Trying to stop the dwindling of savings, the Serbian government decided to raise the guarantee for bank savings to 50 000 Euros. This may have satisfied some bank savers, but it also gave satisfaction to all those who support government intervention in the economy. There are several problems with this guarantee, but the main problem is the fact that it is not covered. Therefore, it means nothing.
It doesn’t take a lot of brains to see that. By guaranteeing the deposits up to 50 000 Euros the state in fact guaranteed around 90 % of total savings in Serbia today. With the savings in Serbia amounting to around 5.7 billion Euros, that means that the state guarantees for around 5.1 billion Euros. What can the state guarantee this with? With what it has access to and that is the budget. The budget’s addressees are the taxpayers.
The budget of Serbia, however, is around 8 billion Euros. This would mean that the state is issuing a guarantee for around 64 % of the budget. According to the (current) law a guarantee must be paid in full in 90 days, if the savings in commercial banks are lost, that means that the guarantee is completely without coverage. If the budget is regularly filled at the same pace, there is no single three month period when 5.1 billon dollars is accumulated. The most that can be accumulated in three months is a quarter of the budget – i.e. around 2 billion. This two billion Euros will be available only if not a single Euro is paid for budget expenses, which is impossible.
Because two thirds of Serbia’s budget is needed for the guarantees for bank savings and because there is no three month period in which that amount could be accumulated – the most that can be accumulated is 2 billion – the Serbian government’s guarantee is completely without coverage. To say that is to put it mildly. What really should be said is that this is – consciously or not – deluding bank savers, deceiving them etc.
In case the guarantee has to be activated, the government would have to say it lacks the means to do it and it would need to reschedule the guarantee. This would bring a new round of “the old foreign currency savings”. What would follow is a period of 10-15 years for the payments to be made, just like the 15-year period we’re in that will last until 2016.
Therefore, as far as the government is concerned, the bank savings are already considered to be “old”. Now you can only pray to high heaven that a situation where the government guarantee needs to be activated would not arise.
It is not impossible for this crisis to end without the guarantee being activated. This, however, does not justify the government’s empty promises. The government is obviously following similar examples throughout the world, with the US government guaranteeing for the deposits to $250 000, and some European countries even up to 200 000 Euros. You can horseshoe a horse, but it is pointless to do it to a frog. Its legs simply cannot lift a horseshoe.
Some other things deserve a comment. Perhaps someone remembers that until several years ago the state guaranteed bank saving to 5000 dinars. Then the guarantee was raised to 3000 Euros. If now the guarantee was raised to some 10 000, it could be perceived as following trends. Although this too would exceed the budget’s economic strength.
This seemed not enough to someone, so he raised the guarantee 17 times. This demonstrates the state’s panicked and insensible reaction. I guess this should compensate for the late reaction and blind us with the amount, so we stop thinking and leave our savings in the bank.
In the end, here’s some economic analysis. In a free society bank savings should not be guaranteed at all. It would be up to the bank saver to make inquiries about the bank’s quality and take their money where they think it is best. Saving money is a business venture like any other. It is subject to risk and as a compensation for their risk – the savers get interest. The state will not cover someone if his café or bakery goes out of business. If it won’t do that, why is it guaranteeing bank savings?
When central banks were founded there were no guarantees of this sort. Then they started issuing symbolic guarantees. Now the guaranteed amounts are no longer symbolic.
The guarantees led to a proliferation of moral hazard and negative selection. If there is a guarantee for even a part of the deposit, the individual has no interest in making inquiries about the quality of the bank in which they deposit their money. That is why many people take their money to bad banks. It is paradoxical that the individual is very careful when they are buying a refrigerator or a car, and not when they are taking their money to the bank, although more money is at stake than the cost of a refrigerator or a car. Instead of lowering the risk of saving, the guarantee makes it higher. And it enables bad banks to survive in the market along with the good ones – so we have negative selection.
In this light the bank savings guarantees are economically pointless. But this was disregarded by almost every relevant state in the world. Ours is not one of those, but it looks up to them. By doing that it joined the dominant economic stupidity. But since the bigger and stronger practice it, it could be “understood”. What cannot be understood is that no one reached for the pocket calculator to work out how much can be guaranteed. And guarantees without coverage are no guarantees at all. What remains to be seen is how the bank savers in Serbia will react to this guarantee without coverage.
Translated by Ivica Pavlović
Peščanik.net, 22.10.2008.
