Money Times - Januray 10, 2017
Posted by Jill Kerby on January 10 2017 @ 09:00
WHEN SAVINGS PAY NOTHING…YOU NEED A CONTINGENCY PLAN
The frustration of ordinary savers with historically low returns could turn to horror if negative deposit interest rates ever arrive on these shores.
Already the European Central Bank, charges -0.4% negative interest to discourage commercial and investment banks from leaving deposits with them (the ultimate ‘safe’ deposit taker). Negative rates also apply at the central banks of Switzerland and Denmark and in both countries some commercial banks now charge their customers negative rates. Here, Bank of Ireland charges a negative rate to corporate depositors who leave more than €100,000 overnight.
At the end of November 2016, the ECB estimated that the value of negative yielding Government bonds (the biggest form of debt that countries buy and sell to each other) in the world is was $8 trillion and rising. This means that buyers of German 10 year bonds for example, now pay the German government a small rate of interest every year, rather than receive an interest payment from the Germans.
How crazy is that?
Would you willingly pay your bank for leaving your life savings with them, which they can then lend out at 4% (a mortgage rate) 10% (person loans), 15% (overdrafts)?
What are the safe alternatives? A mattress? A hole in the garden? Hardly.
Not coincidentally to the negative interest rate phenomena, is the strengthening drive by governments and central banks to keep rolling out cashless banking and cashless purchases.
Denmark, where most financial transactions are now cashless happens to be where negative interest rates are being charged to commercial and individual savers: in a place where practically no one takes cash anymore, and your income and wealth is expressed as digital numbers in on-line accounts and plastic money cards, there is practically no alternative but to accept the power of the central bank or government.
Could an entirely cashless society happen here?
Cash purchase limits already apply in many EU countries, including France (€3,000, €15,000 for non-residents); Italy (€999.99); Denmark (equivalent of €1,340); Spain (€2,500, €15,000 for non-residents); Portugal (€1,000); Greece (€1,500); Belgium (€3,000 and no cash amount for real-estate purchases). Other countries that limit cash payments are Slovakia, Poland and Bulgaria. The Swedes have no limit, but traders are not legally obliged to accept any cash payment.
What options do any of us with any surplus income or savings have to low to negative deposit yields and the encroaching threat of digital and plastic ‘money’?
- You can try and find a genuinely solvent bank/institution that still provides a safe, positive yield. Global Finance magazine produces an annual survey of the top 50 ‘safe’ banks every September. (Not a single Irish, UK, Italian, Spanish or Danish bank make the list. The top 10 include 4 German, 1 Swiss, 2 Dutch, one Luxembourg and France bank and Canada’s Toronto Dominion bank (in 10th place). See www.gfmag.com or better still, consult a professional adviser.
- Use your savings to pay off any interest debt you have, like credit cards, personal loans, mortgages.
- Buy real assets that pay positive annual yields: an investment property that produces a profit from rent after all charges and tax. Shares that pay a stream of positive yielding dividends.
- Depending on your age, ability to live with risk, use savings to buy low cost, diversified investment funds. A tax efficient pension is the best long term option.
- Consider private, but high risk family lending with a portion of your savings or P2P lending.
- Look into the merits – and downsides – of shifting some cash into real money, physical gold or silver coins or bullion, stored in a safe depository (where you will pay a fee.) Consider it insurance. Precious metal prices are volatile and an ounce of gold pays no yield, but gold always has an intrinsic value and has no third party (ie Central Bank) liability risk once it’s in your possession.
Before you ‘encash’ or withdraw your savings, or buy a potentially higher yielding asset or investment, or substitute some of your cash for ‘real money’, do your own research. Understand and accept the potential risks and rewards of non-deposit asset ownership.
Some stock markets and investments are booming, some are floundering.
Property in Ireland is returning big yields again due to post-crash shortages and feeble lending by still fragile banks. But ongoing costs and taxes remain high and the state remains the biggest price manipulator.
Deposits are simple and easy; getting a positive return on your savings is not. Always search for the best independent, impartial financial advice from a professional, experienced, fee-based adviser who will model their suggestions to match your profile.
(The new TAB Guide to Money Pensions & Tax 2017 is now out. €9.99 in good bookshops. See www.tab.ie for ebook edition.)