A few days ago a friend called to inform that he won a substantial prize through a saving scheme promoted by a financial institution.
Given the increasing number of lottery scams, I was in no hurry to congratulate him. My first instinct was to check the name of the bank and its country of origin. Eventually I discovered that the prize is genuine and the institution in question is a reputed UAE bank that has a long history of running prize linked savings (PLS) schemes.
PLS is a kind of savings account that pools some of the interest from all depositors and pays out a big lottery prize every month or so. Such schemes have been successfully used by banks and credit unions across the world for cost-effective liability management.
In a paper titled ‘Making Savers Winners: An Overview of Prize-Linked Savings Products’, Melissa Schettini Kearney, a University of Maryland economist, Peter Tufano, a Harvard Business School professor (available at http://www.nber.org/papers/w16433), suggests PLS schemes can be effective tools to convert spendthrifts into born-again savers.
While the virtues of savings have been long disputed by demand side economists, especially Keynesians, who swear by the mantra of effective demand, the debt delinquent sovereigns of Europe seem to be competing to prove that savers could be the ultimate losers.
As Europe’s sovereign debt crisis is fast metamorphosing into a full-blown banking crisis, the continent’s savers are facing the prospect of losing all they have in their bank accounts. Analysts say if Greece is to exit the euro and return to the good old drachma, its currency probably would suffer an immediate devaluation of as much as 75 per cent against the euro. In such an event depositors in other nations might decide to withdraw euros from banks or shift them to countries seen as safer.
Banks in Greece, Ireland, Italy, Portugal, and Spain saw a decline of €81 billion ($103 billion), or 3.2 per cent, in household and corporate deposits in the last 15 months up to April, according to the European Central Bank data. On March 30, Greece had €160 billion of bank deposits, down almost €75 billion from the peak in 2009, central bank data shows.
In Spain, the government seems to have lost its latest effort to restore confidence in the financial industry. On May 9, the state took control of Bankia, a leading bank and recapitaliszed it with a €4.5 billion. Bankia recently revealed that it needs at least another €19 billion to stay afloat. Last week, the government admitted that its borrowing costs are too high to bail out Bankia. But made a sly proposal to recapitalise it with €19 billion worth of Spanish bonds that Bankia could use as collateral at the ECB for new money.
As expected the ECB refused to recalibrate its currency printing machines to suit Spanish requirements. Insolvency of the government and its implicit inability to bail out banks could mean it is time depositors began their final run.
Liquidity, safety and yield are the prime motives of anyone entrusting his/her money with a bank. A chance of a big win from a saving as my friend experienced last week is indeed a bonus. But for many European savers, under the current circumstances a reasonable opportunity to withdraw their deposits appears a bigger bonus.
