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Watch out! Europe's eight most ‘dangerous’ financial products
by Amy Rowe on Mar 18, 2013 at 14:12
Europe's most 'dangerous' financial products have been named and shamed following a vote organised by green MEP Sven Giegold. Click through to find out what topped the list...
A total of 2,000 people took part in the Dangerous Financial Products poll, set up by green MEP Sven Giegold. The list of products was divided into two categories: financial instruments said to harm the environment or the world's poor, and financial instruments that were said to harm consumers or investors directly. So what came out worst?
Credit default swaps
The naked short selling of credit default swaps (CDS) on emerging markets and sovereign bonds was voted the most harmful type of investment for consumers. A total of 46.8% of votes signalled this sort of investment as the most dangerous, with fears that CDS on governments could drive bond yields and cause markets to overcompensate.
The EU has already banned naked short selling of CDS on government bonds, but should consider this when trading with countries outside the EU, the survey recommended.
Food speculation funds
Top of the list for most likely to harm the environment or the world's poor were funds that could lead to 'completely unnatural price fluctations' on key foods such as soya beans. This sort of speculative investment could directly impact low-paid workers and in some cases even cause death for those who cannot afford their food anymore, the survey said.
...the products that harm consumers
Credit cards with high interest rates
Credit cards with high interest rates were branded the second most dangerous financial product for consumers, by the survey. Just over 20% of respondents thought credit cards such as Barclaycard Visa or Mastercard had interest rates which were far too high. Compounding this, the survey found, were the interest rates at which banks are allowed to borrow cash at the moment.
Foreign currency loans
Seemingly cheap at first, these loans can potentially expose investors to three types of risk, the survey said. Take for example people building their own houses in Austria during the 90s. The cost of building the house was financed by a loan issued in Swiss francs, exposing the customer to interest rate risk as well as foreign exhange risk.
Additionally, the loan needs only to be paid on final maturity. The customer might save for this loan by using a repayment vehicle that invests in stocks and bonds, therefore exposing them to investment risk too.
Austria reportedly accounts for half of the loans given in foreign currency in the Eurozone.
Reverse convertible loans
Popular in Europe and with attractive interest rates, this sort of loan is only ever really good for issuers, the survey said.
The value of the borrowing depends on the share prices of the issuer and, if share prices fall after the expiration of the reverse convertible, could lead to investors becoming shareholders 'through the backdoor.' In the worst case scenario this could lead to a total loss for the investor, as was the case with Lehman Brothers.
The survey also raised the specific example of the Daimler reverse convertible bond, sold by Deutsche Bank. Issued in January it will run for just under a year but will depend on the share price of Daimler. Investors will be misled by the reliable (German) name of the bond, respondees said.
...and the financial products that could harm the globe
Extraction of oil sands
This survey cites the Sustainable Oil Sands TR Index as a specific example of a product. Dubious extraction methods such as fracking threaten the environment and are energy-intensive, the survey found. Moreover, the use of the word 'sustainable' in the naming of the index, and indexes like it, is misleading, since extraction methods for oil like fracking are plainly not sustainable, it said.
Investing in this type of product could also hinder the development of post-fossil fuel technologies, the survey said.
Extraction of uranium
Also cited as a dangerous area of investment was the extraction of uranium. Despite the argument that nuclear energy is more sustainable than the use of fossil fuels, the industry faces ongoing fears about waste. The survey used DWS Go Uranium Exploration Index Certificate as an example.
Gold and silver
The dubious tax benefits of putting your cash into silver that is deposited in 'bonded' warehouses in Switzerland have led to this sort of investment coming under scrutiny. Citing Solit 2 Gold & Silber GmbH & Co. KG as an example, the survey said not only does the process lead to the rather pointless extraction and depositing of silver without any productive use, but it also could lead to silver resources becoming scarce in years to come. Silver is used for essential techniques such as radiography, and so the scarcity of the material could hike up prices of this sort of work.
For more on the survey results, click here.