January to April was a classic ‘calm before the storm’,” said the pension trustee at a conference I attended recently. “Now we’re all back worrying about what happens next with Greece and now Spain and with the long term future of the euro. Pension funds are for the long term, but this doesn’t make asset allocation any easier.”
Money Express with Personal Finance Expert Jill Kerby in association with Aviva. Read Jill’s column first every Tuesday in the Offaly Express
That pretty much summarizes the expression of concern from my readers as my e-mailbox and postbag fill up again with letters from people wondering about the safety of their savings, about what will happen to their debts if Ireland reverts to its own currency again and what options they have to safeguard their money in the event of a Greek default, the collapse of Spain’s banks or even if the ECB starts printing money to “save” Greece and bailout failing Spanish banks.
(It may even resort to the issuing of long-hoped-for Eurobonds if they can sidestep all the EU Treaty clauses that currently forbid such a move.)
Banking and currency experts and economists are all divided on what they think will happen next. No one knows. But Greece is so overwhelmed with debt that it has no chance of every rebuilding its economy if that debt burden isn’t relieved, if its tax system is not reformed, its government and spending programmes replaced with workable, affordable ones.
(Greek MPs earn €10,000 a month in pay and expenses in a country where some pensioners are now suffering from malnutrition.)
Spanish banks are now being forced to own up to the huge debts they are carrying due to their massive property bubble and all the extravagant loans they gave to builders and developers.
Spanish municipalities and states are going bust due to over borrowing and a lack of fiscal governance. A quarter of the adult population is out of work and half the under 25s.
Here, we’ve just passed the Fiscal Treaty that will tie us forever to strict budget controls and an overdraft of 0.5%. The rest of the EU (with the exception of the UK and Czech Republic) are expected to come under the rigourous and unforgiving eye of the Brussels based technocrats. I’m guessing that “events” (or “events dear boy” as UK prime minister MacMillan once put it) will overtake the Treaty long before we start arguing about the horror that is the ESM – the inadequate €700 billion bailout fund - for bankrupt banks.
So what can you do?
Vincent Digby of Impartial.ie, the fee-based financial advisor has a process through which he takes his clients.
“Fear and emotion is now driving a lot of decisions,” says Digby. This is understandable, he says, but is not a good basis on which to make important financial decisions.
“There are three issues to consider: security, access and return. But you have to start by quantifying the risk to your money, by how much risk you are personally willing to take if you do something other than leaving it in cash in an Irish bank, understanding exactly what those options are and then taking an informed decision. That may include doing nothing for the moment, but if things were to worsen, you would be in a better position to act.
“I think there is still time to come up with a defensive strategy.”
For security and a certain amount of access, Digby recommends buying German government bonds.
“However, there are small transaction costs and there is zero return at the moment. They can be traded or sold, but if you do not hold them to maturity the price you get for your bonds could fall.” If the euro goes, this is inevitable, he says, “though the yield will go up.” A zero or even negative return “is the cost of capital protection.”
Moving your euro cash offshore, and again to Germany will provide a degree of security (the €100,000 deposit guarantee also applies in German) and it covers the ‘access’ criteria, says Digby. Access is not necessarily immediate, but if the euro goes, your savings will become Deutschmarks, not punts and the D-mark will be the strongest new currency.
Germany is the number one destination now for euro savers in peripheral countries even though German deposit banks are offering returns as low as 0.5% for six month fixed rate accounts and between 1%-1.5% on sums of c€100k and over.
(Digby charges €500 plus VAT to arrange a Deutsche Bank deposit account in Dusseldorf for clients with a minimum of €100,000 but I have been informed that German deposit accounts can now be opened directly for smaller sums at Deutsche Bank in the Dublin’s IFSC.)
The most convenient location for non-eurozone offshore deposits is still Northern Ireland where certain banks (like NIBs sister bank Northern Bank) will open deposit accounts for customers from the Republic. But you take a currency exchange risk opening a Sterling (or any other) denominated account and you must declare the account and any return with the Irish Revenue. You must do so with a German account too.
Should we be worried about what is happening in Europe? I think so.
Should you have a plan if you have a large sum of cash on deposit? Yes.
But that plan needs to be carefully considered with all the pluses and minuses and consequences fully understood.
As always – speak to an experienced and trusted advisor.