Tumbit - Expat Money

The media has recently had a field day condemning the Banks for paying large bonuses to its staff and I can fully understand this condemnation - particularly in respect those Banks at the heart of the financial crisis and who were rescued by the authorities.

As one who relied on the Banking industry to provide my creature comforts for a number of years I think that someone needs to offer some justification for the Banks actions. Large bonuses, far in excess of those under discussion, are frequently paid to professional footballers and I read recently that a T.V. personality moved to another channel for £6million over four years which did not incur any special media attention !

So it seems that bonuses are acceptable for other professions but not for the Banking industry !

It also has to be remembered that by restricting the magnitude of bonuses paid to key Banking staff it will inevitably result in the loss of this talent to other industries and a subsequent reduction in Banking profitability as a whole. This would certainly be a bad thing at the present time. I think that the media have rather missed the point and have not really looked at the reasons why some Banks required assistance in the first instance.

To put the record straight, the main reason for the financial crisis was the authorities failure to properly regulate the Banks activities and insure capital adequacy. In the U.K. this role was undertaken successfully for many years by the Bank of England however this activity was relinquished and given to the financial services authority which begs the question whether this newly formed institution had the necessary expertise to fully regulate the Banking sector ? It has subsequently been proved that clearly they did not, and I wonder if they really had any idea what the Banks were doing and the inherent risks of their activities ?

If the authorities had regulated the Banks properly in the first place it is unlikely that any “bail outs” would have been necessary - the Banks were, after all, operating within the rules as they interpreted them.

The International Monetary Fund (IMF) has now produced a report recommending two new worldwide taxes on Banks . One of these would be a financial stability contribution to pay for the cost of future government bailouts for the system (do they know something we don’t?) and the other is a “financial activities tax” which would be levied on the sum of the profits and remuneration of financial institutions and paid to government’s general revenue. This strikes me as bolting the stable door after the horse has escaped and could also be viewed as a simple revenue raising activity !

This report also claims that the banking system has caused such acute damage to the world economy that firms will have to make a far more substantial contribution to public finances in the future.

Surely the simple answer is careful regulation, but not unnecessarily restrictive, and allow those Banks who are successful to reward their employees accordingly ?

have been a regular visitor to Spain now for almost 6 years – sometimes visiting family 4 or 5 times a year. 5 Years ago, when it was possible to enjoy 1.45 Euros to the pound on even relatively small sums, the fees and charges applied to any currency exchange were not really a consideration, as overall the exchange rate was so good.

It is perhaps only over the last 18 Months that the exchange rate has plummeted, that I have begun to question how I can make the most of the money that I exchange.

Whilst there is very little that can be done about the actual rate of exchange, there are a number of things that can be done to keep a tight reign on the amount that is paid out on commissions, fees and other charges for spending your money in Spain.

Hopefully, the days of walking around your chosen foreign destination with a clutch of travelers cheques strapped to your waist and with a passport on hand at all times just incase you wanted to cash them, are a throwback to the 80’s. So many things have progressed leaps and bounds since then, so it is only fitting that the world of spending your money abroad should aswell.

For many people choosing to simply use your UK debit card or credit card over here in Spain to either pay for a meal, or buying things from a Supermarket is the easiest option – as is using the same card to make a cash withdrawal from an ATM. Whilst it may be convenient to do this it carries a number of disadvantages: You are not always aware of the exchange rate that you are buying your Euros at; There will be a commission to be paid at both the issuing and receiving bank (which can vary between 2.0 – 2.75%) and there will also be a cash handling fee to be applied (around 1.5% of the value of the transaction).

I have found 2 ways, and whilst they may not be suitable for everybody, it could be that one of them offers a solution for you in saving a few quid next time you travel to Spain:

1.) Banco Santander - Most people know that the Spanish Bank also owns the likes of the Abbey, Bradford & Bingley and also the Alliance & Leicester Banks in the UK. Maybe it’s been a long time coming, but recently the Bank has decided that all transactions for UK customers in Spain will not carry the above 2 fees. This is effective immediately for Abbey and B&B customers, and will come into operation towards the end of the year for A&L customers.

Note: In order to qualify for this service you must be paying a minimum of £1000 per month into your current account.

2.) Post Office Travel Money Card ( TMC ) - For many people as soon as you hear the words “Post Office” and “Money” in the same sentence, you can’t help thinking about old ladies queuing for their pension every week, and that simply isn’t the case.

Last year the Post Office issued a pre-paid currency card that you basically buy over the counter like you would a Phone card.

For example, if you were travelling to Spain, you would simply request a TMC in the Euro currency, load up the card with a minimum of £50 Sterling, and then off you go – able to make withdrawals at thousands of ATM machines throughout Europe. You can also add to the amount on your card over the phone if you find that funds are running low over the course of your holiday.

You can even use your card as a Debit card in places where Visa electron is accepted.

Note:There are a number of charges applicable when using the card depending on how the card is used – full details can be seen on the Post Office website.

Whilst cumulative charges of around 5% for each and every transaction may not seem like a big deal, over the course of a 2 week holiday it can very quickly add up – especially if you are a regular traveler.

I understand that it will soon be possible to purchase gold bars, about the size of a chocolate bar, from a dispensing machine at an airport in Germany. Is the time right I wonder, for us to sell all our stocks and shares, withdraw our bank deposits and invest in Gold ?

I can clearly remember many years ago asking my then manager the same question only to be told that gold was not a good long term investment because the price never fluctuates and instead of earning interest on the metal you have to pay storage charges. How things have changed ; at that time the price was US$35.00 per ounce and currently is in excess of US$1000.00 per ounce. So should we consider investing any of our hard earned savings into this shiny metal ?

Over the past seven years the value of gold has risen quite dramatically every year and has recently broken though the magical US$1000.00 per ounce barrier; a level only seen in February this year and in March 2008.

Will the price continue to rise or fall back as it has done on the past two occasions ?

There are certainly strong indications that suggest gold will continue to glisten. While the economic outlook remains uncertain, the gold price seems unlikely to drop significantly as the metal is seen as the ultimate haven during global turmoil.

It has also been quite noticeable recently that every time the price dips China appears as a buyer of gold bullion which has the effect of underpinning the price and reinforces the belief that China has fundamentally lost confidence in the US Dollar and is looking to boost gold reserves instead.

Another point of interest is that earlier this year China made it legal for Chinese citizens to make purchases of the yellow metal. As recently as 2002 the private ownership was prohibited in China, with jail being the penalty for it's possession. In fact Beijing is actually now encouraging its citizens to purchase the precious metal through state run media.

China has also built a new vault in Hongkong to store its gold and has arranged for it’s physical gold holdings previously held at vaults in London to be shipped to this new vault. While the movement of gold from one location to another should not affect the price of gold it is possible that it could create a shortage of physical gold in London which could contribute to a higher price.

The recent action by governments to pump billions into their economies in a bid to stave off global depression creates the potential for inflationary pressures down the line. Gold has always been seen as an insurance policy against inflation as it tends to hold its value during periods when currencies are loosing their value in real terms.

So is this a one way bet ? - Certainly not ! - before we all get on a flight to Germany to raid the gold "chocolate bar" machine bear in mind that gold is priced in US Dollars, so if the Dollar weakens significantly against the Pound or Euro this can wipe out gains made on rising gold.

Private investors who are looking for exposure to gold have a number of options:

Simply buy small gold bars or coins and find suitable storage facilities. This is probably one of the simplest ways to invest in that you own the coins or bars and are not exposed to any counterparty risk. You will pay a premium over the “market” price but this should be recovered at a later date when the gold is sold.

One of the cheapest and most flexible ways of owning gold is to open an unallocated gold account where you can buy gold that is stored on your behalf but you do not physically own specific bars, rather like having money in a bank account, but without paying storage charges. However like a bank account your gold is at risk if the bank should fail. It is always possible to request withdrawal or delivery of your gold at any time or it can be sold at prevailing market prices. Normally these accounts require minimum starting deposits of approximately US$8000.00

It is also possible to buy gold from a dealer to be held in an allocated account. In this case the bars are held in a vault on your behalf. Each bar is numbered and identified by hallmark, weight and fineness. This does not carry the counterparty risk of an unallocated account but storage and insurance charges will apply. Again the minimum starting deposits are in the region of US$8000.00

While I feel that there is a strong case for the price of gold to continue to rise which could offer some attractive returns, it has to be remembered that in addition to the possible currency risk, already mentioned, the market price is exceedingly volatile and operated by a relatively small band of professionals. It is definitely not an investment for the feint hearted and probably left for the more serious investors, however if you like the idea of owning your own gold then may well be rewarded for your passion !

(Originally Posted  August 2009)

We have seen some extreme changes in the Euro/Pound exchange rate over the past couple of years which has had a bearing on most of us in some way or another.
In January 2007 the rate was hovering around 1.50 euro to the pound, but during the following two years the rate had dropped to 1.00 euro to the pound – a fall of 33%.
Since the January 2009 low, we have seen a steady recovery in the UK currency  to 1.18 Euro to the pound.
This exchange rate volatility has, for example, increased quite considerably the cost to UK residents intending to travel to European destinations for holidays - many preferring to forego an overseas vacation for one in the UK instead. Another impact of these movements has been felt by the many British people who have retired and taken up residence within Europe. Invariably their pension arrangements are in sterling and so a 33% change in the exchange rate can be a disaster.
There are number of ways of protecting against future exchange movements  based on selling/buying currency at various dates in the future based on likely cash flows.
I believe that in the majority of cases individuals are not fully conversant with these procedures and would not fully be aware of the consequences if their circumstances were to change.
One possible solution would be for Britain to join the euro which would completely alleviate these problems. With the pound at its current level this would be a tempting option for the UK government and there would be some trade advantage for the UK.
One of the biggest drawbacks of joining the euro would be in monetary policy where the UK would lose the ability to set its own interest rates.
The UK Prime Minister's popularity amongst the electorate is at an all time low and joining the euro would be his worst call since he lost £2 billion selling the UK’s gold reserves at a 20 year low. He can not and will not risk  any further loss in confidence.
I think the most likely scenario for the exchange rate is for a period of relative calm with the rate moving within the 1.10 – 1.22 euros to the pound range for the next few months. I believe that the problems experienced by the UK banking sector have now been fully exposed (and are being addressed) whereas within Europe there is still problems within this sector which have not yet come to light. Interest rates in the UK are at historic lows however inflation will be a major factor at the point in time when the recession is over. The Bank of England will act quickly to raise rates at the first signs of inflationary pressures within the economy.
My feeling is that higher UK interest rates and possible problems within the European Banking system will weaken the Euro  against the pound and we could see an exchange rate of around 1.50 euro to the pound at some time next year.