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Euroloans v Local Currency Loans
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:
- Cheaper interest rates than in Australia
- Access to higher levels of debt eg in excess of $100m
- Australian Dollar has been appreciating in recent times meaning that the amount to be repaid could be less than the current interest rate
- If the local currency depreciates then repayments can be higher than the interest rate
- If the foreign current appreciates then the repayments will be higher than the interest rate
The benefit of a Euroloan, especially with a depreciating currency due to GFC-2, means that companies can get a lower interest rate as well as a possibly lower rate again if the Australian dollar appreciates or the Euro depreciates.
On the flip side if the Euro can sort out the GFC-2 issues and the currency again appreciates or the AUD$ depreciates during the term then the company will pay more for the loan. This is the risk with the Euroloan concept.