Cyprus Bailout.

19th March 2013

Ian Copelin, Investment Director, my wealth comments  “Equities have fallen slightly today after the euro area forced Cyprus to adopt a levy on bank deposits as part of their bailout, prompting concern that the region’s debt crisis will reignite.

While the FTSE-100 is down around 40 points (or 0.6%) at 6,450 (reflecting the fact that Cyprus is tiny, accounting for less than 0.5% of the 17-nation euro economy), of greater importance is the fact that this bailout could be setting an entirely new precedent for future bailouts.

Under the bailout, Cyprus will impose a levy (effectively a tax on Cypriot bank deposits) of 6.75% on deposits of less than €100,000 (the ceiling for European Union account insurance) and 9.9% above that.

By making depositors take some of the bailout pain, it highlights that the European wide €100,000 (£85,000 in the UK) deposit protection, which was designed to protect customers, is worthless and highlights the benefits of WEALTH at work’s services:  our view is risk management is more important that investment performance and returns (i.e. we do not take excessive risk with client capital that is required for income).

The ‘day-to-day cash element’ invests clients’ capital in liquidity funds which themselves invest in a wide spread of high quality instruments such as government and sovereign debt, repurchase agreements and commercial paper.  This provides a diversified portfolio of issuers, thus providing a high level of security, while maintaining liquidity and diversification.

The ‘on-going income element’ minimises risk by investing client capital into a broad range of investment grade bonds, which if held to repayment date, should provide a secure income and a safe return of capital.”