Foreign Perspectives

Archive for the ‘Finance’ Category

Post offices in many countries around the world offer a range of banking services these days, but are they really up to it?

Typically a small post office will have one counter to do everything. That works well when “everything” is mainly posting letters and parcels which take a few minutes to process.

Add on banking services and you’re into a whole different league in terms of the time that it takes to process a transaction though. For one thing, opening an account takes ages and delays everything. OK, it’s not something that happens every day but it happens fairly frequently: I spent getting on for an hour in a queue in a post office today which ended up snaking right round the available space and out the door because two people were opening accounts.

The problem really stems from the practice of governments to consider post offices in country villages to be a “good thing” and therefore worthy of support. That in turn leads to them being considered a job creation scheme so, of course, you wouldn’t want to add too much automation into them as then you wouldn’t create so many jobs. What automation that there is often is counter-productive: posting my three letters took nearly five minutes because the stamps had to be scanned in and destinations entered into the computer.

So, no, I don’t know that it’s really true to say that many post offices could be considered banks.

With 20/20 hindsight, Northern Rock was an obvious disaster waiting to happen.

When a relatively small regional bank turned out to be writing 20% of all of the UK mortgage market, weren’t some warning signals coming up? After all, that kind of growth in market share implies a very aggressive approach to marketing and indeed on pulling in money to fund all those mortgages.

Bear Stearns, along with many pure investment banks, tends to have quite an aggressive approach to running it’s own book too As it turned out, it was a little too optimistic with the projections and ended up just as bankrupt as Northern Rock for pretty similar reasons.

The approach on both sides of the Atlantic was quite different. Whereas the UK government continued to dither about and ended up taking over the bank itself, the Fed was much more aggressive in going for what needed to be done. They simply transferred the bank to JP Morgan (“sell” isn’t the word to use given the price paid) and backed only the residue of the business that couldn’t be easily transferred.

Which is the right approach and what’ll happen next time around?

Unfortunately, neither is really “right” in the sense of being a workable solution to the problem of the debt crisis. In both cases, a signal has been sent out that significant banks won’t be allowed to go bankrupt and that the government will take over the highest risk aspects of any bank when necessary. I’m not sure that’s a good message to be sending out at the moment as it implies that there’s no risk too much.

On the other hand, would it be better to have let one of those banks go bankrupt? Northern Rock had a major slice of the UK mortgage market and large numbers of savers so letting it go wouldn’t have been good for the government at the next election for sure. Although Bear Stearns hadn’t as many private clients they’d have been pretty vocal ones given the amounts involved but aside from that the bank was a major player with many interlinking deals and would have caused severe repercusions had it gone down.

Sadly, it’s looking like these two banks are merely tasters of what is to come if the credit crisis isn’t sorted out very soon.

That list pretty much covers it for most people in the day to day run of events.

Travel insurance is something that you need once you set foot on a plane or boat. For the most part, it doesn’t cover you within your own country which is something to bear in mind if you make frequent business trips by plane. There are exceptions, of course, but look out for them.

Home insurance can sometimes overlap with travel insurance as the better policies cover many of your valuables when you’re out of our house which can avoid you needing to get travel insurance for things like valuable watches or other jewellry.

Car insurance comes, mainly, in three varieties. Third party insurance covers you when you hit somebody but doesn’t cover you nor theft of your car therefore most people go for the next option up with is Third Party Fire & Theft thus adding the fire and theft elements. They can be fairly cheap but you should always check the price of Fully Comprehensive insurance as I’ve found that as little as 10% more can move you into this type of insurance which isn’t much to pay if the person who hits you isn’t insured (not uncommon!).

When people think of moving to France their first thought as to how to generate an income is to buy a gite complex and rent it out to people from back home.

It sounds like an idyllic lifestyle, doesn’t it? You work one day a week and the rest of the week you can be sunbathing by the pool.

The snag is that you need to wash all the sheets and towels and carry out maintenance work during the week. OK, so two days work and five at the pool? In theory, you might get away with that though, of course, the guests will be using the pool too and, usually, expect you to do things for them like organise tours or the area, tell them all the best places to go and so on.

What’s frequently forgotten about in all this is the financials that go along with this lifestyle. From a typical six or seven person gite you can probably get around 700€ a week in the peak season. That size of gite equates to a small three bedroom house in size and, of course, amount of work to look after. In reality most people aim for a gite complex of around four or five gites. On the whole, you’ll eventually reach an occupancy of around ten weeks per year for the gites which translates into around 35,000€ a year of an income.

However, there’s the matter of expenses to consider. Bearing in mind that you only have four or five hours to reset the gite between guests you’ll end up hiring a cleaner to help you which eats into the income somewhat and you may need someone to look after the pool. There’s also the business of maintenance: unlike a normal house rental you’re getting a new set of tennants virtually every week and that tends to be quite hard on the furnishings so you’ll need to renew at least some items pretty much every year.

Oh, and don’t forget the taxes!

I’ll look at the normal alternative to this next time ie buying a B&B.

If you’re considering investing outside your own country whether it be in shares or in property you need to consider the interest rate in that country relative to your own and the echange rate with your own currency.

The two tend to be linked and can rarely be considered totally in isolation. If you consider relatively stable currencies then a higher interest rate will tend to make a currency more valuable and conversely a lower interest rate will tend to make it less so. I say “tend to” because it’s far from a direct link as exchange rates are notoriously fickle: if markets take a view that a currency is overvalued then it’ll go down regardless of how high the interest rates are raised in that country.

However, unless you’re into short term trading it’s largely trends in exchange and interest rates that are important rather than the value that either may have at a given time. In fact, the neither the interest rate nor the exchange rate at a given point really matters a great deal but what you do need to do is to keep an eye on the exchange rate which is, usually, the most important variable when you’re investing outside your own country.

This also affects how you should keep score. Say you’re in the UK and you’re investing in America. In that case you need to measure the performance of your portfolio in dollars, not pounds. To rate the performance in pounds is just going to create a false performance statistic as it’ll be affected by the ups and downs of sterling vs the dollar and those can be quite substantial: in the last 20 years the pound has ranged from around $1 to the pound to over $2 to the pound. Obviously you’ll still measure your bottom line performance in sterling in this case but the performance of the portfolio itself is best charted in dollars.