Are Irish banks safe… including the Post Office?

Update Note 5 June 2009: In the past week, financial strength agency Moody’s has downgraded some Irish Banks (read full MSE News story) and after a record pre-tax loss was announced, the Irish government decided to inject 4 billion Euros into Anglo Irish Bank (read full Guardian article).

Update Note 14 April 2009: Lib Dems warn over Post Office safety.

A leading politician has called the Bank of Ireland ‘shaky’ after ratings agency Moody’s downgraded the debt ratings on all Irish banks. Read the full news article “Lib Dems warn over Irish banks’ safety“

Update Note 24 Feb 2009: Anglo Irish raided by police.

The fraud investigation department of Irish police has raided the head office of Anglo-Irish Bank (see the Telegraph Story). In itself, this isn’t an issue for savers, but it is a salutary reminder that the Irish Banking system has questions to answer. It’s worth remembering if you’ve savings in a UK account owned by an Irish bank you don’t get the usual UK £50,000 per person per institution protection: you’re reliant on the Irish government’s protection.

Republic of Ireland banks have been in the news a lot lately, for two main reasons. A couple of weeks ago the Irish Government nationalised Anglo-Irish, and there have been some muttered comments in austere journals about the solvency of the Irish state.

The cruel joke doing the rounds in the City is “Q: What’s the difference between Iceland and Ireland
A: One letter and six months.”

This is big news, not only because Anglo-Irish often has savings best buys, but another Irish institution, Bank of Ireland, provides all the savings for the Post Office.

As such, my mailbag’s started to get jammed up with questions about their safety, so I thought I’d briefly jot down some of the issues. Havings said that, at best consider these to be MUSINGS. This type of situation moves so quickly that many things that are impossible to pre-guess could come into play. We’ve seen many precedents set in recent months; my hope is to try and explain the situation as I see it, but there are no guarantees.

It’s Post Office savings NOT NS&I

Yet let me clarify one common confusion first. Bank of Ireland provides all Post Office branded savings products (with the exception of its Child Trust Fund), but that’s not the same as NS&I or what used to be called National Savings, which you can also get from the Post Office. NS&I is owned by the UK government. Here we’re talking savings which specifically have the word “Post Office” in the title.

What’s happened?

Anglo-Irish has been taken into government ownership, just like Northern Rock here in the UK. This would normally be a positive step, i.e. the bank was struggling before, and the Irish Government has taken it over and shored up its finances. Yet these aren’t normal times; in this day and age questions are raised even about the solvency of European Union governments, and fingers seem to have been pointed at Ireland more than most others.

On top of this, as some Irish banks have opted for the passport exemption (though Allied Irish haven’t), if one goes bust you must first claim from its home country’s scheme, and as Ireland offers bigger compensation than the UK, British Savers are solely reliant on the Irish compensation scheme.

In a nutshell, that means if any Irish bank now went into default, all the money would have to be claimed back from the Irish government, and it seems the UK would have no legal responsibility for it (see safe savings for a detailed explanation).

How protected am I?

Put plainly, by the book, 100% of the protection comes from the IRISH government, so you have no protection from the UK government (which doesn’t mean it wouldn’t step in, but there are no guarantees).

Now, as Anglo Irish is nationalised, for it to go bust the Irish State would need to go bust too; thus in effect rather than a two step level of protection, it’s a bit of an all or nothing scenario, though it’d take an extreme problem for there to be an issue.

The aim of this blog ISN’T to spook, or to say “don’t save here” or “withdraw your money”, quite frankly my expertise does not stretch to the solvency of a international governments. It is simply to say if you have money in Irish banks, you need to be aware of the protection and the fact that you’re reliant on Ireland and take your own decision accordingly.

One of the problems here is that last year the Irish Government said it’d guarantee all savings and was the first European country to do so. A lot of people moved savings there on the back of this, in other words, it became a ‘safety-resort’. So, of course, for those for whom safety is everything, any minor change can spook you. Yet it seems many people are staying put, especially those on fixed rates, who would pay a penalty to withdraw cash anyway.

It’s worth taking a step back here, and not panicking. Ultimately it’s likely we’re talking about the Irish government needing to go bankrupt for there to be a problem – and Ireland is an Euro country interlinked with all the big European countries. If it did there would be a calamitous impact on the world economy, so it seems a relatively small risk this would be allowed to happen. Yet in our current world, where the capitalist system seems to be on trial, nothing is impossible.

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