The Government Must Guarantee Savings!

Ireland has given savers a 100% government-backed guarantee, with France set to follow. The Fool says it's high time that Gordon Brown and Alistair Darling did the same.

For investors, yesterday was a day to forget. Growing fears over the health of the global financial system caused stock markets to tumble. The blue-chip FTSE 100 index dived 270 points (5.3%), one of the biggest falls since its creation in April 1984. After the vote-down of the $700 billion US bank bailout, the Dow Jones Industrial Average fell 778 points (7%), its biggest one-day points drop ever.

Irish eyes aren't smiling...

With inter-bank lending almost frozen solid, banks in the UK, US and Europe were among the biggest casualties. In particular, Irish banks have been left reeling, as the following table shows:

These steep falls come in spite of a promise from the Irish government to beef up the savings safety-net. On 20 September, the upper limit for the Irish deposit-guarantee scheme was increased from _20,000 to _100,000. However, this news failed to `stop the rot', forcing the Irish government into an even bigger promise.

...but Irish savers are now 100% safe

Today, the Irish government agreed to guarantee all deposits and debts at these six major financial firms:

 Allied Irish Banks

 Anglo Irish Bank

 Bank of Ireland

 Educational BS

 Irish Life and Permanent

 Irish Nationwide BS

This guarantee is effective immediately and ends in September 2010. According to the Financial Times, it covers _400bn of liabilities, including retail, commercial and inter-bank deposits, plus covered bonds, senior debt and dated subordinated debt. This guarantee will be paid for by a levy on the banks concerned.

Thus, the Irish government has put its full faith and credit behind Ireland's largest banks. Last week, Ireland became the first euro-zone country to go into recession, so this guarantee will come as a welcome relief to worried savers. In addition, I understand that the French President promised to protect French savers from the turmoil in world markets. So, we could get a formal extension to the French deposit-guarantee scheme later this week.

British savers demand the same security

A week ago, in Savers Get A Stronger Safety-Net, I urged the British government to follow suit by strengthening the protection afforded by the Financial Services Compensation Scheme (FSCS). At present, the FSCS protects only the first £35,000 of savings with a single institution (£70,000 for joint accounts).

According to the banks, this £35,000 threshold fully protects 24 out of 25 savings accounts (96%). Alas, savers with much larger sums (such as pensioners and older savers) could still lose out if a bank went bust. Then again, by intervening to save both Northern Rock and Bradford & Bingley, the government has given an implied guarantee to savings institutions.

It's now time to make this promise clear-cut. Therefore, I believe the government has no choice but to issue a blanket guarantee to protect 100% of all savings deposits, regardless of their size, in return for a fee from banks for this protection.

Hence, in a press release issued today, The Motley Fool has called on the government to safeguard savers by providing a government-backed guarantee for all UK savings accounts of any size.

Without this guarantee, we think Prime Minister Gordon Brown and Chancellor Alistair Darling are selling British savers short!

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