uber-worried about risk then a savings account would be right for them. To get the most out of this, you will need to keep switching to get the best interest. The best accounts still pay nearly 4%.

Before deciding, you should wade through all the info on this site at thisismoney.co.uk/ctf
Our investment correspondent Philip Scott will shortly write a new update of the full CTF investment market, including winners and losers. And he will ask financial advisers where they are investing for their own children. Alan O'Sullivan, our banking man, will also give an update on the CTF savings market, with analysis on which providers have consistently offered decent rates. It will all be included in our round-up next week.

And finally, try this nice decision diagram from the Government...
http://www.childtrustfund.gov.uk/Documents/toolkit_leaflet/toolkit%20leaflet%20-%20low%20res.pdf

Happy investing.

- Andrew Oxlade, Editor, This is Money

Irish banks do not deserve desertion

When Anglo Irish Bank was nationalised recently, I could almost see the headlines spinning towards me against a black background, frenzied music circa the average 1960’s thriller:

‘Irish bank collapses!’
‘UK savers fear savings losses!’
‘Mass riots as hoards of savers run amok! (though little is known of situation as-of-yet!)’

Given the flurry of conjecture and near-hysteria that has greeted the news of the Anglo Irish bailout, one would swear the bubonic plague had returned from the tone of some our readers’ telephone calls and e-mails.

So let’s just take a moment to breathe, make an Ovaltine, take a sedative and look at exactly what has happened here.

An Irish bank has run into funding difficulties and been bailed out by the Irish government. Similar funding difficulties have already hit Northern Rock, Bradford & Bingley, HBOS and Alliance & Leicester. That’s not to mention a handful of building societies and, let’s face it, RBS/ NatWest has had healthier-looking days.

But millions of people still bank with them.

Irish banks – bar Anglo Irish, before it was nationalised – are not terribly worse off than their counterparts in the UK. So here comes the science bit (click here for an explanation of any of the terms contained in this paragraph): A&L, Abbey, RBS, Barclays and Nationwide have only slightly better ratings than their Celtic counterparts, according to Fitch Ratings. The tier one capital ratios of the Irish banks are better than Abbey and B&B, while Bank of Ireland and Anglo Irish have better ratios than Barclays. Granted, the CDS rates of the Irish banks are in some cases two or even three times higher than those of some UK banks, but nowhere near alarming levels.

More importantly, the Emerald Isle’s banks are 100% guaranteed by the Irish government. Yes, yes, if all the Irish banks failed, the government would be unable to guarantee all of the nation’s euro400bn of savings as it would push Ireland’s national debt to 240% of GDP. But a meteorite could also slam into Ireland. Aliens could invade. The odds of these all happening are about the same.

‘But what about Iceland!’ the masses cry. ‘Iceland’s economy collapsed. And it has a similar name to Ireland! In fact, the only difference is one letter!’

That’s true, but calm down again, breathe into a paper bag and just think about it. UK savers got their money back. The UK Government had to step in after Iceland refused to honour its foreign liabilities, but it is unlikely Ireland would do likewise given the comparatively high proportion of UK savers with Irish banks, mainly via Post Office accounts. Also, after Kaupthing, Landsbanki and Glitnir bit the dust, other retail banks in Iceland continued to operate. Wages still flowed into current accounts; savings still attracted interest. 

Yes, before you say it, the Landsbanki collapse pushed the Icelandic government into eventual default. But it can turn to the International Monetary Fund, much the same way as other Western governments have in the past. Scenic Iceland and its 300,000 inhabitants are not going to spontaneously combust. The economy will repair itself with time and effort – as the UK would in such an eventuality. Albeit, in a great deal of time.

As it stands, Ireland had a national debt to GDP ratio of 40.6% at the end of 2008. The national debt in Japan and Italy is much higher, at over 100%. It was 47.5% in the UK at the end of last year. So there are worse cases to worry about than Ireland.

Like ourselves.

Finally, some of the banks, particularly Anglo Irish, offer decent savings rates and treat their customers fairly. Anglo Irish has been a regular feature at the top of the Moneyfacts savings consistency tables, although it has admittedly dropped off of late. However, pulling your savings out of an Irish bank at present may lead to loss of interest while you search for another deal elsewhere – as well as penalties if you have signed up to a fixed-rate deal.

My point is, for once let’s not make the situation worse by creating another run on yet another bank. Can we not learn a lesson from Northern Rock and keep our heads, while everyone around us loses theirs?

• Our colleagues on the Financial Mail hold a different view and believe all savers with variable rate accounts should pull their money out of Irish banks. Read their views on Irish banking stability here.