Key Post Protecting your savings against a euro breakup

Discussion in 'Deposits' started by Brendan Burgess, Nov 23, 2011.

  1. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    32,821
    I am grateful to the many contributors who have made valuable suggestions as to the content and layout of this Key Post. To make the thread easier to read, I have deleted the suggestions after incorporating them into this Key Post - Brendan Burgess

    Most of these issues have been discussed in this thread from November 2010 on the saftey of deposits generally.

    What might happen?
    There are three main categories of outcome:

    • Ireland remains a member of the eurozone and the euro maintains its value against the major currencies
    • Ireland remains a member of the eurozone but the euro depreciates in value significantly or collapses entirely.
    • Ireland leaves the euro and the punt nua becomes worth a lot less than the euro and other major currencies
    Despite people's confident forecasts, no one can really predict what will actually happen, so prepare for all eventualities.

    Everyone's finances are at risk, and while you can diversify this risk, you cannot eliminate it.
    The most important thing to realise is that there is nowhere totally safe and risk-free for your savings. You might protect against a collapse in the euro by opening a sterling account, for example, and then find that the euro rises in value against sterling so your savings will be devalued.

    The Financial Times has a good article on what might happen.

    You should probably use your savings to reduce your mortgage or any other borrowings
    If you have a mortgage or other borrowings, you should probably use your savings to reduce that mortgage. This reduces the overall level of risk. Some people comparmentalise their savings separate from their mortgage e.g. “This account is my child’s education fund and I don’t want to touch that”. This doesn’t really make any financial sense. It is better to use such funds to pay down borrowings. Your overall wealth will increase.

    A problem arises if you have a cheap tracker mortgage. As you can get 4% on deposits, it doesn’t make much sense to pay down a mortgage on which you are paying 2% interest. You could ask your lender if they will give you a discount for paying off your cheap tracker mortgage.

    Should I use a lump-sum to reduce my mortgage?

    If Ireland leaves the eurozone, no one really knows what will happen. It is likely that your savings in Irish banks would be converted into punts which would be worth less. It is also likely that your mortgage would be converted into punts so mortgage holders should benefit. So some people believe that you may be hedging your risks by having savings and borrowings in euro. But as no one really knows what would happen, I think that the most risk free option is to pay off your mortgage.

    Summary of options - all these options are perfectly legal


    • Transfer your money to a German bank account
    • Invest in German government bonds - Bunds
    • Open an account in a bank outside the eurozone - sterling, Swiss Francs, US Dollars, Norwegian Kroner, etc
    • Open a foreign currency account but in an Irish bank
    • Hold some actual euro notes
    • Buy Irish shares which have significant foreign currency earnings
    • Buy German shares or other foreign shares
    • Buy gold or some other precious metals or commodities
    • Buy property

    Is moving your money out of Ireland unpatriotic?



    Transfer your money to a German bank account

    It is assumed by the vast majority of people that if the euro collapses, the German euro will be the safest currency. This would be my opinion also, but the vast majority has often been wrong in the past. Why would you want to move your money to Germany?

    This is an increasingly popular option and Irish brokers are now offering to set this up for you. Some people have managed to do this directly without visiting Germany.

    Pro

    • You are linking to the anchor-tenant of the Euro. In the event of a break-up of the Euro-zone, it is conceivable that the value of German currency (either DM or Euro) would rise in relation to the new currencies of economically-weaker countries.
    • In the event that the Eurozone doesn't break up, you don't have to worry about unfavourable foreign exchange fluctuations
    Cons

    • Interest rates on offer are quite low in comparison to Euro deposits in Ireland. German banks do not have to offer high interest rates to attract deposits. If there is no Euro-break up, then you are at least likely to forfeit higher interest rates available from some Irish banks.
    • There is no guarantee that the deposits of Irish residents would be converted to German currency in the event of a euro-zone breakup.
    • You're likely to have to pay a few hundred in fees or airline tickets to get a German account set up.
    You would need to be careful about the safety of the German bank and check out the German deposit guarantee scheme.

    You can open an account with DKB bank without travelling to Germany, but you need to be able to speak some German.

    Deutsche Bank is another popular option for Askaboutmoney users, although you have to travel to Germany.

    Some Irish based brokers will open accounts for you in Germany for a fee, so you don't have to leave Ireland.

    Others have suggested opening a euro account in either Switzerland or an offshore location such as the Isle of Man


    Investing in German government bonds


    Pro
    • These are considered by the markets to be amoung the safest assets within the Eurozone
    • In the event that the Eurozone doesn't break up, you don't have to worry about unfavourable foreign exchange fluctuations

    Risk
    • Bond prices rise and fall. You're going to be watching bond yields, and if German yields increase after you buy, your investment will fall in value.
    • German bond rates are very low right now. You won't get much interest and some commentators feel that there is more downside risk to German bonds right now

    German deposit account or German bunds?

    Discussion of German bunds on The Property Pin

    A step by step guide to buying bonds on The Property Pin


    Open an account in a bank outside the eurozone in a non-Euro currency

    Pro
    • In the event of a Eurozone break up and an Irish devaluation, your sterling/dollar/other deposits are likely to retain their purchasing power more than Irish currency.

    Risk
    • You will pay to transfer your money into another currency four times over. First, you will not get the wholesale FX rate when converting from Euro to another currency, so even if foreign exchange rates were absolutely static, you would lose on the margin between the wholesale FX rate and the rate you actually get. Second, you would need to pay transaction fees. Third and fourth, you will pay the FX margin and transaction fees in the future whenever you need to convert back to whatever currency is in use in Ireland.
    • You are subject to fluctuations in foreign exchange.
    • Currency values are not completely decoupled. A collapse in the Eurozone is likely to hit other countries - especially the UK. There is no guarantee that a Eurozone breakup would not have an impact on the value of other currencies especially Sterling.
    • There is also the risk of default by the bank you have your deposit account in.
    • The interest rates in "safe" havens may will be a lot less that those available in Ireland.

    Check out these graphs to see how volatile they have been. In September the Swiss government unilaterally devalued the Swiss franc by 8%


    Don't forget, you must buy and sell. So the costs will be something like this. (I have no idea how much it costs)


    sell 100,000 euro to buy sterling|£90,000
    Sell £90,000 to buy euro on same day|€99,000
    Cost of round trip|1%
    You can reduce these costs by using a transfer company such as Transfermate

    If you take this option, you should not put all your assets into that currency.

    If you open an account outside the euro, but within the EU, the tax rate will be lower than opening it an account outside the EU. Check this post

    Key Post

    Australian dollars

    Swiss banks


    Open a foreign currency account but in an Irish bank
    The Irish banks will open foreign currency accounts for you, but I am not sure how easy it is to do and if you can get deposit interest. I opened a sterling account with AIB and closed it again after a few months as the administration was just too complicated.

    If the euro collapses, it is likely that there would be enormous question marks over the solvency of the Irish government and the Irish banks which depend on the Irish government guarantee.

    It has also been suggested that in the event of a collapse in the euro, foreign currency accounts in Irish banks would be converted to the punt nua. Of course, no one knows if this is correct or not, but it is a risk.Discussed further here

    Hold some actual euro notes
    This is discussed in more detail in this thread.

    The reasoning is:
    If Ireland leaves the euro, deposits in Irish banks will be converted to punt nuas which will be worth less than the euros.
    It will not be possible to convert actual notes to punt nuas at some devalued exchange rate.
    So any euro notes you have will retain their value.

    Cons
    The security risk of keeping euro notes in your home, even if you have a safe.
    The lack of interest on notes.
    This does not protect you against a collapse in the value of the euro.



    Buy Irish shares which have significant foreign currency earnings

    Most Irish shares get their earnings in a mixture of foreign currencies, so they are a natural hedge against a fall in the euro.

    Of course, buying any shares is a risky business as shares can fall in value due to other reasons.

    And the cost of buying and selling shares is around 2%, so it's not for a short term investment.



    Buy German shares or a German ETF
    If the euro collapses, it's likely that German shares will survive. However, it's not a one way bet. In the event of an effective revaluation of the German euro, German exporters would find overseas markets more difficult and share prices may fall.

    Of course, buying any shares is a risky business as shares can fall in value for reasons unrelated to the euro.

    And the cost of buying and selling shares is around 2%, so it's not for a short term investment.

    Here is a list of the 30 German blue chip shares quoted on the DAX.

    Just in case anyone accuses me of having a conflict of interest, I have recently added German shares to my portfolio.


    Buy gold or some other precious metals

    Gold has done very well in recent years, but over a 30 year term, gold has not been a good investment. Many people believe that gold is in bubble territory at the moment and that the long-term outlook is poor. Even those who sell gold, recommend that you should not put more than 5% of your wealth in it.

    Buy property
    Property is more like a business than an investment. Your success depends on how well you buy the property and how well you manage it. While property prices have fallen by 50% in Ireland, there is still a lot of risk in property. I am not forecasting that property prices will fall further, I am simply pointing out that property prices may fall further.

    Related Issues

    The Taxation of foreign deposit income


    Key post: Brendan Burgess explains the taxation of foreign deposit income


    Is a euro account in a foreign bank in Ireland vulnerable to a collapse in the euro? e.g. Rabobank, Northern Rock, Nationwide Uk, Ulster Bank
    These are effectively denominated in Irish euro and would face the same problems as euro deposits in AIB or Bank of Ireland.

    Discussed further here
     
  2. 8611

    8611 Frequent Poster

    Posts:
    16
    So what I plan on doing is opening a Canadian dollar account with NIB, the reasons being:

    - not sure of future of euro and as such would prob get more purchasing power from another currency in the event that it collapses
    - even if the euro survives it may well be through the printing of more euros leading to a devaluation, presumably leading to a favourable exchange rate if and when I convert back (this is assuming the Euro is not already trading at a rate where traders have factored in the likelihood of more euros being printed)
    - if I'm wrong all I will lose is the cost of transferring in and out, the currency fluctuations and the interest I would have had elsewhere, I would think I would be unlucky if this was more than 10%
    - I have a child on the way and need access to the money fairly easily (which makes other assets less attractive)

    I am choosing Canadian dollar because:-

    - I have no clue on how to predict currency changes but neither, does it seem, do the experts
    - the US and AUS dollars both seem seriosly volatile whereas the Canadian dollar v Euro has been relatively stable (with a regular trending towards the dollar strengthening v euro)
    - I trust Canada and think its less likely to be affected by a sudden change than AUS or US (profound stereotyping there)
    - both Sterling and Swiss Franc will be badly affected by a euro collapse

    I am choosing NIB because:-

    - they have one of the best ratings of banks still in the Irish market
    - they are also covered by a Danish guarantee scheme as well as the Irish one (which I believe to be close to worthless anyway - if the Irish govt were called to pay it it couldn't)
    - whereas the likes of Investec offer interest on their foreign accounts my reading of their rating by the agencies is very poor (albeit they are covered by a UK scheme)

    My main fears are:-

    - if and when the markets are happy that the euro is safe there will be a bounce in its value and a consequent loss to my deposit
    - in a doomsday scenario my dollars might be converted into Punt Nuas overnight anyway making the entire exercise irrelevant


    Any comments or thoughts on the above welcome!
     
  3. 8611

    8611 Frequent Poster

    Posts:
    16
    Hi, I opened the account but have now gotten cold feet looking at the 5 year graph of Eur / Can - the swings are massive. I'm now thinking of opening a Norwiegan Kroner account instead, swings are much less.

    Either way I'm reluctant as the reality is I will be buying either currency at a time when the Euro is at its lowest against the other currency. So essentially I'm buying at the top of the market and will most likely be buying back at a lower rate, possibly a far lower rate. Some stockbrokers offer a currency trading fund and they, presumably, know more about such trading than I do so that might be a better bet. If, however, the attraction is that my money is no longer in euro I'm not sure if I get that from the fund.

    Interest rate with NIB is 0%. There is a €25 quarterly fee if the balance is less than €10k equivalent. Guy who opened my account was ambivalent as to whether the fee would actually be charged if you had less than the €10k.

    Investec offer the same accounts with varying interest rates. 0% on demand, 1% 1 - month demand etc, up to 2% on 12 month demand.

    I didn't go with Investec as their rating is much lower than NIB. They are (apparently) covered by a UK scheme though. NIB is covered by the Irish and a Danish scheme. I was assured that if the euro went under the account would remain in the other currency.
     
  4. RichInSpirit

    RichInSpirit Frequent Poster

    Posts:
    599
    Agricultural Land

    Agricultural land mightn't be a bad buy at the moment. It has reduced in price a good deal from the developer days but the price seems to be fairly stable now.
    It mightn't be the most liquid of assets but that might be a good thing in a Euro breakup.
    Your cash may lose all it's value and it's relatively easy for someone to take it off you, for example in extra taxes, but land is relatively hard to take off you.
    Plus one could buy as little as an acre of land for around 10k so it's within the price reach of a lot of people.
     
  5. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    32,821
    Hi Spirits

    It's an interesting idea. Back in 2006/2007 there was some good analysis on askaboutmoney. The general idea is that normal economics doesn't seem to apply to the price of land.

    I thought I had written something about a year ago about buying semi-mature forestry which is for sale for less than the crop value. In other words, you are getting the land for free.

    Brendan
     
  6. bullworth

    bullworth Frequent Poster

    Posts:
    646
    Where would one look for agricultural land for figures such as 10k ? Daft.ie wasnt that helpful for example.
    Hi Brendan, where would one look for such plots of semi-mature forestry land ? Are they advertised anywhere ?
     
  7. Spear

    Spear Frequent Poster

    Posts:
    248
    In addition to "buy property", I think it's also worth considering increasing maintenance/upgrades of your existing property, e.g. home improvements, extension, garden design. The goal here would be to pull forward the expenditure that you might be getting around to anyway over the next 5-10 years.

    Additionally, if you have an appetite for it, increase acquisition of tangible assets such as artwork, antiques and jewellery.
     
  8. postman pat

    postman pat Frequent Poster

    Posts:
    312
    Hi,
    also if a person has american shares would this also be an advantage if the euro went up in smoke?

    Pat
     
  9. postman pat

    postman pat Frequent Poster

    Posts:
    312
    Hi Bullworth
    As it happens there is an ad in the back cover of the property magazine of the examiner today for 60 acres of maturing forestry land in Mallow Co Cork,hope this helps.


    Pat
     
  10. dublin27

    dublin27 Registered User

    Posts:
    10
    Not a fan of buying assets which dont yield a return. Property I understand, you rent it out and get income but artwork or wine, I just dont see how these investments work. A poece of art could be anything - probably my ignorance but I dont get art as an investment - it doesnt bring in an income (gold also but it I feel totally over inflated).
    The Euro is going nowhere - people make big money on selling fear. Nothing is going to happen (that may result in an Irish bank not giving deposits).
     
  11. Spear

    Spear Frequent Poster

    Posts:
    248
    As I said, "appetite"
     
  12. celebtastic

    celebtastic Guest

    Cant comment on the strength or otherwise of the Canadian dollar, but by holding your assets in an Irish bank you are still heavily exposed if a run starts on Irish banks

    If you want to hedge yourself completely, then you need to take your money offshore. Why don't you open an account in Canada?
     
  13. celebtastic

    celebtastic Guest

    Yes - unless the shares are held in a trustee account with an Irish broker. There is a very real risk that the broker could fold, if there is a run on the banks here.

    If you hold the shares directly, that should give you a good degree of protection
     
  14. postman pat

    postman pat Frequent Poster

    Posts:
    312
    Thanks celebtastic,they are in a nominee account with an irish branch of a british stockbroking firm,should i be worried still?
     
  15. celebtastic

    celebtastic Guest

    The Irish branch bit would concern me, if currency controls were brought in after the devaluation.

    Can you ask to have the nominee account moved to London?
     
  16. postman pat

    postman pat Frequent Poster

    Posts:
    312
    i dont know is the honest answer,i will try to found out.


    pat
     
  17. 8611

    8611 Frequent Poster

    Posts:
    16
    Not sure how to do this, is it easy?

    I have an Aunt in Canada who could presumably open an account for me...
     
  18. 22+allin

    22+allin Registered User

    Posts:
    34
    The Euro Debate

    This is what Tim Bicknell | General Manager, RaboDirect.ie on Friday, 15 June 2012 said


    Every time I’ve met a friend or family member in the last few weeks the conversation has turned at some stage to the economic difficulties in Greece, and more recently Spain. Many people are genuinely and understandably concerned about what will happen next in Europe and what the ripple effect will mean for their savings.

    The obvious question on most people’s lips is ‘what would happen in the event of a breakup of the Euro’? We’ve also taken some calls from customers who are concerned about the speculation we’re seeing in the media and press.


    The challenge in offering our typical straight talking view is that no one knows exactly what will happen in the future. Anyone who tells you otherwise is, we believe, simply speculating. We’ve talked about this in earlier blogs, but I think it’s worth highlighting again - when the Euro was introduced in 1999 no exit strategy was ever put in place. So, in the unlikely event of the Euro breaking up, legislation still has to be written and no one knows what it will look like.

    The most important thing is that people take their time, look at their options and take care when making decisions on where they want to place their savings – which bank, which currency, which product. Do your research, find trustworthy and unbiased sources and make your own mind up, in your own good time. It’s your money after all.
     
  19. DK123

    DK123 Frequent Poster

    Posts:
    31
    carbon taxes

    Does anyone know anything about investing in carbon taxes or carbon credits as an alternative to euro term deposits
     
  20. kdoc

    kdoc Frequent Poster

    Posts:
    101
    That seems like a very straightforward appraisal from Mr. Bicknell. Judging from what he said vis-a-vis legislation, it seems nothing untoward can happen overnight. And I think it's worth noting, several years into the crisis, that no depositor has lost a single cent.