AFRICANGLOBE – The EU recently announced a $10 billion deal with the Cypriot Government to avert a bank meltdown that may have spread to the EU and potentially began the collapse of the 17 country European Union. Whether that deal is a means to an end or just another paper in the cracks will be known sooner rather than later. The lesson learnt in this latest crisis has exposed the oblivious risk in stashing money in offshore havens. For Nigeria though, the lessons I drew from the latest spate of economic crisis in the Euro are in two folds.
Hot Money, which in essence is Foreign Inflow that is channelled into Portfolio Investment, has proven to be a recipe for economic disaster in destination countries. The Nigerian stock market witnessed this in 2008 and is yet to recover despite the 35 percent year to date Dec 2012 returns posted by the Nigerian Stock Exchange All Share Index (NSEAI).
At the height of the crash, the NSEAI was over 50,000. Currently, it is at an average of 33,000. Yet the market growth is largely seen as a function of influx of portfolio investment said to be around 70 percent of investments in the NSE. That is why the CBN is hell bent on ensuring that some of the foreign inflows are channelled into productive sectors of the economy.
A country is better of if foreign inflows finds its way to companies that need capital to fund new projects and product lines that create jobs rather than ending up in the cyclical business of buying and selling shares. The former has always proven to remain in the economy and will mostly find its way out through dividend payments.
Here is the second lesson. Whilst the world has largely focused on Russian money, moneybags in Nigeria, particularly corrupt ones must be worried stiff. There is this false, albeit comforting impression, that banks especially those abroad hardly fail. Banks have never been the safe haven for depositing money as most would like to think no matter where you are in the world. However, some places are safer than the other depending on the economic peculiarity of the country. But the safer countries are the ones with tight policies against cross border transfer of money.
They are also the most likely to freeze financial assets if the beneficiaries are suspicious of being an economic and political threat. Therefore, moneybags looking to stash money in the UK, US or even China, their laws allow for unperceived restrictions to depositors fund a risk that can materialize in the slightest suspicion of a threat or malpractice. James Ibori is a typical example as his properties and assets in the UK where easily confiscated by the British Authorities. The US has also been known to instil travel restrictions in addition to seizing of assets.
This leaves moneybags with an option to stash their cash in off shore countries with little or no restriction for moving cash. Islands such as Cyprus, Caymans etc, have all been destination vaults for holding foreign cash. But with the Cyprus situation Nigerians must now know that monies can be easily wiped out in the event that the host countries economy is in turmoil.
That is the order of the day. The current $10 billion deal will see bondholders and some large depositors in Cyprus loose their investment. This surely is not what depositors envisioned will have ever happened. Banks deposits are however not the safe haven they pretend to be. With this experience corrupt Nigerians or moneybags seeking offshore havens have with little option but to hide their money in real estate and landed properties another recipe for Asset Bubbles. The CBN must be wary of this and seek ways of minimizing the impact on the larger economy.
The current European crisis surely is not the last and I know more countries will fall in line sooner rather than later. For Nigeria, Cyprus is another reminder that banks one day should be required to do more to safeguard depositor’s money. Your money, no matter how it was derived, is only as safe as the bank is.