Could a Cyprus savings ‘grab’ happen here in Britain?

July 22nd, 2013

In March, Cyprus sent shockwaves throughout Europe when it decided, as part of a €10bn bailout package agreed with the EU and IMF, that it was going to introduce a 6.75% one-off tax on deposit savings of up to €100,000 held in Cypriot banks, with sums over that threshold paying 9.9%.

Aside from the basic fact that this effectively amounted to confiscating peoples savings the reason this was so fundamentally shocking was that, since the start of the financial crisis, there has been a guarantee that deposits under €100,000 would be protected. The purpose of this guarantee is simple: to ensure faith in the integrity of the banking system in order to prevent mass withdrawals, and, ultimately a collapse in the financial system.

Fortunately the original EU-IMF deal was voted down in Cyprus’s parliament. A new deal with no levy was placed on the table which instead involves a significant restructuring of the banking system, although there will be strict controls on withdrawals to prevent any run on the banks.

The question has already been asked: Could this happen in the UK? A key mistake the Cypriot government made was the direct approach in attempting to seize its citizens’ wealth to pay its debts. If you are going to plunder peoples savings then at least be more discreet about it!

However, there is another angle which illustrates how our wealth is already, silently, being seized. The Bank of England are doing everything they can to try and stimulate economic growth as this is the quickest, pain-free route to start paying off our debts but part of this strategy has seen round after round of quantitative easing (or QE), which essentially increases the supply of money. The UK is not alone though as almost all major Governments with a debt problem are taking similar action, as they hope that, as well as simply putting more money in the system, increasing the supply of money will also help to put downward pressure on their currencies – and a weaker currency (hopefully) results in increased exports and gets the economy moving.

The first effect of this is to de-value the pound in your pocket. The second potential effect (that many economists fear) is that QE encourages inflation as more money sloshing around in the system should eventually serve to push up prices. In addition, we already have negative real interest rates (i.e. – interest rates below the rate of inflation) meaning a significant element of UK inflation is effectively what we import. In other words, low interest rates also contribute to a weaker pound and the weaker our currency is the more expensive it is to buy from abroad.

It is important to remember, however, that whilst too much inflation is of course a bad thing the Government do not appear overly concerned about stoking the inflationary fire. We only have to look at the inflation (CPI) rate which ran at 2.8% in March (its highest rate since May 2012) with the Bank of England predicting inflation will exceed 3% later this year. This is well above the inflation target of 2% and yet we are unlikely to see rises in interest rates (at least for the foreseeable future) and could even see another round of QE.

So, if a combination of low interest rates (hitting savers and pensioners) and rising inflation is damaging our wealth why doesn’t the Government change direction? The answer lies in our debt problem: Not only do we have a deficit (i.e. our Government spends more than it raises in revenue) but we have an enormous pile of (growing) debt to pay off. Inflation of course is a debtor’s best friend because it erodes the ‘real’ value of the debt. To you and me, however, inflation feels more like a hidden tax as we simply see prices rise and the purchasing power of our money reduced.

What can I do to protect my savings?

Firstly we must stress that it is essential to first seek financial advice. However, should the pound weaken further, holding significant amounts in cash (sterling) may not be the best way of protecting the ‘real’ value of your savings. For those with a sufficient appetite to risk consideration could be given to investing part of your savings in other assets such as equities, other currencies, or even gold as a hedge against any further drop in the value of the pound. Whilst we have seen gold prices become more volatile and the huge price increases of the past 10 years are likely to be over, this could still be appropriate for a small part of some portfolios. As always this will depend on your exact circumstances and attitude to investment risk.

In addition, making best use of your tax allowances is another way of ensuring that you don’t compound the problem by paying more tax than you need to. A good example is to make use of your ISA allowance each year (£11,520 for 2013/14). It is also worth mentioning that if the Government did choose to go down a ‘wealth tax’ route in the future it would be politically difficult for them to impose this on tax-incentivised savings accounts!

Please feel free to contact us for further advice and guidance in respect of any of the issues raised in this article.