Pound & Euro Saver

I decided to open an ISA with Northern Rock. I think there is indeed a kind of arbitrage for any person with an ISA with National Saving and Investment (the other retail saving bank owned by her Majesty Treasury):

• Britain is falling into recession and interest rate cut by the Bank of England are more than likely. Some analysts are expecting the rates to be around 2% next year.
• NS&I is paying 0.3% above the Bank base rate (4.8% now). It is likely to go down by next year with the Base Rate
• The Rock is and is likely to remain for the term of the fixed rate (3 year) a safe bank under state ownership. It will be backed by the government during the crisis.

Now the only question is to chose between 1, 2 or 3 years? The question is rather important as the longer the maturity, the more interests you loose when accessing the money.

• On a economical point of view, I would definitely go for three years as I can't imagine the bank of England raising its rates soon in the middle of the downturn. Moreover with the government becoming more active, the spread between LIBOR and the bank rate will fall. Banks will not have to offer high rate saving accounts as they will be able to borrow from the market.
• On the liquidity side, the main issue for me was when will I leave the UK. I now have a date in mind so let's roll !

The facts

Numerous city councils in the UK were investing their money (the proceeds from the taxes paid by people) with some the Icelandic banks who went bust last week. Those councils are now asking for the government to "guarantee" their deposits. .

So far, the Chancellor refused to give them financial guarantee and judged that these councils should have get sounder financial advice. Margaret Eaton, chairman of the Local Government Association, said that councils are spreading their assets to ensure the maximum return for their investments.

A few comments

I think this is a very odd situation.

On one hand, we have been recently hearing politicians from each side calling increasingly for the persons "responsible" to be punished. I think those kind of comments are very stupid especially when this crisis is the result of several years of common hysteria. Politicians will point out a few culprit whereas they will never take heir responsibility for not enforcing the insufficient regulation they had designed in the past. They purposefully closed the eyes on a situation that was favorable to them: voters are usually more easy to handle when they are enjoying a strong growth period (even if it is a growing bubble).

On the other hand I am still scrutinizing the newspaper to read about the resignation of the people that where managing the money in these councils. If we are about to do a which hunt let's start with the easy culprits They were not innocent victims.. If you are managing someone else money you are required to be a fully qualified investors. You have to know there is no free lunch and if you are getting a higher return their is a higher risk. Do they even know about risk adjusted returns?

Newspaper have been discussing about a potential collapse of this bank for more than a year now. You can gamble with your own money (and its even easier when there is a compensation scheme to help you) but things are much different when you are paying with tax payers money..

ps as I am reading this article I just discovered that Universities and hospitals money managers were also investing in these banks ...

... and Chuck Norris has not fixed the credit crisis yet

Anyway that is still funny