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Who supports the cause of small savers?


ECB chief Trichet could reassure Irish savers

ECB chief Trichet could reassure Irish savers

ECB chief Trichet could reassure Irish savers

One of the great mysteries of the crash is the way in which official Ireland and official Europe sat mutely by while confidence in the Irish banks drained away.

Anyone with any connections to the world of finance will know the most frequent question they will have been asked since all this began: "Is my money safe in an Irish bank?"

There is a safe answer one can give. The Government guarantees €100,000 (£87,540) of personal deposits. Should the bank fail, it will back the payment of deposits up to that amount. It is almost impossible to imagine circumstances in which small deposits up to that level would be lost.

But while I do not think it even a remote possibility, that is exactly what the questioners are imagining. And they want better reassurance than opinions from the likes of me.

They never got it. Instead, they got advertising from foreign banks, playing not too subtly on those fears.

So people have been withdrawing their deposits from Irish banks in huge quantities. It may be the biggest bank run ever recorded, proportionate to the size of the banks. In the past 12 months, banks covered by guarantee lost 20% of deposits.

But the money is not really the point. The point applies only to the small, personal depositors, and it is this: what are the wider consequences of a widely held belief that the financial system might collapse, and with it everything that one has worked for?

One has only to pose the question to see the answer - the consequences are bound to be dire. Forget recovery in the housing market for a start. Forget about reducing the saving rate either.

And don't assume that the deposits will return to Irish banks even if the fear wanes. If the foreign banks' rates and services are satisfactory, there is no obvious reason why depositors should go to the trouble of shifting their money again.

The problem, of course, is that the guarantor - the Irish State - lacks credibility. Deposits in the banks not guaranteed by the State actually rose 4% in the past 13 months. Ideally, Irish depositors needed reassurance from elsewhere. This is the really odd bit. In order to keep the Irish banks functioning, the European Central Bank has to replace those lost deposits. Yet it is unwilling to do anything to make it less likely that those deposits leave in the first place.

An ECB guarantee would be ideal.

But there is a simpler method which might also prove effective - that the Central Bank would demonstrate confidence in its own policies by offering Irish banks medium-term loans, instead of the present emergency-style short-term ones. Emergency procedures do not reassure.

Even though Frankfurt proved unwilling, one is not convinced there was nothing the Irish Government could have done.

It is about psychology.

Small depositors should have been given legal protection ahead of secured lenders as early as possible.

Assets could be ring-fenced to cover small deposits.

Any measures would be accompanied by heavy publicity stressing the determination to protect the small saver.

It will be said that this kind of action might have frightened the horses even more, but they have bolted anyway.

In the thirties, the authorities let banks simply fail, with disastrous consequences. In the 2000s, they determined to save them.

History will marvel at how they managed to save them at such vast expense, without making anyone feel safe.