The economist has a great article on the Icelandic debt woes. It outlines the possibility of a future flood of government and international defaults.
My analysis of this is that the investors took the risk in this case. The “savers” in this case should have exercised more caution in picking their accounts. A higher rate of return should be assumed to come with a higher rate of risk or volatility. My suggestion?
- Consider any investment/savings in a foreign country with “high returns” to be a risky investment, even if it is a “savings” account.
- Never use a savings account without a Government or Government corporation (ie FDIC) guarantee. In the case of Icesave, even the savings insurance plan failed investors and savers.
Below are some links that illustrate how much we underestimate endemic risk.
An investor or saver reading one of the above articles might think they were secured by a government guarantee. However the Economist article clarifies in the text I copied below.
“Landsbanki’s products were not covered by the domestic deposit-insurance schemes of the target countries. Under a passport system covering the European Economic Area (a broader, watered-down version of the European Union), investors were supposedly covered by the Icelandic deposit-insurance scheme.”
Clearly now that the European countries paid back their savers and they now want to money from Iceland. Now a vote will decide the issue. I think there is serious confusion on how savers are protected domestically and internationally. Clearly there is confusion and misinformation about international savings. Governments need to better inform, outline and legislate how transnational investments are covered under Deposit Insurance plans.
My advice to savers? Find a good domestic Credit Union or established bank.