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Cyprus shows risk of foreign CDs

By Claes Bell ·
Wednesday, March 20, 2013
Posted: 3 pm ET

If you think being a saver in the U.S. is tough, you should try being one in the island nation of Cyprus.

Up to now, having a certificate of deposit in a bank in Cyprus has been a pretty good deal. Savers there enjoyed the relatively low inflation rate of the euro combined with CD rates that were much higher than in the U.S. According to the latest numbers from the European Central Bank, Cypriot banks were paying an average of 4.66 percent annually on their equivalent of CDs maturing in one to two years. That's many times the 0.26 percent average annual yield that U.S. banks are paying on one-year CDs these days.

But now, there's a big downside. Cyprus' largest banks are currently insolvent and are negotiating a bailout package with the European Union, of which Cyprus is a member, and the International Monetary Fund. As a condition of providing that bailout, European policymakers are demanding that Cyprus confiscate a substantial chunk of the savings sitting in Cypriot banks -- up to 9.9 percent in some cases.

Should it come to pass, the special saver tax is going to hurt not only a lot of Cypriots, but also a lot of the foreign investors, particularly Russians, who had flocked to Cyprus to take advantage of the high rates and the country's relaxed money-laundering controls.

In the U.S., depositors are mostly insulated from those types of issues. Not a single depositor under the insurance limit of the Federal Deposit Insurance Corp. lost a dime from those accounts in the 2008 financial crisis. The FDIC guarantee on deposits backed by the full faith and credit of the U.S. government is a big reason why many Americans have turned to deposits as a safe haven since the system was put into place in 1933.

Savers who decide to seek out higher rates abroad should know that they won't necessarily get a guarantee on their deposits, and if even if they do, it may not mean as much. After all, Cyprus, like all E.U. countries, carries deposit insurance on amounts up to 100,000 euros.

What do you think? Would you put your money in a foreign CD to boost your yield?

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