CANTILLON: INSIDE THE WORLD OF BUSINESS:Are Irish people saving too much? If you're one of the many people whose personal bank statements spell "recession", that question may come as something of a shock. Who are these people who can afford to save?
However, the Economic and Social Research Institute’s latest Quarterly Economic Commentary confirms that this is the case: “Households have reacted to the current crisis by increasing their savings rate and reducing their debt,” it says. One of the buzzwords of 2008, “household deleveraging”, is being borne out in the figures.
As the economy lurched into crisis, those with cash to spare started to hoard it. Ireland’s savings ratio – the ratio of savings to income – has shot up from 2.3 per cent in 2007 to almost 12 per cent this year.
It’s completely rational: if you’ve still got a job, you’re going to try your best to have that safety net in case your employer shells out P45s. If you’re afraid that the Government is going to tax all the joy out of your salary in the next Budget, you will not being going crazy spending this Christmas.
The deflationary Irish economy means that one of the big problems with saving during normal inflation-riddled times has gone away: the value of your money is not going to decline in real terms, even if the rate of interest you get is pretty paltry. We’re also just emerging from a debt bubble: being financially sensible has never been cooler.
But being sensible subdues the economy. Consumption in the economy is forecast to plunge 7 per cent this year and another 2 per cent in 2010 – “that’s really enormous,” the ESRI’s Dr Ide Kearney said at an ESRI conference on Tuesday. “Anything more than 2 per cent next year would be really bad.”
Economists refer to people’s natural instinct to save during a recession as “the risk of precautionary saving”. But even if a severe Budget convinces Irish consumers that the worst is over and they can safely hit the shops again, there is no guarantee that this phenomenon won’t come back to batter us.
Personal savings rates in the US have jumped, delaying the upturn in its retail sales. And, as Dr Kearney stressed this week, the Irish recovery is “absolutely hinged” on a global upswing.
Merging mutuals
A VARIETY of official and other voices have been pointing out that the National Asset Management Agency (Nama) will be a catalyst for consolidation in the banking sector. As the Government’s toxic loans agency denudes five of the domestic lenders of their most contaminated assets, this will pave the way for mergers and takeovers.
Fergus Murphy, chief executive of EBS, said last month that the building society could be merged “overnight” with the State’s only other mutual, Irish Nationwide Building Society (INBS).
EBS and INBS, which will be a shadow of its self post-Nama, are expected to form part of an enlarged group, possibly a mutual.
Merging mutuals is relatively straightforward with the blessing of the Central Bank through “a transfer of engagements”.
The Building Societies Act of 1989 says that such a lender can transfer its engagements (in other words, its overall business) or undertake to “fulfil” the engagements of another in a takeover by special resolution of members.
This could be messy given that EBS has 462,000 members while INBS has a smaller but still substantial number of owners.
The Government could avoid canvassing members in a time-consuming ballot as the legislation allows a merger of building societies by resolutions of their boards of directors if the Central Bank agrees. This would be the likely path followed if the Government accepts an EBS-INBS alliance.
The last takeover of a building society through a transfer of engagements was in 1998 when the Norwich Irish Building Society (NIBS), which had 1,400 members and 2,600 mortgage customers, was acquired by EBS. On that occasion, a majority of 757 NIBS members voted in favour of the deal.
In these severe financial times, members at EBS and INBS are unlikely to be given the luxury of approving a marriage between the two lenders given that both will need large handouts from Government and it will have the final say.
Judicious choice of home
Lawyers for National Irish Bank have raised the prospect that financier Niall McFadden may have relocated to London to avail of “what is perceived to be a more debtor friendly bankruptcy procedure in England”.
They made the allegation in the course of an application on Tuesday to have an application; for a judgment of €6.3 million against McFadden transferred to the Commercial Court. The bank – which is pursuing him over personal guarantees in relation to his ill fated takeover of Buy Sell magazine – said Mr McFadden had told them on September 28th he was now based in London.
Jurisdiction shopping for bankruptcy has been made possible by European bankruptcy legislation introduced in 2002 and the UK undoubtedly offers a more attractive regime. It is possible to be in and out of bankruptcy in as little as 12 months, while in Ireland it is normal to remain an undischarged bankrupt for 12 years.
There is no minimum residency requirement under the UK legislation, but the individual must show that their “centre of main interests” is in the UK.
NIB may simply be throwing mud and Mr McFadden has not commented on the allegations. But if they are true it will be an ignominious enough end for one of the Celtic Tiger’s poster boys.
TODAY
Wall Street will be eagerly awaiting results from both Citi and Goldman Sachs as the second quarter earnings season hits its stride. Google also reports numbers.
Back home, the Minister for Finance will preaching to what he must hope are the converted at Dublin Chamber of Commerce annual dinner.
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