The Deposit Guarantee Scheme has been revamped as of yesterday to cover any depositer in an Irish institution for up to €100,000 per person. This move is being done to help restore confidence in the Irish financial markets.
The scheme was created in the mid 90’s and throughout its history cover was never index linked or adjusted for inflation and therefore it never increased. The recent move is designed to restore confidence in the Irish banking system, however, there is one small oversight that Mr. Lenihan has omitted from the story, namely, the amount of money in the scheme.
Prior to this the scheme covered people for 90% of their deposit to a limit of €22,000. This meant that in effect you could only ever expect to get a maximum payout from the scheme of €20,000, this was amongst the lowest levels of cover in Europe and now, in a pen stroke we are one of the highest (only Italy covers more).
However, there is still that issue I mentioned earlier of the amount of money in the pot which is (a call to the central bank verified) €527 million. This would have given them the money to pay out roughly 25,000 individuals to the maximum amount. With the new scheme however it would only pay out 5,300 people, they changed the rules but not the money available for it.
The scheme now works as follows: you are covered for up to €100,000 the old rules of 90% of €X amount are gone. You don’t have to be an Irish citizen, you need only have your deposit in a bank covered by the Irish Scheme. That raises a concern about where the money would come from should a bank actually fail, on another hand though it’s a genius stroke. In times like this that move will put Ireland on the deposit map, it will help replenish capital into our banks, it is better for their deposit taking than all of their advertising budgets combined and used to get depositors in would have been.
For the start date I called the Central Bank and spoke to a representative there, they informed me that it is official as of the 20th of September, I can’t find it in any law/code but it does It may also be a move towards Ireland finally taking its place in the market as a financial hub. Everything is starting to come together (although it’s early days yet!) in some respects, we have low tax, a well educated population, native English speakers (money is international but its language is English), and the IFSC area, add big deposit guarantees to the bow and it helps us up a further rung. The problem is to get people to realise the opportunity whilst we are in the midst of a financial crisis.
Recession became official yesterday, the first thing I told any of the folks in our firm were ‘that means we had two consecutive quarters of stagnant or reducing GDP… but that means something else too!’…. I awaited answers and they didn’t come. What I was talking about was the fact that we had which means it is now in the past, we went over the tipping point 6 months ago and it therefore means that we are in the trenches and that much closer to coming out of it. As a contrarian I now believe we will start to see market opportunities arising, Share prices in financial institutions look good to me, then again they looked good a few weeks back and I am still licking my wounds (in the short term) and the fear of buying into a bank that will be taken over is less (in my opinion) because the deposit scheme will put banks in a stronger position to resist such moves.
For now I continue the lonely life of forecasting and being utterly alone in several key areas of my belief in terms of where the market is headed. On a final note: Always hold some gold, the inflation that will come on the back of the US bailout of $700bn will affect all of us!