Protecting your deposits

Originally posted on where you can discuss the article.

The situation is changing all the time. This is written on 29 November 2010 just after the EU/IMF/ECB have agreed to lend money to Ireland to fund the exchequer deficit and the Irish banks.

Many people believe that we are panicking unnecessarily, and that the ECB will never let Ireland or the Irish banks go bust.

There is no way to eliminate risk completely. The best you can do is reduce it or diversify it.
If you have a mortgage or other borrowings, consider using your savings to reduce these borrowings. If you have a cheap tracker, you may not want to do this.
Don’t tie up your money for a fixed period in case things change and you need to move it. This includes products such as Savings Certs where there is a penalty if you don’t leave your money there for the full term.
Is moving your money out of Ireland unpatriotic?

What are the potential risks I should be trying to protect against?

* The Irish government goes bust because it is unable to push through the austerity measures. Its guarantees on Irish banks deposits become worthless.
* The Irish government places restrictions on deposits in Irish based banks.
* The EU/ECB goes bust because it can’t afford to bail out Greece, Ireland, Portugal and Spain.
* Ireland leaves the euro or the euro falls apart or depreciates dramatically

How safe are the Irish covered banks?

There is significant doubt over these banks. They are dependent on the Irish government guarantee. The cost of the bail out and the continuing state of the public finances mean that the Irish government guarantee has lost its value. As the ECB/IMF/EU have backed up Irish banks, they are safe for the moment.

How safe are my savings with An Post?
These remain dependent on the solvency of the Irish state which is doubtful. Discussed here

How safe are the Credit Unions?
There are 411 Credit Unions in the Republic and each one is separate. So one might be rock solid, while another is in trouble. 400 of them are members of The Irish League of Credit Unions stabilization fund, but this would not be sufficient to bail out a lot of Credit Unions if they got into difficulty or a few large ones. The fund is discretionary, so there is no guarantee you would benefit from it.

The savings are guaranteed up to €100,000 by the Irish government.

A big problem affecting the Credit Unions is that they all have surplus cash. This cash is invested mainly in Irish bonds and with Irish banks. So some Credit Unions will fail if the Irish banks fail and the Government guarantee is found to be worthless.

Discussed more fully here

How safe are the foreign banks in Ireland?

The various guarantee schemes are summarised in this Key Post

Rabobank would be about the safest as it is rated AAA and has a Dutch government guarantee as a backup.

However, they are still subject to risks:
The Irish government could impose some restrictions on movements of savings in “Irish” banks and this would include these banks.
The euro could collapse or Ireland could be kicked out of the euro.

Will Irish deposits in Rabo be devalued, if the euro is devalued?

Opening a bank account outside the Republic

Key Post on this topic
Is it legal to open a bank account overseas and what are the tax consequences?
Yes, it is perfectly legal to open a bank account overseas. It is a criminal offence to hide it from the tax authorities.

The taxation of foreign deposit income

What about opening a sterling bank account in Northern Ireland?
This is discussed in this Key Post

You would be exposed to depreciation of sterling against the euro and the costs of transferring and exchanging currencies.

What about opening a euro account elsewhere in the eurozone?
Most of the banks outside Ireland make it difficult to open banks accounts. One exception is Keytrade in Belgium which a lot of people have recommended on askaboutmoney. It is owned by Credit Agricole whose rating is .

Obviously no bank is entirely safe and you are still subject to a problem with the euro.

Opening an account with KeyTrade Belgium

So how can I protect myself against a devaluation of the euro?
You could open a bank account in sterling or some other foreign currency.
But this is not risk free. Sterling could fall in value against the euro.

What about investing in German government bonds?
These are regarded as one of the safest investments by the international markets. Of course, they are denominated in euro so they will be affected by any such devaluation.

You will find a full discussion on ThePropertyPin

What about Irish government bonds?
Irish government bonds are paying around 9% at present. These are not a substitute for deposits. But they could be considered to be like equities. There is a potentially very good return, but there is a significant risk of default cutting the underlying value of these bonds.

What about gold and other precious metals?
These are very risky. Many people believe that gold is in a bubble stage so there is a risk of a significant fall. Of course, gold could continue to rise in value as well.

If you keep gold bullion under your bed, you are taking significant other risks. Whereas if you buy your gold through certificates , you face a risk that there is no real gold behind those certificates when the crunch comes.

Whatever your attitude to gold is, you should not have more than 10% of your assets in gold.

What about tracker bonds with guarantees?
These tracker bonds are, in effect, deposits with banks, so you have to look at the underlying bank to assess how safe it is.

What about investing in Irish unit-linked funds?
The Irish banks are in difficulty because of the difficulty in getting repaid on their bad loans.

The fund managers such as New Ireland, Irish Life, Hibernian, Standard Life should be ok. A balanced fund will have a mixture of shares, property and bonds. It will also have investments in the euro, dollars and sterling.

So the fund will not be guaranteed, but it should be well diversified and it might rise.

What about buying shares directly?
Buying shares directly is a good way to get exposure to foreign currencies. Most blue chip Irish companies such as CRH, DCC, and Aryzta have earnings in a combination of euro, dollars and sterling. ( Note: the author owns shares in these companies)

You may want to buy shares in British companies or American companies directly.

What about inflation?
The best way to protect against inflation is to hold real assets such as property or shares. There is a serious risk of inflation but it may be some time away. Make sure not to tie up your money in long term deposits in case there are signs that inflation shoots off again.
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