Is your money safe in Euros if the Greeks default?
Foreign currency savings accounts are not the magic bullet to protect your dosh in a crisis, finds Roisin Burke
A big fat Greek default is on the cards and the Lehman's style spillover might have a dire domino effect on Ireland and the euro.
People are worried about Argentina-style hyperinflation making their money worthless or a government smash and grab on their precious savings if everything falls apart. What to do to protect money is the hot topic of the hour.
"This is being discussed at the board tables of business, charities, you name it," says Niamh Cahill of Irishdeposits.ie. "The deposit rate of interest has been very much relegated as the most important concern, what's important now is safety."
So, if the worst came to the worst, what might happen?
"It could be one of two things," says Cahill. "The Government could say 'as of tomorrow we're going to devalue all deposits and loans on the balance sheets of banks in Ireland'. Or else they could say 'we're going to devalue all euros originating from Ireland'. That would be a logistical nightmare, but it's possible.
"More recently, with the sovereign debt issue in Europe escalating again thanks to Greece, people ask: 'Well I have diversified and my euros are in foreign banks in Ireland, but are they still safe if anything happens to the euro?' I think in general they feel that they probably wouldn't be."
There are two risk concerns investment clients are asking about, according to financial adviser Vincent Digby of Impartial. "First there is the credit risk -- what happens if Ireland defaults or restructures debt. What would the impact be on personal deposits or company deposits or money? Could the bank put a levy on it, or could the bank impose controls where you couldn't access your funds?
"Second is the currency risk -- what happens in the unlikely event of us being kicked out of the euro or choosing to leave the euro?"
How any exit would play out is the sixty-four million dollar (or rather multi-billion euro) question.
"The expectation," says Brian Culliton of Trusted Advisor Group, "is that the new Irish currency would depreciate significantly against the euro if it continued to exist, or depreciate against the harder euro economies' currencies such as Germany's in the event of a total break-up. Ireland exiting while the euro continued to exist is thought to be extremely unlikely. It is more likely that there would be a complete break-up," he says.
"The theory is that the Irish Government would impose exchange controls to prevent a rush of assets out of the country. This is speculation and it's not clear that this would actually happen.
"But if that were the case, the follow-through would be: Irish deposits in Irish banks would most likely be re-denominated in punts, with no translational benefits if the new currency depreciates. It's not at all clear that this would happen, but it would follow on from an imposition of exchange controls.
"By the same logic, holders of euro deposits in non-Irish banks based in Ireland are unlikely to benefit as the accounts would be redenominated in punts, with no translational benefits."
So if the worst of all worsts occurs, your savings here are exposed. However, moving your money offshore to a foreign currency account comes with a whole shooting match of other risks.
Foreign A/C THE pros
"If you have debts in another currency, such as a sterling mortgage for example," says Digby, "then a devaluation of the euro and its changing into say the punt would mean your debt would go up by the extent of the devaluation. So in that case you do really have to look at doing something to hedge that risk."
Equally if you're receiving or making rental payments outside the eurozone a local currency account may makes sense.
"Also for someone who is either intending to live abroad or who spends a significant portion of the year out of the country, in that case their Irish 'punts' abroad would be worth less and this will have a real impact on their purchasing power," Digby says.
If you have business interests outside the eurozone it may also have solid advantages.
Foreign A/C THE CONs
The biggest problem is that you -- literally -- become a currency speculator.
"You have to be clearly aware that the currency could move against you by 15 or 20 per cent," says Digby. "If someone's living in Ireland and spending euros, they're going to have to convert back at some stage. People need to know that the principal amount could be a lot less when they do."
Niamh Cahill agrees. "Over US$4 trillion is traded every day in the world and in excess of 90 per cent of that is speculation linked to trade. If you're trying to make an informed bet around whether a currency will get stronger or weaker you haven't a hope in hell."
The euro breaking up or our being kicked out of the eurozone is "still a long shot" says Digby. "Even if that comes to pass, if you're based in Ireland and all your assets and your liabilities are based in Ireland, you'll be broadly insulated from a devaluation.
"If it were to happen you can only imagine that import prices would go up dramatically and therefore inflation would be higher and yes, over time, your spending power would be eroded, but it's more of a longer term drift impact than an immediate problem."
A foreign account means you'll be missing out on higher interest yields at home. "The interest rates would be nowhere near as attractive compared to the deposit rates in the Irish banks," says Digby.
If you open a bank account outside the EU, you also end up paying at the marginal rate of tax (nearly twice the rate of DIRT) and there are likely to be embedded costs and charges attached as well.
Digby feels overall money here is well protected. "The €100,000 deposit guarantee scheme was issued under EU directives, and I would be very comfortable to say that would be paid in full if it was ever needed. As it's €100,000 per person, per institution, if you've more than €100,000 you can simply diversify across the credit institutions."
Most Ireland-based financial institutions offer foreign currency accounts.
Friends First's Insight Currency Fund is looked after by fund managers Alder Capital. The HSBC has an offshore savings account, as does Investec. The mainstream banks (Bank of Ireland, AIB, National Irish Bank, Permanent TSB and Ulster Bank) all have non-euro accounts.
Most are bog-standard deposit accounts in the foreign currency of your choice. "At any rate, the same principles apply in a structured product, in terms of currency risk" says Niamh Cahill.
"The statistics around speculation and foreign exchange are still the same, whether you're in a structured product or not.
"You need to drill right down and understand what you're getting: ask is there a guarantee, and if it is a tracker-type product."
"There are a wide range of other options to hedge the credit risk," says Vincent Digby. "We help people open deposit accounts in Deutsche Bank in Germany, there are also German bonds, and other money assets.
The interest rates on a German deposit account will not pay you anything like the yield you can expect at home. "It's for security, it's where people say: 'I want to know in 12 months that my money is safe where it is.' If Ireland leaves the euro and you have German bonds or a German bank deposit account, they'll either stay in euros or, if the eurozone breaks up entirely, they'll go back into Deutschmarks -- and under most people's thinking should appreciate considerably.
"That might be a more appropriate way of managing the currency risk for people who are looking for capital preservation.
Cahill advises spreading risk. "Diversify between a number of banks whether it's in Ireland or outside. For a very big portfolio, say €10m, that could include putting some into foreign currency, but you don't want someone taking their life savings and just lobbing it into sterling.
"There is no perfect hedge," says Culliton, "but, the following are worth consideration.
"Buy German, Swedish, Danish, Swiss or Norwegian bonds (that is, strong non-Eeuro, or strong euro government bonds). The downside to this is that you will be lending your money to these governments for not much more than 3 per cent a year, but this would seem like a pretty attractive deal in the event of a eurozone break-up.
"The simplest, though not the most effective hedge in the event of penalties, is investing in unit-linked funds which hold non-Irish assets."
Buying precious metals like gold is another, though that comes with its own risks, given the talk of a gold/silver bubble.
Overall, keep a sense of proportion, advises Culliton. "No matter how persuasive the narrative backing up a particular investment thesis, investors should not base investment strategy around narrow predictions, that may have a 10 or 20 per cent chance of occurring. Don't build your investment strategy around one possible outcome. Consider all possibilities."
Sunday Indo Business