Wednesday, 4 November 2009

Where are all the (cash) savings going?

An Saoi: Hidden inside the Central Bank’s monthly statistical reports is an analysis of household cash holdings in banks and credit unions (Table B2.2). These figures seem to tell a very different story to the one being broadcast by the stockbroker employed economists. While they are suggesting that there is a massive increase in saving underway, cash held by households is declining.

I have extracted the figures for the past three years, which provide a potted history of the period. Cash saving peaked in May 2007, the final month of the SSIA scheme. Cash held has fallen 15.5% since then. In 2008 the banking crisis saw substantial withdrawal of €8,600M between July and December. While savings had increased steadily for the first six months of the year, perhaps as money moved back from the mattress to the bank branch, the decline in the past two months has been substantial

The importance of this decline in cash deposits held by households cannot be overstated. Most ordinary people use banks or their local credit unions for regular saving and immediate access to this cash when necessary is crucial to help people pay unexpected bills. In due course, the slimmed down Irish banks will have to move to sourcing cash savings to balance their lending books. This will have to come from domestic savings.

Other assets normally included as part of household saving are not easily accessible, if at all. Even those that can be cashed in will normally incur a substantial tax charge on any withdrawals. Pensions are taxable as earned income and investments held through investment funds may incur an exit tax. Capital withdrawals from housing stock are one of the reasons we are in the mess we are in.

A Eurobarometer survey on the public’s perception of the social effects of the current crisis, available here, suggests that many people are beginning to struggle to make ends meet with 19.6% suggesting that they would be at high risk of being able to meet an unexpected bill of just €1,000.

There maybe some signs that people are paying off debt, which is reflected the decline in spending. However, this may be due to lack of access to new lines of borrowing rather than any concerted effort to get personal finances in order. In the case of credit cards we have had 12 months of continuous decline in their use, but no decline in the outstanding balances. The Central Bank’s explanation of decline in private sector debt is sobering,

“The vast majority of this annual decline is a result of valuation effects, such as write-downs of loans and increased bad-debt provisions given more difficult economic conditions…”

Further cuts in expenditure are going to see a greater squeeze on personal savings and pressure on organisations like St Vincent de Paul society, who report a 30% increase in calls for assistance.


Marise said...

Maybe the peak and drawdown indicated redundancy or early retirement lump sums.

I don't think the bulk of the Irish populace will have much in the way of savings to bolster their banks in the mid-term.

This is another reason why I oppose the pro-cyclical approach; in an economy with 70% of GDP coming from consumer expenditure, taking money out of peoples' hands is like removing one's head to lighten the load. And I have yet to hear about another economic engine that could replace this.

I have commented before that we see our population in too siloed a fashion: these people over here are the public sector workers living the high life at the taxpayers' expense, or the private sector workers expecting too much in pensions or wages, or the unemployed person getting a free handout -- but they are also the customers and consumers. These are not discreet sets of people, they are identical. You need commerce? Deposits? Purchases? Well, people need disposable income for that. Not credit, mind you, but real income -- let's get something a little more sustainable this time.

An Saoi said...

Marise, Thank you for your comments. I agree with you that redundancy payments may have had a role in increasing the level of cash holdings in the current year. Historically pensioners have been the mainstay of depositors.

However, all of us need a degree of cash saving as our expenditure is not evenly spread throughout the year, let alone our lives.

If as I suspect people are running down their savings, then we maybe in for far more trouble. I have heard Deputy Burton suggest that many parents are helping out their adult children by use their income & savings to cover mortgages, even food. This is not a process that can continue for very long.

You are overstating the role of consumer spending within the economy, however it is significant and cutting it will I agree make things worse immediately.

The ECB has announced that it is phasing out cheap loans for the Irish and other banks, they will have to rely on their deposit base to balance their loan books. This will force them to a) become much smaller in line with their deposit base, b) force up interest rates as they push up the rate on deposits to attract money, c)demand repayment of existing loans. The alternative is a return to reliance on the interbank market. Would you, as Treasurer of a German Bank, lend to AIB?

Marise said...

@An Saoi

I apologise, 70% is the US consumption/GDP, not Ireland.

True, I would not lend to AIB or indeed many other banks and financial institutions right now, were I a big German firm or not. Potential investors are correct in casting a jaundiced eye, because there is little confidence. It seems apparent that throughout the crisis, financials and governments have tried to hide the true extent of the problem, trying to stop panic and keep a floor on asset/book values (even though the recorded bubble values of many assets are overly optimistic).

Knowing this, I certainly would feel as if there are still more landmines to go off in the sector. Then again, I am not a good person to ask -- I have little knowledge of the trade and even less appetite for risk. I would make a poor fund manager indeed!