With the surging $A and low US interest rates, does this not provide a financial incentive for banks in Australia to borrow funds from the US, as an alternative source of cheap funds.
Is this what happens or are my assumptions incorrect. All other things being equal, would this not keep downward pressure on interest rates (or at the very least greater margins)??
Anyone with experience in financial institutions that could lend credence to my theory or alternatively, debunk it.
Thanks
James
James
What you’re thinking was tried several years ago by a lot of farmers and businesses. The problem is that if you’re borrowing $US the lender wants $US back. This is OK if the $A keeps rising or only falls a couple of % during the term of the loan. But if the $A falls say to 64c (I think there was something in one of the financial pages suggesting 64c was the likely level of the $A in a couple of years) and it is 80c now if you borrowed $1m US you’d get $A1.25 m now but if had to repay when The $A was 64c you’d be repaying $1,562,500 which if you were borrowing over 3 yrs would be equivalent to about 8.3% per annum. To protect yourself you would need to do something like buy a forward foreign exchange contract and the cost of that will be based on where the market thinks the exchange rate will be at that time.
The link shows some of the issues that might arise:
users.tpg.com.au/adslflfl/1995/foreign4.htmcrj
All the banks borow offshore and have done so for many years. However they then have to hedge the repaymnst via the swap markte which negates the bulk of the advantages.
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