Friday, February 6, 2009

Debt Mountain 'Ireland Inc' IV

Spot the odd one out...

Chart 1 shows the most indebted (in absolute terms - gross external debt volumes) nations of this world with their debts expressed as percentage of Ireland's gross external debt. This clearly ranks Ireland as the 9th most indebted nation in the world, and 6th in the Eurozone. Note that in absolute terms, Irish total debt is greater than that of Japan!Now, Chart 2 is even more revealing, as it plots per capita debt levels of the most indebted (in absolute terms) countries in the world. Ireland is a clear outlier!Massive, unpredictable and a (possible) danger to others... Is there something moving in the corner?


Anonymous said...

Well this looks pretty bad, so maybe you could give some details on which banks outside Ireland are the best choice to move our savings to.

Rabobank ? HSBC ? Bank of America ?

TrueEconomics said...

This is a complex issue, best addressed based on a client's specific situation. The following is just my personal view, not an advice.

My only suggestion to anyone concerned about with the safety of their deposits would be - do not make rushed decisions and do your homework on what your needs are and what risks you face.

I think that at any time, good risk management requires that one should hold diversified portfolia of assets, with diversification working across both assets classes and institutions.

I do not think there is, at this time, significant counterparty risk at Bank of Ireland or AIB for small and medium retail accounts holders.

The risks these institutions carry are more likely to impact a limited number of corporate (and possibly very large retail) deposit holders (just as in the case of the Anglo Irish Bank, where the Government has threatened restricting withdrawals from some large accounts linked to large loans), and for institutional international transactions.

So the risk is not there at a retail level, but, potentially, at a corporate level.

Another issue to watch out for is trade finance - if you are engaged in exporting/importing. Irish banks are smaller and have less international exposure to trade finance, so they are naturally perceived to be higher risk by your trade counterparties. Here, globally diversified banks should offer lower risk and lower cost.

Finally, we simply have no record of what happens in the case of a larger bank failure. US and UK do, so for their banks, the risk of not being able to access your money in the case of a bank failure is a known. On the other hand, the risk for Irish customers with international banks is the insurance cover on the accounts held - should the crisis deepen in months to come, we could see foreign countries, where these banks are based, limiting protection offered by these banks to non-resident account holders.

The real difference in the current environment is that when you are looking at the savings, you should consider closely risk-return relationship vis-a-vis your bank. In good times, savings are being kept in a bank primarily for convenience, not because they yield significant returns. Today, you should think of your savings as both an asset and a risk-buffer. This means you should hold a share of your savings in an institution you consider to be safer than average, offering good prospect of liquidity risk protection. However, with many institutions offering relatively good yields on savings products, you should also look at the possibility of placing some savings deposits with riskier institutions to gain advantage of higher yields.

It is from this perspective of risk/return tradeoff, not from the point of view of potential illiquidity of deposits, that I would suggest you should assess your current situation.

I would certainly have a clear understanding of your individual need for liquidity, preferences for risk and return and your current bank(s) risk before making any rash decision to move savings elsewhere.