Investments to Protect you From Euro Collpase

Tuesday, 10 January 2012 19:12

1. Opening a bank account in 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 will have to do an income tax return every year if you have deposits in foreign bank accounts.

You would need to be careful about the safety of the German bank and check out the German deposit guarantee scheme.

2. 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.

How to invest in German Bonds:

Purchase through a stockbroker.

Zurich Life have a German Bond Fund on there platform of funds. However, a 1% annual management charge applies to the investment.

3. 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 well be a lot less that those available in Ireland.

4. Open a foreign currency account but in an Irish bank

The Irish banks will open foreign currency accounts for you. 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

5: 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.

6: 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.


7: Invest in a unit linked Investment Bond:

A unit linked investment bond will hold assets in both euro and non-euro currencies. For example, you could invest in a fund which has a portion of assets in North America, Europe, Asia, Japan and various emerging markets.

Unit-linked funds are currently quoted in euros, many of them hold assets in non-euro currencies. When these assets are translated back into a devalued Punt, assets denominated in Sterling, Dollar, Yen and other non-euro currencies receive a translational benefit, all else being equal.

There is an investment risk associated with this choice. The value of your investment may rise or fall. However, we have low risk well diversified investment strategies whereby there is a 95% probability that your investment will not decrease by more than 6% in any one year. The investment strategy has a range of different asset types such as Protected Equity, Cash, Absolute Return Funds and Currency Funds. The fund seeks to achieve smooth investment growth over a five year period. If you need access to the investment within 5 years, exit penalties may apply. This investment strategy is orgainsed through insurance company Friends First. Friends First is owned by Eureko who are based in the Netherlands. Eureko is a leading, privately-owned European financial services group whose core business is insurance

8. Danish Kroner Deposit Account:

Funds are held in Danish Kroner for the entire 3 year term. Investors will earn interest at 1.25% (AER 1.25%) per annum paid in Kroner. There is a €20,000 minimum investment.

Investors have three options at maturity

a) Retain the Danish Kroner Account at the prevailing deposit rates or request repayment in Danish Kroner.

b) Convert the Danish Kroner to another currency of your choice, the Bank will quote the foreign exchange rates for conversion.

c) Convert back the Danish Kroner into Euro at the initial conversion rate used on the start date.

About Investec

Investec Bank plc is authorised and regulated by the UK Financial Services Authority, and is a member of the UK Financial Services Compensation Scheme which can pay compensation to depositors of €100,000 if a bank is unable to meet its financial obligations.

9. Zurich Guaranteed Tracker Bond:

This is a secure 5 year investment which guarantees you will receive at least 100% of your investment at the end of the investment term provided no encashments have been taken. The bond also provides a return linked to the performance of the Euro Stoxx 50.

Benefits:

· Credit Suisse provide a 100% Capital Guarantee. Credit Suisse is a leading financial services group with 153 years experience and has a credit rating of A+ with Standard & Poors. It is beneficial that the provider of the guarantee is outside of the Irish Banking system. It was recently ranked as the 27^th safest bank in the world by Global Finance magazine.

· Your investment is held in a Euro denominated account in the UK.

· In order to limit the effect of significant stock market falls the maximum loss that can be incurred in any one month would be 6%. Stock markets have fallen over the past few months so the max your investment would have dropped in any one month is 6%. The maximum your investment can gain in one month is 3%.

· There is a lock in feature on each anniversary of your investment. The lock in feature calculates the value in November every year and the highest of these values recorded is taken as the final value. Therefore, if the stock market performed well in any particular year, you would be guaranteed the value at that particular date when you are maturing your investment.

· You are entering the investment at a period when the stock markets have dropped. A good time to enter the stock market is after markets have dropped and there is a greater prospect of an uplift in values.

· You have access to the investment during the five year term but you will lose the capital guarantee if you encash the policy before the maturity date. This is not relevant if the investment is in positive territory at the time of withdrawing the investment. If the value of the fund is in negative territory, the capital guarantee becomes important.

The only risk with this investment is that you do not earn any return over the 5 years and you only receive your capital back. Based on the research that I have conducted on the Euro Stoxx 50, I feel there is strong potential for growth as European stocks have not recovered to the same extent as US & Emerging Markets stocks after the credit crunch of 2007- 2009. The reason for this is due to the Greek crisis and indecisiveness from European leaders around the future of the Euro zone. Once a resolution is created for the Euro Zone, I think the Euro Stoxx 50 will have a similar recovery to what US stock markets achieved.

The Key Three Benefits of this investment are:

Liquidity purposes - you will have access to the cash if required. With the KBC investment, you have no access to the capital for five years.

Security of the bank – As Credit Suisse was ranked 27^th safest bank in the world and has a credit rating of

A+, I feel it is a secure bank to invest your money with.

Return – It gives you the potential to earn a return that may be greater than cash/inflation.