Last week in this column I suggested that there are three areas of your personal finances that you should be prioritising this summer: 1) the security of your money and savings, 2) health care provision as the cutbacks intensify and 3) an affordable retirement.
Last week’s EU summit agreed yet another bailout for the insolvent Greeks, and a debt reprieve for us which our politicians say will prevent a sovereign default here; the interest rate at which we will repay our EU loans has been reduced while the period in which we must repay them has been doubled.
However, just as doubling the term of a mortgage repayment will reduce the monthly amount you must repay, it still hugely increases the total amount you will pay; so will this extension of our EU debt.
Also, while the immediate threat of Greece fully defaulting and leaving the eurozone has receded, that extra €100 plus billion loan for Greece is still subject to a compounding interest rate of c3.5% and if it is to really remain in the eurozone, it’s economy is still going to have to consistently grow in excess of that 3.5% rate with all the budget austerity that is also still in place.
Can a catastrophic debt crisis be solved with more debt? No, but the EU is determined to buy more time.
So how should you respond in terms of safeguarding your own savings?Optimists predict that this latest deal will work. Pessimists say it won’t. Those of us who don’t have a crystal ball say you should hedge your bets and try to do as little harm as possible.
The following are realistic options for both optimists and pessimists who want to get a return ON their savings as well as the return OF their savings:
Don’t leave more than €100,000 in any Irish financial institution as per the terms of the Irish bank deposit guarantee.
Don’t just chase yield. Spread your savings between institutions that offer good demand deposit and short rather than long fixed returns (mainly the struggling Irish banks owned in whole or part by the state) and the solvent non-Irish banks like NIB, RaboDirect and Nationwide UK Ireland and the solvent credit unions that offer slightly lower returns but more peace of mind.
Hedge your bets regarding the on-going sanctity of the euro. Now that the ECB looks on course to eventually start issuing Eurobonds (presuming members states agree and treaties are amended) you should be prepared for the spending power of your euro to devalue in your pocket. You might not want to exclusively leave all your cash savings in paper and ink euro. Consider holding some precious metals, stronger currencies, inflation-linked bonds issued by strong countries and carefully selected defensive shares that produce steady income.
The eurozone deal does nothing to restore Irish competitiveness or to reduce the €18 billion budget shortfall and the government needs to raise more money. Expect 27% DIRT rate on savings to rise in December. However, over 65s whose annual income is below the €18,000 tax free threshold already pay no DIRT on savings based in Ireland or in any other eurozone country. Anyone who pays standard rate tax of 20% but keeps their savings in a non-EU country that carries an income tax liability in Ireland rather than DIRT, will be able to save 7% on their tax bill since they will only pay 20% and not 27% on any deposit yield.
Precious metals are not subject to any annual tax because they pay no interest and are not considered as ‘money’. (The price varies but not the physical asset.) Prize bonds are another way to avoid annual DIRT but again, no interest is paid, the bonds are vulnerable to inflation eating away at the capital value and while any winnings are entirely tax-free your bonds are entirely held in euro and are held in trust by the Irish state.
Holding some of your money outside the eurozone and entirely away from the long clutches of politicians and central banks by converting some of your paper cash into pure gold and silver (which cannot be printed at whim or be devalued unilaterally by central bankers) and then storing it outside Ireland also protects your savings from outright confiscation by the government, as has already happened with private pension funds.
This latest EU deal is yet another bail-out for the European banks that lent far too much money to countries that could never repay that money. A portion of the money that was lent to Greece will be written off and the ECB will step in to backstop the Spanish and Italians if the private debt markets keep charging them a higher interest rate in the future.
We may have secured an interest rate reduction/extension, but the Irish people are still left to repay the debts of our insolvent banks, our national debt which is estimated will be €173 billion this year, and we must still reduce the annual €18 billion budget shortfall. Less has changed than you may imagine. The euro got a reprieve last week. So did your euro based savings. Spend that extra time wisely.
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