Ireland’s dastardly new savings product

June 23, 2010

A standard trick in the consumer-facing financial services industry is to appeal to people who are sure they’re going to have no liquidity or cashflow problems in the future, and then make lots of money off them when the inevitable crunches happen. Free checking, for instance, becomes extremely expensive checking when you overdraw your account; and people regularly buy items on their credit card intending to pay the statement off in full, but then fail to do so, incurring substantial interest payments not only on that one item but on everything else they bought that month as well.

In the U.S., some kind of consumer financial protection agency is going to be created to crack down on the worst excesses along these lines. In Ireland, however, the government seems to be interested in taking a leaf out of the predators’ book with its new savings product, the National Solidarity Bond. You can download the brochure for these things here, but the basic structure is quite simple and dastardly: the bonds pay a coupon of 1% per year, and then pay out a massive final tax-free coupon of 40% of the initial investment at maturity in 10 years’ time. And then there’s the clever twist: you can pull your money out at any time, with just 7 days’ notice.

It’s trivially true that this product makes very little sense as an investment product unless you’re going to hold it to maturity. And it’s also trivially true that the number of people who end up needing to get at their money at some point in the next ten years is going to be substantial. It’s a bit like the life insurance industry, which is profitable only because of the people who stop paying their premiums and therefore never get any payout at all.

So while this is a clever way for the Irish government to raise some much-needed long-term funding, I also think it’s a little bit evil. And it’s very hard indeed to recommend this product to anybody.

(Many thanks to Alex Rolfe for the tip.)


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