The Value of Foreign-Currency Deposits

There are many angles to the Cyprus events.  One issue is the value of foreign-currency deposits:

1.  for a euro area investor, there will be some range of judgements about the relative safety of euro-denominated deposits in different euro area countries. If one wishes to shift into a non-euro deposit, currency fluctuations map into volatile returns once the conversion back into euro is taken into account (unless a currency hedge is also purchased).  Since summer 2012, both the dollar and sterling have depreciated by about 9 percent against the euro so foreign-currency deposits can experience significant capital losses (or gains).

2.  for a non-euro investor, holding a euro deposit carries the symmetric currency risk. For example, the rouble has appreciated by about 11 percent against the euro since summer 2009 (so that Russian investors in Cyprus have already experienced a significant capital loss over that time period). [The rouble depreciated by about 29 percent in late 2008 / early 2009, so euro deposits provided a very good hedge for Russian investors during the worst phase of the global crisis.]

3.  currency movements are not predictable so ex-ante expected returns can look similar across currencies (interest rate differentials are typically small across the major currencies) but ex-post realised returns can be very different.

6 replies on “The Value of Foreign-Currency Deposits”

I take the view that you should never, ever invest in a foreign currency on risk/reward considerations. That is because of symmetry, there is no way that both sides of the zero (slighlty negative) sum exchange trade can be getting a reward for the obvious risks both are taking when translated into their own currency.

However, currency investment as an insurance policy is a different matter, a bit like whether to invest in gold. Thus a Euro investor buying Sterling gets an exchange rate risk in the CAPM sense without any increase in expected return, but he does have an insurance policy against collapse of the Euro. I am that soldier.

Philip, not sure what you are getting at unless its that, if you are a Russia based Russian, holding a larger Euro deposit in Cyprus, your 5% interest combined with a 10% clip from the proposed ‘levy’ shouldn’t be that much of a big deal.

We should not forget that the origins of the Cypriot crisis lie back in 2004 when Greece (of course) threatened to veto the EU enlargement if Cyprus (technically still at war with Turkey) were allowed to join.

@ Peter Stapleton

Siege of Malta (1565), surely?

@ All

Not a very coherent post, but the Russian negotiators and Cypriot bankers must be reading what has been written about them and thinking about various sanction busting, Mexican drug running, libor fixing, rogue trading, double crossing government advising, tax managing, loss shifting Western bank activity and wondering why they’re the baddies.

I mean, absolutely, welcome our Qatari overlords (joke stolen from Frank Galton), but the Russians – they’re just a bunch of Mafiosi.

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