Monday, 22 August 2011

Investing in a zero interest environment

We are living in a low interest rate environment for quite some time already. This makes investing very difficult. Risk averse people receive almost no interest on their money so they are looking for other products, to enhance their returns. Many bank managers, who look more at commissions than what is suitable for their customers, recommend yield enhanced investments. Performance of these products is often linked to another currency, or a basket of shares or commodities. Unknown to their customers, there are hidden risks, very real ones. In Singapore and Hong Kong many investors found this out when Lehman Brothers went down and their Mini Bonds turned worthless. In Europe apparently many people invested in products somehow related to the Swiss Franc, they are now sitting on huge losses.

Be careful with all these financial products, if you don't understand them or they appear to be too good to be true. Also, make sure you get information what the commissions are, customers should be entitled to know that.

Trouble in Paradise

Strength of Swiss Franc Roils Saint-Tropez and Other Cities Across Europe

Municipal officials in the sunny Mediterranean resort of Saint-Tropez are in a cold sweat: The rush into the Swiss franc is creating a time bomb for city finances. The hometown of actress Brigitte Bardot on the French Riviera has a €6.7 million ($9.6 million) loan on its books that carries an annual interest rate tied to the Swiss franc, according to Saint-Tropez officials. The rate currently is fixed at 3.94%. Starting in May 2012, however, the rate becomes variable and rises when the Swiss franc appreciates against the euro. Some officials in Saint-Tropez have calculated that, unless the Swiss franc falls off significantly from the peaks reached in recent days, the interest rate on the 20-year loan signed in 2007 would soar to 30%.
"This is devilish," says Verane Guérin, a member of the Saint-Tropez's municipal council, the city's parliament. "It would blow up our finances."
Like Saint-Tropez, many municipalities across Europe are saddled with loans carrying variable interest rates pegged to fluctuations in the Swiss franc, other foreign currencies or various commodity prices.
Jittery investors have been turning en masse to the Swiss franc and other assets deemed as safe havens amid growing concerns over sputtering economic growth in the U.S. and Europe.

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