TransferWise: Money Transfer Scheme For The Masses?

Given the relatively high-cost of most cross-border / international money transfer schemes, is TransferWise the “cheapest” one out there? 

By: Ringo Bones 

Like they say in those cold medicine adverts – “there is a better way” – and in the world of cross-border / international money transfer schemes, TransferWise is set up to be the better ones out there due to its lower transaction costs in comparison to the competition. But is TransferWise really is the better alternative out there? 

TransferWise is a UK based peer to peer money transfer service launched in January 2011 by Kristo Käärmann and Taavet Hinrikus with headquarters in London. The commission charged is usually 0.5 pecent and money is converted at interbank rate – i.e. also called overnight rate if the term of the loan is overnight – in contrast other companies setting a premium rate. In a peer to peer business model, the money a user is sending from their own country is rather swapped with money someone else in the same country is receiving – i.e. the local currency.  

The creation of TransferWise was inspired by the personal experience of one of its founders – Taavet Hinrikus and Skype’s first employee and financial consultant Kristo Käärmann. As Estonians working between their native country and the UK, they felt the “pain of international money transfer” due to bank charges on the amount they had to convert from Euros to pounds and vice-versa. In the words of Hinrikus, “I was losing five percent of the money each time I moved it. At the same time my co-founder Kristo Käärmann (also from Estonia) was starting to get paid in the UK and was losing a lot of money transferring cash back home to pay for his own mortgage. 

Exorbitant money transfer fees of conventional money transfer service providers inspired the two Estonians to make private arrangements, with Hinrikus – who was paid in Euros – putting this currency directly into Käärmann’s Estonian account so that he could pay his mortgage without having to convert pounds to Euros, while Käärmann returned the favor by putting pounds into Hinrikus’ UK account. This inspired them to develop a “crowd sourced currency exchange service” to offer a cheaper alternative to established institutions. 

From the customer’s point of view, money transfers via TransferWise are not essentially different from conventional money transfers. The customer chooses a recipient and a currency, the money to be transferred is taken from his or her account, the transferring company charges the service and some time later the recipient receives the payment in the chosen currency. 

The difference lies in how TransferWise routes the payment. Instead of transferring the sender’s money directly to the recipient, it is redirected to the recipient of an equivalent transfer going in the opposite direction. Likewise the recipient of the transfer receives a payment not from the sender initiating the transfer, but from the sender of the equivalent transfer. This process avoids costly currency conversion and transfers crossing international borders. 

Perpetual Bonds: An Economically Viable Solution To The Big Fat Greek Debt Crisis?

Even though the last time economists heard of it was probably in their history courses back in college, are perpetual bonds an economically viable solution to the current Greek debt crisis? 

By: Ringo Bones 

When the “radical left-wing” SYRIZA Party won a majority of seats during the January 25, 2015 Greek Legislative Election, the European Union powers-that-be at Brussels got scared given that SYRIZA’s party leader Alexis Tsipras was a well-known left-leaning politician running on an anti austerity platform that got him elected with an overwhelming majority. Several days after the January 26 swearing in of Tsipras as the new Greek Prime Minister, fears of a “Greek Eurozone Exit” died down after the new Greek prime minister decided to cooperate with the EU to pay its debts but in a manner that would lessen the current austerity measures imposed on the country by Brussels, could perpetual bonds provide an economically viable – and a less austere option for Greece to pay off its debts? 

Perpetual bonds are a kind of bond with no maturity date therefore it may be treated as equity, not as debt. Perpetual bonds are not redeemable but pay a steady stream of interest forever. Some of the only notable perpetual bonds in existence are those that were issued by the British Treasury to pay off smaller issues used to finance the Napoleonic Wars back in 1814 – hence the college history class connection of when might current tenured economist had last heard of such bonds. Some top economists in the United States believe that it would be more efficient for the government to issue perpetual bonds, which may help it avoid the refinancing costs associated with bond issues that have maturity dates. A perpetual bond is also known as “consol”, “perpetual” or just “perp”. 

Since perpetual bond payments are similar to stock dividend payments – as they both offer some sort of return for an indefinite period of time – it is logical that they would be priced the same way. The price of a perpetual bond is therefore the fixed interest payment, or coupon amount, divided by some discount rate, which represents the speed at which money loses value over time – partly due to inflation. The discount rate denominator reduces the real value of the nominally fixed coupon amounts over time eventually making this value equal to zero. As such perpetual bonds, even though they pay interest forever, can be assigned a finite value, which in turn represents their price. In exchange for the loans, the issuer agrees to make interest payments to the bond buyer for a specific time period. 

A variety of risks are associated with perpetual bonds. Perhaps the most notable is that a perpetual period is a long time to carry on credit risks. As time passes, bond issuers, including both governments and corporations, can get into financial trouble and even fail. Perpetual bonds may also be subject to “call risk”, which means that the issuer can recall them. 

J.P. Morgan Chase: Worth Less Than The Sum Of Its Parts?

As one of the “megabanks” created in the wake of the 2008 global financial crisis, are J.P. Morgan Chase and its ilk truly worth less than the sum of its parts?

By: Ringo Bones 

                                  

Even though it made over 4 billion US dollars during the last three months, J.P. Morgan Chase and related “megabanks” that were created during the wake of the 2008 global financial crisis had been recently criticized by leading economic pundits as being “worth less than the sum of its parts”. Worse still, some “economic schools” criticize such global megabanks as “too big to outperform competing banks now nipping at their heels”. In short, the world’s leading economists seem to have reached a consensus that these global megabanks – unless broken up soon – are just too big to succeed. 

While risk-averse politicians like U.S. Democratic Party Senator Elizabeth Warren even recommends that global megabanks and their ilk need to be broken up soon because they threaten the U.S. economy. Whatever your political leanings may be, it is quite hard to ignore the fact that shareholders of these global megabanks are now complaining because their investments in these banks are not earning enough to their own personal satisfaction. Maybe it is now safe to wonder if these global megabanks actually used the U.S. government’s bailout money wisely. 

Francogeddon: A Eurozone Luxury Problem?

Even though the rest of the world’s working poor dismiss it as a mere Eurozone luxury problem, will the Swiss franc no longer being pegged against the euro affect working class Swiss citizens?

By:Ringo Bones 

Back in January 16, 2015 the headline “Francogeddon” rattled the Eurozone economy when the Swiss government suddenly decided the morning before to suddenly “unpeg” the Swiss franc against the euro. The resulting monetary policy move resulted in the Swiss franc rising 40-percent against the euro to 0.85 Swiss francs against the euro as the Swiss government removed the cap on Thursday morning January 15, 2015 before settling down a few days later. 

Inevitably, Swiss stocks lost 10 percent of its value resulting in billions of dollars being wiped out in their value and a New Zealand based currency brokerage and investment firm Global Brokers NZ was driven into bankruptcy as soon as the de-capping of the Swiss franc hit the fan. And also, this results in additional burden to mortgage holders whose mortgages are in Swiss francs. But why did the Swiss government made such a seemingly “bone-headed” move? Well, at least the Swiss people now wanted why the powers-that-be of their central bank made such a move and wonders whether if the Swiss National Bank’s managers are really up to the job. 

As of late, central banks now have a hard time maintaining economic stability on their own in their respective jurisdictions. During the past three and a half years, the Swiss National Bank capped the value of the Swiss frank at 1.20 Swiss francs to the euro. Such monetary policy had made the Swiss franc one of those “safe haven investments” instrument akin to gold or the Japanese yen. Keeping the value of the Swiss franc artificially low – according to Swiss government economists – benefits the Swiss tourism and manufacturing industry by making their products and services lower in cost in comparison to the neighboring competition. Sadly, 99-percent of the world’s population still can’t afford to buy an entry-level Rolex or go skiing to the Swiss Alps on a whim.  

Downward Trending Crude Oil Prices: Good For The Global Economy?

Even though crude oil producing countries had voiced their “howls of derision” over plunging crude oil prices, but is downward trending crude oil prices good for the global economy? 

By: Ringo Bones 

Crude oil producing countries and multinational crude oil extraction companies had been complaining since the 2008 global credit crunch that if crude oil prices fall below 100 US dollars per barrel, there would be no economic incentive anymore for crude oil exploration and develop new finds. But most economists beg to differ that a downward trending crude oil prices will be good for the global economy and primarily benefits the developing economies. Both premises can’t be true, right? 

After Operation Desert Storm, economists around the world noticed that heavy crude oil dependent countries with still developing economies – like Bangladesh for example – experiences a 1 percent rise in GDP for every 10 US dollar per barrel fall in crude oil prices. Though why these countries haven’t moved away from crude oil may be blamed on conservative business think tanks in Capitol Hill making their economies more crude oil dependent every decade after Operation Desert Storm. 

During the start of 2014, crude oil was trading at 110 US dollars per barrel and by October 20, 2014, it was already down to 85 US dollars per barrel. Bond and hedge fund pundits are already predicting crude oil prices to fall to 70 US dollars per barrel before the end of 2014 while 50 US dollars a barrel crude oil prices is not out of the question during the first quarter of 2015. Would the Rockefeller Foundation moving away from crude oil sourced funding near the end of September be playing a part of this downward trending crude oil trading price? Who knows, at least downward trending crude oil prices  has a geopolitically advantageous effect of curbing the deleterious military adventurism plans of fascist-leaning crude oil producing states like Iran and the recent Vladimir Putin run Russia.