By ADRIAN LOWCOCK 10/06/2009
The credit rating agency Standard & Poor’s, has downgraded the Irish government’s debt from AA+ to AA. A downgrade means the cost of supporting its banking system will be much higher and is the second time this year that the Irish government rating has been reduced.
How does the downgrade affect savers?
It is not good news for UK savers who have deposits in Irish banks such as Bank of Ireland, Allied Irish Bank and Anglo Irish Bank as a downgrade reflects negatively on the Irish government’s ability to pay compensation to them, in the event of a bank collapsing.
This is because in September the Irish government offered to pay 100% compensation of savings with no upper limit for deposits. This means if any of the Irish banks fail, compensation would come directly from the Irish government. The Financial Services Compensation Scheme (FSCS) are no longer involved in this, as this protection exceeds the maximum level of compensation they could offer.
Which investors might be at risk?
Over 1.5 million savers in the UK have accounts with Irish banks. Most of these are Post Office accounts, which are all underwritten by the Bank of Ireland, comprising in the region of £6 billion held in cash ISAs, bonds or easy access accounts.
Many believe that the UK government would help to rescue savers as there are millions of people who would be affected, and they have done previously with the Icelandic banks; Landsbanki and Kaupthing Edge.
Given that Ireland is also part of the Eurozone, it is conceivable that the European Central Bank would intervene and bail out the banks, although this would not necessarily involve full compensation for depositors/savers.
It is important to remember that during this financial crisis not one private individual has lost their deposits to date.
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