Irish troubles could affect UK investors

There will be knock-on effects from the crisis gripping our neighbour
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The Independent Online

Irish eyes are certainly not smiling as the once proud Celtic tiger economy lurches from crisis to crisis. But this is no remote problem to be viewed by British savers and investors from afar.

Our two countries are joined at the hip when it comes to the banking sector, with estimates of British bank exposure to Irish debt standing at ¤160bn – more than the Government spends on social security and defence combined.

In recent weeks, the Irish government saw the yield on its 10-year bonds soar to more than 9 per cent as traders became increasingly concerned about its ability to repay the debt. Ireland is yet to apply for a bailout, but there is mounting pressure for it to do so in order to rein in the bad debt that is crushing its banks. British investors cannot ignore the risks for our own banks either, with shares in UK banks likely to remain volatile until the issue is resolved.

"Unfortunately, many of the UK's major banks are heavily invested in Ireland, since it is a key trading partner," says Chris Nicholls, the managing partner at Investment-advice-online.com. "Therefore, the major British banks like Lloyds and Barclays, who have backed companies in Ireland will have more bad debts to cope with."

Royal Bank of Scotland (RBS), 84 per cent of which is owned by taxpayers, is the most vulnerable of the British banks. It has a £4.3bn exposure to Irish debt, according to figures disclosed by the Committee of European Banking Supervisors as part of a "stress test" in July.

Despite the concerns for some of Britain's banks, however, most UK investors have little to worry about in terms of the stock market because Ireland accounts for such a tiny proportion of FTSE earnings.

"The Irish economy isn't going to be a big part of a diversified portfolio. Exposure to the US and emerging markets far outweigh that of Ireland so it's only going to have a small impact," says Jonathan Jackson, the head of equities at investment house Killik.

That's not to say that British investors will come away from the Irish crisis completely unscathed. Ireland is the UK's fifth largest trading parting and the UK is heavily dependent on the Irish and the European economy as a whole.

Experts do predict some volatility in European bond funds, mostly due to concerns over a possible knock-on effect of Ireland's woes in Spain and Portugal, although many expect a relatively quick recovery.

"Since Ireland is in the eurozone, it is likely to receive substantial aid from other nations. Having learnt their lesson from Greece, eurozone nations know they have to act quickly and confidently in offering assistance. This will reassure the markets and European bond funds are not likely to be too heavily affected in the long term," says Mr Nicholls.

Another issue for investors is that if Ireland does take a financial aid package, the country could well be compelled to raise corporation tax. At the moment, it stands at 12.5 per cent, compared with 33 per cent in France and 30 per cent in Germany. If Ireland is bailed out by these countries, it will be under pressure to increase this rate. This will have an impact on the European and UK companies such as WPP and Shire Pharmaceuticals which have moved operations to Dublin in recent years lured by the low tax. Any investment sector exposed to consumer spending in Ireland, such as retail companies, will be also vulnerable.

"Perhaps the biggest impact on equities is likely to be one of sentiment. There is no doubt austerity measures will reduce funding for infrastructure and public spending which will have a knock-on effect on suppliers," says Danny Cox of IFA Hargreaves Lansdown.

The problem for British investors concerned about their exposure to Ireland is that there is little they can do to protect their portfolios now. Moreover, it is difficult to pin down the level of exposure to one particular country in a portfolio made of various funds and individual companies all with different holdings.

"Markets are good at seeing what is coming down the track, so with the Irish economy already on its knees there's not much investors can do in the short term," says Tom Stevenson, an investment director at Fidelity.

Rather than trying to Ireland-proof their portfolios, some seasoned investors might even view the problems in Ireland and the rest of the eurozone as a long-term investment opportunity. Adrian Lowcock of IFA Bestinvest recommends Ignis Argonaut European Income and Neptune European Opportunities.

"The best way to access any upside to this would be through a European equity fund which will invest across euro-denominated countries and companies which will benefit from weakness in the euro in the long term," he says.

However, this move is recommended only for professional investors or those particularly experienced in buying sovereign or corporate bonds. For most investors, the message is to hold tight and tweak their portfolios so that they hold a mixture of assets to protect their money.

"For investors who are heavily exposed to Ireland, last week would have been painful. But if you're someone with investments across developing and emerging markets, equities and bonds are much better placed to ride out this volatility," says Mr Stevenson.

British investors with their money in cash may well be more concerned – two million Britons have placed their savings into the Bank of Ireland and 100,000 in Anglo Irish Bank. Many hold long-term fixed deposits in these banks and would suffer interest rate penalties for withdrawals, leaving them with little choice but to stay put.

The good news is that money tied up in Irish banks does have considerable protection in place. Firstly, British subsidiaries such as the Allied Irish Bank UK, are covered by our own Financial Services Compensation Scheme (FSCS). And as of 1 November, savers with money in the Post Office, which is operated by the Bank of Ireland, are also covered by the UK scheme.

For deposits in many of the Irish banks, building societies and credit unions, savers can turn to the deposit guarantee scheme which protects up to ¤100,000 (£85,000) per person, per institute. For savings above this, the Irish government's eligible liabilities guarantee (ELG) covers 100 per cent of deposits until 30 June 2011, or when fixed-term accounts mature.

This protection is only for deposits placed after the bank joined the ELG scheme, however. For Anglo Irish savers, the account must have been opened after 28 January 2010 and Bank of Ireland accounts must have been opened after 11 January 2010. Investors must also remember than any guarantees from the Irish government do rely on the country remaining solvent. For the thousands of savers who had to rely on the British Government when the Icelandic protection scheme failed to come up with the goods, this may not offer enough assurance.

"Regardless of the Irish problems and whether an Irish or UK bank, investors should already be keeping their savings below the FSCS protection limit of £50,000 per person per institution. This protection is due to rise to £100,000 from 1 January 2011 so investors with higher deposits should be aiming to reduce their exposure to within the FSCS limits," says Mr Cox.

Expert View

Adrian Lowcock, Bestinvest

'The likelihood is that we will see volatility in markets, but it may only last a short while before rebounding. A repeat of this scenario is more likely with the sovereign debt issue in Europe receding and returning for some time. Investors should make sure they are well diversified.'

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