Protecting Icesave depositors, was it a mistake?

Dr Altmann goes on to say that: "Anyone who put their money into this bank was doing so because it offered attractive interest rates. The press has been full of information explaining that only the first £50,000 was protected by compensation schemes and any amounts above that were at risk. Depositors knew that. Yet, in another panic reaction, the Government has promised taxpayers' money to reimburse unlimited amounts to all IceSave retail depositors. This is crazy.

In fact, it is really dangerous. Firstly, it was not even a British bank so why should taxpayers fund people who saved in an Icelandic institution? This implies that anyone saving in any bank that fails (not just a British one) will have to be bailed out by the taxpayer too _ where will it stop? This is the road to hyperinflation. Secondly, why should those who were seeking higher returns be rewarded with both better interest rates and a 'money-back guarantee' from the rest of society? If people take a risk, they cannot expect it will always pay off, otherwise it is not a risk at all! This makes a mockery of the whole idea on which capitalism is based. There have to be failures and Governments cannot just prevent them by printing money to bail people out and please the bankers. Thirdly, if all bank deposits are 100% protected, but pensions and other long-term savings are at best 90% safe up to a £35,000 cap, why bother with pensions? Keep all your money on overnight deposit and forget about investing longer term. This is the opposite of what we need as society ages.

We urgently need to get away from short-term thinking. Here are some suggestions.

Banks are short of liquidity. They need longer term money _ why not only offer a guarantee of safety above £50,000 for money that is tied up for a longer time? Why not only offer a guarantee if people are willing to forego interest on the money and use the interest to shore up the system? At least that would be some quid pro quo.

Promising that taxpayers will print money is not a solution. Some banks cannot pay the money back and have to fail. Of course it will be painful if people lose money, but that is what has to happen if the system is to survive and thrive again. .

I believe that Mervyn King can see the longer term dangers and the futility of the short-term panic measures being taken. He has not been able to voice his concerns but they are valid. We cannot avoid recession, it is inevitable. The bubble has burst and the authorities cannot just keep trying to blow it up again. Having lived beyond our means for years, it is time to retrench. The markets will have to find a level from which they can start to recover and that will be painful for all of us but it is the result of many years of unsustainable growth and borrowing from the future which has to be repaid. It is time for straight talking, not throwing good money after bad. But the politicians and financial experts who got us into this mess have not understood that short-term thinking is responsible for the crisis. Until they do, they will not take the necessary measures to start a recovery. That economic recovery is some way off as there is so much debt to be repaid first. We need canny policymakers to steer us through these difficult times, not to destroy pensions as the population ages."

Two very differing reactions have been received from readers

I had a lot of money in this bank. I pulled as much out as I could when I heard of the Icelandic problems a few months ago. But I had £250,000 stuck in a bond that I couldn''t get out. When I opened this bond in January, Icesave was triple AAA rated. I wasn''t taking a risk in any realistic sense of the word. If one has a lot of money that one wants to save, what does Dr Altmann expect? you have to open up 30 bank accounts with £50k each. There aren''t even that many umbrellas available in the UK. Icesave had a huge British customer base due to its aggressive marketing and constant advertising and reports in the UK press. It wasn''t akin to placing my money in The national bank of Argentina. We''ve all learnt a lesson here, from the Govt. to financial journalists to consumers. I''m glad I will be receiving my money back and think it would have been very harsh had I not:

D Crown

Rather than condemn those savers who deposited money with Icesave, the government should not have allowed this bank to operate in the UK in the first place if it was not able to cover the guarantee deposits as with British banks. Saving should not be seen as a risky business, if it is then why bother you may as well live for today and let the tax payer support you in old age. I don''t suppose Dr Ros Altmann has money invested in Icesave so it easy for her to criticise the current pay back scheme. After all it was on the advice of so called financial advisors that many innocent investors have money deposited in Icesave accounts in the first place.

A Freshwater

and a few more ....

I would like to add the above comments, I am also an Icesave depositor. Yes I was attracted by the high interest rates and yes I was aware this was a foreign bank, however deposited less than the 50,000 compensation limit feeling reassured that in the event of the institution failing my savings would be safeguarded by the passport compensation scheme, which is a minimum requirement under EEA/EU law, I was not to have any reason to believe the the Icelandic authorities would default on their obligations. The UK authorities in particular the FSA need to take a certain amount of responsibility for allowing these institutions to take deposits in the UK knowing that the liabilities of these banks far exceeded their home countries capacity to honour compensation guarantees. The UK government were right to step in and help Icesave savers, whether it was right to extend the guarantee beyond 50,000 is another matter. We should bare in mind that there are numerous foreign institutions in the UK that take deposits under the passport scheme including ING Direct and Allied Irish Bank, if there is any concern going forward that foreign governments could not meet the liabilities of these banks in the event of failure then the UK government should immediately take action to prevent them taking deposits or they will again have to put tax payers money on the line. The average UK consumer is not aware the complexities of the banking system and various credit ratings, balance sheets, matters surrounding liquidity and nor should that need to be that is an issue for the government and regulators.

D Marsh

Dr Altman is critical of the government''s decision to gaurantee Icesave deposits, without making reference to their main reason for doing so, ie to help maintain confidence in the financial system. In this respect, her article unfortunately misses the point.

C West

I agree with Ros Altmann. Why should UK taxpayers compensate UK citizens who knowingly invest outside the UK? They made their own choices and should be big enough to live with the results. I suspect many thought they were smart and didn''t seek proper advice. Why should the rest of us bale them out. They were greedy rate chasers, not prepared to do their own due diligence checks, and now they have the cheek to plead ignorance! Had they taken proper advice they would have been told that AAA credit ratings are meaningless. If they had a modicum of common sense they should have realsied, or been asking the question, why a foreign bank was able to offer significantly higher rates of interest than UK banks. After all, Iceland is not known for it''s financial services system! I find it astonishing they will receive all their money back, I personally favour them only receiving the first £50,000. Otherwise we are fostering a culture in this country where people will expect to be compensated for their own actions that subsequently prove to be mistaken. That is wrong. Advise yourself, take the consequences. Advisers have to pay horrendously expensive professional indemnity premiums for the luxury of advising the public so why should the public be allowed to badly advise themsleves and it costs them nothing when things go wrong only to be fully compensated? As for the councils? When will the Finance Directors witin these councile be brought to book. I haven''t heard of any of them falling on their swords yet?

David Johnstone, IFA.