Eurocredit

From CEOpedia | Management online

Eurocredit in countries outside Eurozone is the credit denominated in Euro. In many countries credit can be taken in local currency, but denominated in other curerncy, e.g. Euro, Swiss Frank, US Dollar.

If the price of the foreign currency is low it may be profitable to take a loan denominated in that currency. Also, if a person or company earns in a foreign currency (e.g. Exporter) it may be less risky to take a loan in that currency because that person or company is turning the currency on a daily basis so making a loan in a foreign currency is a safer option.

However, if the person or company earns in local currency and takes loan in foreign currency it is exposed to currency risk. If the price of foreign currency grows, the loan principal an interest become more expensive. Many borrowers don't take that into account when taking loan. And many banks don't inform customers about that (or they make it in small letters).

Advantages and Disadvantages

  • The main advantage of taking loans in foreign currencies is the possibility of profit resulting from the favorable exchange rate during the term of the contract.

Moreover, Eurocredit has many hidden defects, which makes it very risky for people who do not make money in the currency in which they want to take out a loan. People who do not have a stable income should analyze their financial situation due to the existing defects [1].:

  • currency exchange rate - the price of a given currency expressed in another currency may be beneficial on the day the loan is taken, however, it may change drastically at any time to the disadvantage of the borrower.
  • the political situation of each country - depending on the authority and political system then existing, [2]. and changes that occur during the term of the loan agreement can undergo an absolute transformation
  • the economic situation and economic reasons influencing it - economic growth is conditioned by factors such as: quantity and quality of owned natural resources, fixed assets, level of technology, advancement of innovation implementation and at the same time level of education, skills of the population, professional qualifications which directly affects the size unemployment rate. The more the developing country is, the greater the risk of changing the value of the currency[3].
  • the banking system - is the most important element of the monetary and credit economy, because credit transactions occur through its intermediation. In a situation where many borrowers fail to comply with the contract, ie cease to repay loan installments, the banking system may break down by the emerging chain reaction of other sovereigns borrowers.

Eurocredit Action

Eurocredit spreads through wide novelties on the domestic and foreign market, which often surprise borrowers. Well, the positive effect of Eurocredit can be seen through its strong dependence on spread changes and information about the future event. One of the main goals of eurocredit is to break down and suppress the risk of expected and unexpected events that are related to the borrower's creditworthiness. As a result, the aim is to control and adjust the spread between periods, the last and the current one[4] Therefore, if the borrowers decide on the credit processes referred to, then the prices of loans in euro should be adequate to the expectations of the clients based on the potential growth of the post-loan country. In connection with this, speaking about euro fluctuations, we translate them as "new information" referring to the growth of the host of the borrowers.

Examples of Eurocredit

  • Eurocredit provided by foreign banks: In countries outside of the Eurozone, foreign banks may offer Eurocredit. This type of credit is often used to finance international trade, or to facilitate capital flows between countries. For example, a foreign bank may provide a Eurocredit to a business in India, which can then be used to purchase goods from a supplier in Europe.
  • Eurocredit provided by local banks: In some cases, local banks may offer Eurocredit to their customers. This type of credit can be used to purchase goods or services from another country or to finance a project in a different currency. For example, a business in India may take out a Eurocredit from a local bank in order to purchase raw materials from a supplier in Europe, or to finance a project in a different currency.
  • Eurocredit provided by international payment platforms: International payment platforms, such as TransferWise, may also offer Eurocredit to their customers. This type of credit can be used to facilitate international payments, such as payments for goods and services, or to transfer funds from one country to another. For example, a business in India may take out a Eurocredit from TransferWise in order to pay for services provided by a supplier in Europe.
  • Eurocredit provided by international money transfer services: In addition to payment platforms, international money transfer services, such as Western Union, may also offer Eurocredit to their customers. This type of credit can be used to transfer funds from one country to another, or to make international payments. For example, a business in India may take out a Eurocredit from Western Union in order to make payments to a supplier in Europe.

Other approaches related to Eurocredit

  • Eurocredit enables companies to access financing from lenders in the Eurozone without the need to convert currency.
  • Eurocredit can also provide access to more favourable lending rates and terms than are available in the local currency.
  • Eurocredit can be used to finance international trade, allowing companies to pay suppliers in the Eurozone in Euro.
  • Eurocredit can be used to hedge against currency fluctuations, as the risk of exchange rate movements is eliminated.
  • Eurocredit can also be used to raise capital for investments or acquisitions in the Eurozone.

In summary, Eurocredit provides companies with access to financing, more favourable lending rates and terms, a means of financing international trade, currency hedging, and a means to raise capital for investments or acquisitions in the Eurozone.


Eurocredit — recommended articles
Capital Base — Borrowing capacity — Currency risk — Money emission — Global demand — Asset swap — Creation of money — Repatriable — Currency Convertibility

References

Footnotes

Author: Mariola Goc

  1. ↑ Stockhammer, E. (2010).
  2. ↑ Curto, J., Nunes J., Oliveira L. (2008)
  3. ↑ Bacchetta, P., Merrouche O. (2015).
  4. ↑ Doukas, J. (1989)
Retrieved from "https://ceopedia.org/index.php?title=Eurocredit&oldid=92052"