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Savings: Is my money still safe in savings bonds or should I put it somewhere else?

I have some money invested in savings bonds. With more and more talk of the Government defaulting on its debts and the yield on Government bonds rising all the time, is my money safe? If it isn't, then what should I do with my money?

Josephine

Last week the yield or interest rate on 10-year Irish Government bonds rose to almost 6.4pc. That's almost 4pc higher than 10-year German government bonds, which currently yield 2.43pc.

What this means in practice is that, including the repayment of the principal or amount borrowed, the German government is paying €1,243 to borrow €1,000 over 10 years.

By comparison the Irish Government is now paying €1,640 to borrow the same amount over the same length of time.

In other words, the German government is paying almost 25pc less to borrow money over 10 years than the Irish Government. Why?

Despite everything that the Government is saying to the contrary, there is mounting fear in the international bond markets about the ability of the Government to repay its debts in full. This huge gap between Irish and German government bond yields reflects bond traders' best guess on the extent of the likely haircut if Ireland is forced to reschedule its debts.

But that's the big boys, who can look out for themselves. What does this mean for small savers who have their money invested in savings bonds and certificates? While these are normally sold through post offices, they are in fact issued by the NTMA, the body responsible for managing the national debt.

This is, of course, the same NTMA that issues Irish Government bonds, which are currently so out of favour on the international capital markets.

So if the unthinkable happens and the Government is forced to come to an accommodation with its creditors, will investors in savings bonds and certificates be hit? Will they too be forced to accept a haircut, ie. get back less than 100 cent in the euro of their money?

Well first things first. The big boys knew what they were getting into. While they are currently enjoying a 6.4pc yield, the annual interest rates on savings bonds and certificates are 3.23pc and 3.53pc respectively. In other words, having enjoyed the rewards, the big boys can hardly complain if they are now exposed to the risk.

It's a different story for small savers. They never enjoyed the rewards, so why should they suffer a haircut? Moral issues aside, while the international bond markets have a short(ish) memory, no Irish saver will ever again trust the Government with a cent of their money if they are short-changed.

If that doesn't provide Josephine with sufficient reassurance, maybe she should move her money to one of the foreign-owned banks, Rabodirect is paying the equivalent of 1.77pc for three-year money and 2.24pc for five-year money (both rates are subject to 25pc DIRT).

I have some money on deposit with one of the Irish banks. Is my money still guaranteed by the Government after the deposit guarantee expires at the end of this month?

Sile

September 29 is the second anniversary of the Government's unconditional guarantee of bank deposits and bonds.

The Government is now coming under intense pressure from the EU to scale back the guarantee. However, last week Finance Minister Brian Lenihan announced that most deposits would continue to be covered by the guarantee until at least December 31.

Even after that date most deposits will still be guaranteed by the Government, as the existing guarantee on all bank deposits up to €100,000 will still remain in place.


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