Anglo Irish bailout: Savers should protect themselves

Headlines about the Irish government's billion-euro bail out of Anglo Irish Bank will leave hundreds of thousands of British investors and savers fearful for the security of their money The Irish government first stepped in to ensure Anglo Irish Bank's solvency through nationalisation last year, with Allied Irish Bank and the Bank of Ireland also recapitalised in February of that year to the tune of €3.5bn each. Customers who had borrowed from Anglo Irish were told their loans were not affected by the nationalisation and have continued to make repayments. But investors with ordinary shares saw them delisted from the Irish and London stock exchanges and automatically transferred to the Irish Minister of Finance's ownership. Holders of Anglo Irish preference shares – a hybrid between an equity and a debt instrument – also saw their ownership transferred and no further coupon or interest payments were made, while bondholders have been able to trade their investments and Anglo Irish has continued to make interest payments and repay the principal upon maturity. The Irish government has long claimed that customers with savings in all of Ireland's major banks are safe. It extended a 100% deposit guarantee to all Irish-owned financial institutions in 2008 until 29 September 2010, and this has recently been extended to the end of the year. But panicked savers have continued to withdraw their cash – in the first half of this year customer deposits fell by more than €5bn to €23.1bn. Once the state removes the 100% deposit guarantee the level of protection will drop to €100,000 per customer per institution under the Irish Deposit Guarantee Scheme – but up to a third of deposits in the Irish banks are estimated to exceed this threshold. Andrew Hagger of Moneynet.co.uk says: "Savers who have fixed-rate bonds with Anglo Irish Bank or other Irish banking groups will just have to wait for them to expire. When they do, especially if this is after 31 December when the 100% government protection is scheduled to end [depending on when savers took their bonds out – check with your provider], and especially if they have savings worth more than €100,000 in any one group, customers might want to spread their cash around to be safe. No one is saying the banks will go under, but then no one thought Icesave would go bust ." Post Office implications The Bank of Ireland also supplies savings products for the Post Office , exposing UK savers to an added degree of risk given Ireland's parlous financial health. All Post Office savings – except those held in its investment Isa and child trust fund, which are covered by the UK's Financial Services Compensation Scheme (FSCS) – are covered by the Irish Deposit Guarantee Scheme. But a separate division, Bank of Ireland (UK), has been created to handle these products, and a high court hearing set for late-October will determine if it will fall under the UK's FSCS. If it does, the Post Office expects all its products to be covered by this scheme from 1 November. If Bank of Ireland went bust in the meantime Post Office customers would be protected under the Irish scheme, unless the Irish government effectively went bust at the same time. In this scenario the compensation scheme might not be able to pay out and Post Office savers could lose their deposits. The Irish central bank today warned that in a worst-case scenario bailing out Anglo Irish Bank could cost up to €34bn , which would lead to a downgrade of Ireland's debt rating, while Irish finance minister Brian Lenihan has admitted that if Anglo Irish Bank fails, Ireland itself would go with it. The Irish economy contracted by 1.2% in the second quarter of this year and economists have begun making comparisons with Greece, which received a €110bn bailout. Earlier this week Ben May, European economist at Capital Economics, said: "Even if the [Irish] government can persuade markets it has already committed enough money to put the banks back on an even keel, its troubles are far from over. At the very least, fiscal austerity will lead to a long period of very weak growth. At worst, Ireland may eventually be forced to default." Safer havens Meanwhile, Post Office customers worried about the short-term future of their savings might want to consider switching to better-paying alternatives, Hagger says. He highlights Birmingham Midshires ' two-year bond paying 3.6% on amounts from £1, while Derbyshire building society pays 3.6% on its two-year bond on a minimum deposit of £100. Best-buy three-year bonds are on offer from the AA , which pays 4.1% on balances from £1, and Cheshire building society , which pays 4.1% on amounts from £100. The AA also offers a decent easy access account paying 2.8%.