Foreign Interest Rates

TreeEater
TreeEater

Why aren't people dumping their savings and bank loans into foreign bank accounts where interests rates are crazy high?

Countries like Ukraine, Argentina, Ghana, Afghanistan, Sri Lanka etc. all have high interest rates.

Imagine if you took a 20k loan from your bank, converted that into the country of your choices currency and let that money sit there for like 4-5 years. You'd get 20% interest (depending on which country) on every quarter of the year. You'd be able to pay your loan back within one year and you'd use the rest of the years as gains.

How many people are doing this and why aren't you doing this?

Burnblaze
Burnblaze

You can't really be this stupid can you?

Emberburn
Emberburn

And what if the government of one of those countries decides to seize your bank account?

RumChicken
RumChicken

why wouldn't it work

StonedTime
StonedTime

Well that's a risk you have to deal with

Stark_Naked
Stark_Naked

Why would this not work?

Lord_Tryzalot
Lord_Tryzalot

Venezuela had a fucking inflation rate last year of 1000%.

The US dollar has gained on every fucking currency for a decade now.

Any faggots starting to put 2 and 2 together yet?

MPmaster
MPmaster

What's that suppose to mean?

Nude_Bikergirl
Nude_Bikergirl

In local currency or US dollars?

King_Martha
King_Martha

Why aren't people dumping their savings and bank loans into foreign bank accounts where interests rates are crazy high?

Exchange risk. If the interest rates are high, the exchange rates will worsen in compensation.

It's possible to profit relatively risk-free, but nothing crazy, just small benefits. I have most of my liquid funds parked at a local bank that is a 100% daughter of a big Turkish bank. They consistently offer the best interest rates because they transfer the money via their mother company into Turkey and profit from the high rates there (upwards of 8%). They take all the risks and I get better interest rates than any other local bank offers. Wouldn't be caught dead investing in Turkey directly, being the politically and economically unstable shithole that it is.

Spamalot
Spamalot

Ukraine
Ghana, Afghanistan

nty

SomethingNew
SomethingNew

If the interest rate's high the value of the currency that's gaining interest will actually increase in value relative to other currencies. It increases the demand for that currency so that people can exploit the high rates

lostmypassword
lostmypassword

Yeah, that's the idea, to encourage foreign investments. But at the same time high interest rates are indicative of high inflation and a troubled economy, which means the currency will devalue compared to others.

I should have worded it differently, but it's still a sliding scale. Arbitrage is very limited in todays markets, no such thing as a free lunch. You can only get risk premiums, which are always a gamble one way or the other.

JunkTop
JunkTop

If the bank you have your money in is 100% daughter of a Turkish bank, then I don't see how having your money there is any safer than putting you money in said Turkish bank.

Fried_Sushi
Fried_Sushi

always in local currency, not worth the risk. you'd probably have a chance at gaining 1% or losing 10% when converted back to your currency assuming it's stable

Garbage Can Lid
Garbage Can Lid

No exchange risk for me, only for the bank.
I can communicate with the bank in my language.
I can sue the bank in our local court system, not Erdogan's sanitized joke of a nepotistic "court" system.
They have to abide by local laws and they're overseen by my country's regulatory authority which I trust way more than whatever the Turks have set up.
Plus there's legally mandated deposit protection for domestic banks. Up to 100k in deposits are guaranteed by a collective bank fund and the federal government should the bank and the fund both default.

Harmless_Venom
Harmless_Venom

They have to abide by local laws and they're overseen by my country's regulatory
Alright fair point. But I still think it's risky to invest in a bank which mother company is located in a high-risk unstable country.

Evil_kitten
Evil_kitten

OP there's a concept called interest rate parity that suggests that countries having high interest rate differentials should have their respective currencies appreciate or depreciate to reflect that rate differential.

As some other people mentioned in this thread, you have risk that the countries inflation rate will wipe out your currency value. In addition, it's likely you'll have to pay significant spreads to convert to and from a very thinly traded emerging market currency.

For more information look up the concept of a "carry trade".

idontknow
idontknow

Risk v return is always proportional

You stupid fucking nigger

kizzmybutt
kizzmybutt

But I still think it's risky to invest in a bank which mother company is located in a high-risk unstable country.
I can top that. The big Turkish mother bank has been bought out by Sberbank a few years ago. :-)

But so what, as long as I stay under 100k (which I always will - it's just 40k emergency funds and overflow from my portfolio at a different bank/broker) it's basically risk free. The worst would be I have to wait a few months for the insurance to kick in if the bank goes under.

But I'm not going to lie, Turkey shooting down the Russian jet and the Russian ambassador getting killed in Ankara were a bit worrysome. Some nasty sanctions could probably put a big ol' wrench in the system, but for now I'll happily profit from my sweet sweet interest rates. The fact that a lot of people mistrust a bank with a foreign name and a mother from a high-risk country just means they have to offer even higher rates to attract customers. Fine by me! Most people don't realize they funded a daughter entity that's 100% under domestic law like any other local bank.

Gigastrength
Gigastrength

How did you insure the money?

Sharpcharm
Sharpcharm

See above:
Plus there's legally mandated deposit protection for domestic banks. Up to 100k in deposits are guaranteed by a collective bank fund and the federal government should the bank and the fund both default.

Flameblow
Flameblow

Woooow, you're so smart! The thing is to maximize return/risk while keeping risk under a certain threshold you decide on. I'm more of a conservative steady small profits long time investor so limiting variance within my portfolio is very important to me. Obviously this limits E(return), but it also limits P(capital < desired threshold).

VisualMaster
VisualMaster

Ah, missed that. Yeah, I guess that's a pretty sweet deal then. Certainly if it's a small liquid emergency fund then I guess local currency inflation isn't even really a big factor.

JunkTop
JunkTop

What is exchange rate right? 12 for a local might be good but adjust for inflation and the devaluation of their money + interest on your loan you will be basically giving money away to rot