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Euroloans v Local Currency Loans

Updated on November 1, 2011

Many businesses consider the loan options before they purchase a loan, especially taking on large debt, in order to minimalise repayments. This is especially occurring in Australia at present.

Some brokers are advocating a Euroloan denominated in Euros in part due to the Greek Financial Crisis (GFC-2). There are a number of reasons for this:

  • Due to the depressed Europeanmarket at present interest rates are lower than in Australia (Petty et al, 2009, p.597). The Euro Loan rate is 1.75% (European Central Bank, 2010) whereas the Australian Cash Rate is higher at 4.75% (RBA, 2010)
  • The Australian dollarcontinues to appreciate against major foreign currencies in part due to our commodity prices. Today AUD 1 buys EUR 0.67147 (XE.com, 2010). This is up from a low of EUR 0.56 earlier in 2010 (Exchange-Rates.org, 2010).
  • There is generally more access to funds in overseas marketsthan in Australia (Petty et al, 2009, p.597)
  • Allows the firm to diversify their debt portfolio outside of the Australian market

However there are some risks and benefits in considering Euroloans. They are:


Benefits

  • Cheaper interest rates than in Australia
  • Access to higher levels of debt eg in excess of $100m
  • Australian Dollar has been appreciating in recent times meaning that the amount to be repaid could be less than the current interest rate

Risks

Exchange rate risk

  • If the local currency depreciates then repayments can be higher than the interest rate
  • If the foreign current appreciates then the repayments will be higher than the interest rate

The benefit of a Euroloan, especially with a depreciating currency due to GFC-2, means that companies can get a lower interest rate as well as a possibly lower rate again if the Australian dollar appreciates or the Euro depreciates.

On the flip side if the Euro can sort out the GFC-2 issues and the currency again appreciates or the AUD$ depreciates during the term then the company will pay more for the loan. This is the risk with the Euroloan concept.


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