‘One step forward and four steps back’ could be the story of the world’s personal finances these days.
Since last summer when the global banking industry finally burst into flames – after its trouser pockets had been left smouldering for a few years with no one paying much attention, the stock markets and the price of many other assets and consumerables have been spectacularly erratic; up and down, up and down – and then mostly down.
Here in Ireland, we’ve seen plenty of examples of this, with many food items and oil products soaring in value earlier this year, but now coming down in price.
Cars are getting cheaper, so are houses (still), furniture, holidays, electrical goods and many other items. The higher home fuel and electricity bills we were warned to expect in January now don’t look like they’ll happen either as oil prices drop below €50 a barrel.
This looks like very good news, but it’s also a sure sign that the recession is moving to another level. It was looking like stagflation had taken hold, that is, prices were going up while the economy and ‘growth’ stalled.
Now, as a result of the banking melt-down and the impact it is having on spending, company profits and jobs, it looks like we are entering a dangerous deflationary phase.
This is where asset prices keep falling (houses, stocks and shares, consumer goods AND wages) and everyone is reluctant to buy anything because they believe those prices will fall even further.
Last week, the ‘one step forward’ event happened when it was allegedly proposed by the Minister for Finance and bank regulator that the six Irish banks should be merged into two mega-banks to solve our banking crisis.
“Two banks that will then be ‘too big to fail’ with all that involves” said one banker, bitterly.
By the time you read this, the deal may have been sealed. But the suggestion is that the Permanent TSB, Anglo Irish Bank, Nationwide and EBS building societies bosses don’t think it’s a very good one, especially if foreign private equity investors get up to 40 per cent of the shares in the two new merged banks in exchange for their much needed billions.
So how does this affect the ordinary banking customer or shareholder? Not very well, I suspect.
Bank shareholders have already been nearly wiped out by the collapse of the ISEQ and a merger or part takeover of the banks will probably dilute the number of bank shares you still hold.
Competition will be certainly be curbed if four banks are taken off the high street, though of course Ulster Bank, National Irish Bank and Halifax will still operate here, plus the on-line, mainly deposit banks, RaboDirect, Northern Rock, PostBank, Leeds and of course An Post and the credit unions.
Presumably many of the 250,000 people who switched to the Permanent TSB from other banks in recent years to take up their attractive current account and mortgage deals will be unhappy if they are forced to switch to Bank of Ireland.
However, this was the deal that was made when their bank agreed to the €500 billion guarantee of all savings and loans.
The four smaller players want to create a third pillar (that would also include Irish Life) to compete against the recapitalised AIB and Bank of Ireland.
They also want a share of taxpayer’s money in order to do this (ideally taken from the National Pension Reserve Fund.) So far, neither the government nor the markets seem to think this idea is very feasible.
It is going to take a great deal of time for bank mergers and consolidation to happen, whatever the final arrangement.
Your savings are still guaranteed but your personal loan, mortgage and credit card debt will still have to be paid on time. Shareholders will probably find their shares will be diluted and will not be worth what they were at their peak for a very long time.
Any merger process will take up enormous cash and people resources within all the banks, probably to the detriment of customer service and the launching of new products or services.
But I also think we can expect to see a lot of effort by An Post, local credit unions and the non-Irish owned banks to try and fill that vacuum. Certainly you will need to be even more diligent about your bank accounts and statements during this chaotic period.
Anyone whose bank affairs are already in a bit of mess – that is, you’ve been meaning to close dormant accounts and cancel that standing order – might want to sort it out sooner rather than later.
A mass bank merger is not going to be a pretty sight, especially if half of the banks involved (and their employees) believe it’s nothing but a shot-gun marriage.
Next week: Private health insurance premiums to soar?
* The new TAB Guide to Money Pensions & Tax 2009 edition, co-authored by Jill Kerby, Sandra Gannon and Neil Brooks is now available to MoneyTimes readers for the reduced price of €10 plus €2.50 p/p (instead of €15). Call 01-6768633 to order a book or e-mail firstname.lastname@example.org