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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Savings Guarantee Raised to £50,000 to Halt Run on UK Banks

Personal_Finance / Savings Accounts Oct 02, 2008 - 02:13 AM GMT

By: Nadeem_Walayat

Personal_Finance Best Financial Markets Analysis ArticleGordon Brown confirms that to all intents and purposes all UK savings are guaranteed to £50,000 per depositor per financial group. This is a reaction to the the Irish governments decision to guarantee all depositor savings at 100% for 2 years which has ignited a flood of scared monies seeking refuge within Irish banks that have operations within the UK. This has resulted in increasing calls from media commentators and politicians for the UK government to follow suit with a similar 100% blanket guarantee.


As reported in the Independent - The Liberal Democrat leader Nick Clegg last night said his party would support a blanket guarantee for all deposits in the British banking system. He said: "We will co-operate fully with the Government in passing depositor protection legislation next week. "But today a copper-bottomed guarantee that all people's money in British banks is safe must be the priority. Then, in the longer term, all parties must work together to find common solutions for a re-regulation of the City."

The Irish Times Reports - David Cameron also urged the Labour government to produce legislation as early as next week to protect people's savings and deposits, ensure quick payout's and allow everyone "the comfort and security of knowing that whatever happens, their money is safe".

However some commentators are making the mistake of comparing a small country such as Ireland which sits under the Euro umbrella which is on the periphery of the worlds financial system against the UK with its own currency and is one of the primary centres for international finance. The Irish liability for the 100% guarantee is estimated at some $560 billion. This is set against the total liability to the UK government for the £50,000 guarantee which is estimated at $1.8 trillion. However a 100% guarantee of ALL depositors would multiply the exposure. It is difficult to estimate the total liability but at a rough guide it would be in the region of $4.5 trillion as it would encompass all foreign depositors whether they are individuals, corporations, banks or even other governments. The magnitude of exposure of twice UK Gross Domestic Product would given a worse case scenario of total financial meltdown could really prove apocalyptic for the UK economy, we would be talking along the lines of the Weimar Republic when Germany was forced to print ever increasing amounts of money to cover the financing of the growing debt mountain which lead to hyper inflation and a collapse of the German economy into a prolonged depression and a public loss of confidence in democracy, eager for a fascist dictator to rescue them from the economic abyss.

The current UK government debt is officially put at some $1 trillion, a financial collapse of the financial system would see this explode to as much as $6 trillion as guide as to how much risk the country would be put under and therefore a risk of a collapse in sterling which would further intensify the crisis by several orders of magnitude. The situation would be far worse then the cost of rebuilding a collapsed financial system following the failure of most of the banks, therefore this explains government reluctance to date to explicitly raise the savings limit from £35,000 per depositor whilst repeatedly alluding to NO retail bank would be allowed to go bust and that no depositor has lost a penny to date, which is true, however in the face of total collapse of the banking system the government would put the countries financial survival first which is how it should be.

Therefore many commentators need to revisit their conclusions in arriving at the suggestion that the UK should follow the lead of a small country such as Ireland due to the potential consequences of a loss of confidence in sterling. Similarly those agreeing with bailouts should recognise that there is no free lunch and in the long-run the cost will be greater than the benefit of preventing bankrupt banks from going bankrupt. All countries that announce huge bailouts will experience subdued economic activity and higher inflation for many years proportionate to the level of bailouts as a % of GDP.

Countries Can Go Bankrupt Too!

Whilst we ponder the deepening financial crisis where individuals are going bankrupt, corporations are going bankrupt, and lately the biggest banks in the world are going bankrupt. Savers should not forget that countries can also go bankrupt as the Germany of the 1920's clearly illustrated that was saddled with huge debt burden following the end of World War 1 resulted in hyper-inflation and the systematic destruction of the value of savings as the German government printed money in response to Allied government demands for payment of War reparations, similarly governments now declaring ever larger bailouts and more importantly unlimited savings guarantees that if push comes to shuv would effectively bankrupt the said countries should their bluff ever be called. For the only way such guarantees could be financed would be by printing near unlimited amounts of money which would lead to hyper inflation and a collapse in the value of the currency and hence value of savings and the the whole economy. Therefore bailouts of the kinds that are being proposed are highly dangerous as they could lead to literally an out of control cascading currency collapse and loss of confidence in FIAT currencies which would result in a barter system economy, thus extreme economic deflation along the lines of the 1930's Great Depression.

In that light, the Irish decision is seen as a highly risky short-term attempt to bolster the collapsing Irish banking system, which would bankrupt Ireland should they have to actually pay out on their promise. However Ireland's action in part is highly selfish as the country is part of the EURO single currency mechanism and thus creates a huge problem for the other European countries that are witnessing a flight of capital, or mini-runs on their banks in favour of the the Irish banks with 100% guarantees, as all savings fall under the umbrella of the EURO single currency therefore money deposited with Irish banks is effectively collectively insured by all EURO countries in the form currency stability, which under normal conditions market forces would lead to a selling of the currency that is extending its liabilities which obviously is not happening in Irelands case due to the under-writing of Irelands currency by the whole of the EURO block. This will undoubtedly lead to actions amongst other EURO countries or by the European Commission in an attempt to reverse the Irish decision due to the impact on the whole of the European Banking System.

The Irish action is in many ways reminiscent of what followed the great crash during the 1930's as governments sought to protect themselves by taking actions that destroyed international capital flows and trade. Therefore this could set in motion a chain reaction amongst governments where the net outcome would be to hasten the already trend in motion towards an economic depression as the global credit freeze turns into a credit ice age, especially if the next step is taken where savers suddenly realise that countries could also go bankrupt given the risk under written!

Gordon Brown realising the ramifications of the Irish decision has been calling on the Irish Government to comply with European Union competition law by reversing its decision, however what is likely to happen is that cry's will go out across Europe to match the Irish guarantee which will meet much resistance from Germany that still bares deep scars from the consequences of hyper-inflation and therefore will be fully aware of the consequences of such action. It will be interesting to see what the outcome will be, for the more countries that follow Irelands example the more likely that the Euro will suffer in relative terms.

UK Banks with 100% Guarantees

The UK government does offer a 100% guarantee on several UK banks which includes National Savings and the Post Office as well as nationalised bank of Northern Rock which has become the toxic waste dump for nationalised mortgage backed securities such as those from Bradford and Bingley who's savers also have temporarily 100% guarantee.

  • National Savings
  • Post Office
  • Northern Rock
  • Bradford and Bingley - temporary
  • Irish banks for 2 years

And again savers should not forget that the first £50,000 is secured at 100% amongst all UK banks under the FSCS (the Financial Services Compensation Scheme).

United States $700 to $820 Bailout Plan

The amended and inflated bailout plan was passed by the Senate yesterday and also looks set to be passed by the House of Representatives today. The key problem with the plan is that a. It is not enough to do the job, and b. That the US Treasury will not be paying market prices, as the whole problem with the frozen mortgage backed securities market is that the banks are not pricing their mortgage securities at the market price as if they were then they would be bankrupt. Therefore despite whatever spin the politicians put on the bailout plan, the US tax payer will be looking at an instant loss of some 50% or more on the price paid. The only positive from the revised bill is the increase in FDIC depositor guarantee from $100,000 to $250,000.

Our friends at EWI have prepared a 10 page report which gives 28 answers to the governments role in the latest financial turmoil for FREE to our readership, Visit EWI to download the full report.

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-08 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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Comments

Chris
02 Oct 08, 22:56
Banks 100%

This will boost the Irish economy, we should do the same


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