Eurocredit
| Eurocredit |
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| See also |
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.
References
- Bacchetta, P., Merrouche O. (2015). Countercyclical Foreign Currency Borrowing: Eurozone Firms in 2007-2009. "Swiss Finance Institute Research Paper No".s.3
- Curto, J., Nunes J., Oliveira L. (2008). The Determinants of Sovereing Credit Spread Changes in the Euro-Zon "Introduction, Determinants of Credit Spreads" s. 2-7
- Doukas, J. (1989).Journal of International Business Studies. "Syndicated Euro-Credit Soverign Risk Assessments, Market Efficiency And Contagion Effects" s. 1-6, 8, 10-11
- Jenk, J. (2015). The Greek Euro crisis as seen through Greek myths. "Hercules pursued a host of tasks to correct an error" s. 7
- Mayer, H. (1979). Bis Economics Pares."Credit and Liquidity Creation in the International Banking Sector" s.5-8
- Stockhammer, E. (2010). Political Economy Research Institute "Finalization and the Global Economy" s.4-5
Footnotes
Author: Mariola Goc
