Friday, 11 July 2008

Markets are tough, Slovak bank clients learn

Before the Slovak crown's exchange rate to the Euro was fixed (to 30.126 crowns per euro) two major Slovak banks offered clients deposit instruments with high guaranteed interest rate.

Of course there was a reason these deposits carried rates over 5%, well over one percentage point above any other similar guaranteed deposit. The deposits included a speculation on the Slovak crown's eventual fixed rate to the Euro.

In July the exchange rate was revealed. The crown ended up stronger to the Euro than most had expected even a few months ago. Suddenly, Slovenska Sporitelna bank Grand deposit clients are finding out that they will be making their 5+ % interest but their deposit will be converting at the fixed rate of SKK 32.5 per EUR (the same rate applies to clients of the "Premiovy vklad" at Slovak Volksbank).

At Slovenska Sporitelna a 100,000 Sk in the Grand Vklad (which also drew a 500 Sk fee at the start) will become EUR 3,231. Had they kept their cash under the mattress they would be converting to EUR 3,319 (via eTrend). Aside from the fact that these deposit reportedly attracted about 3 billion crowns, a 2.65% loss is not a bad price to learn a bit about how the markets work.

People and companies are coming forward claiming they were not properly shown or explained the fine print. The obvious lesson: if it sounds too good to be true (or is so much more attractive than the competition in a relatively competitive market) there is a risk. And risks sometimes do materialise.