Indexing Debt to Foreign Currencies

Zynks

There is a lot of talk of the british economy being doomed and the US heading towards possible intentional hyper-inflation to get personal debts wiped out as fast as possible.

The euro is likely to remain strong against the US dollar and sterling and if the scenarios above are also true, the US dollar could be heading towards a collapse.

I am not trying to discuss these predictions or guesses, but trying to understand how Irish debt could be indexed to a currency due for a drop in order to reduce the overall euro debt.

Example: company or person owes €2 m. Coverts debt to USD @ 1.3. Dollar collapses over two years to 1.95 and debt is coverted back to a euro total of €1.3 m.

Leaving aside the speculation on the currencies, how possible would it be to secure such an indexation through an Irish bank, and what are the main risks you see?

Zynks

over 50 views and no comments so far....maybe it would help if I give some more background information.

Reference case 1: Brazil late 80's, hiting hyper-inflation (over 80% p.m.). All account holders receive interest daily on their accounts - similar to overnight interbank measures to balance the books - assets with deffered payments are traded in US dollars (considered a firm currency at the time) to ensure value corrections.

Reference case 2: recent "Grand Designs" program, UK couple buys pre-fab house from Germany at a fixed price in € - sterling drops, payments in sterling increase.

Now, what I am suggesting is that personal, corporate or national debt could be indexed in an opposite manner - say the government issuing bonds in a currency likely to devalue, people borrow in dollars, service its interests and buy out of it when an ideal exchange rate is available, etc.

Ireland is a small market, so such moves wouldn't have a major impact in the market, such as propping up the target currency, and could potentially be very beneficial for us.

In times of volatility like today is when big opportunities arise, and this could be one of them. So, any views?

What if the dollar goes up? You'll pay back more.

http://en.wikipedia.org/wiki/Carry_trade#Currency
http://en.wikipedia.org/wiki/Interest_rate_parity

Zynks

Deleted User wrote: »

What if the dollar goes up? You'll pay back more.

http://en.wikipedia.org/wiki/Carry_trade#Currency
http://en.wikipedia.org/wiki/Interest_rate_parity

Sure, that's a risk allright, but if you are taking a big bet like this, you hire people like George Soros to help assess risks.

silverharp

It is just currency speculation by another name, there is no such thing as "likely" in the world of currencies. The idea that a gov. could time the €/$ market over decades is not plausible.
Take for example Eastern Europe , they have borrowed in Euros and Swiss Francs and they are paying for now.

Zynks

...as opposed to Mr. Lenihan...

Zynks

silverharp wrote: »

It is just currency speculation by another name, there is no such thing as "likely" in the world of currencies. The idea that a gov. could time the €/$ market over decades is not plausible.
Take for example Eastern Europe , they have borrowed in Euros and Swiss Francs and they are paying for now.

Well, I guess we need to check the background of these moves by Eastern European countries. Did they have a choice? Maybe international markets wouldn't lend in their currencies... Not a valid reference in my view.

Zynks

Zynks wrote: »

There is a lot of talk of the british economy being doomed and the US heading towards possible intentional hyper-inflation to get personal debts wiped out as fast as possible.

The euro is likely to remain strong against the US dollar and sterling and if the scenarios above are also true, the US dollar could be heading towards a collapse.

I am not trying to discuss these predictions or guesses, but trying to understand how Irish debt could be indexed to a currency due for a drop in order to reduce the overall euro debt.

Example: company or person owes €2 m. Coverts debt to USD @ 1.3. Dollar collapses over two years to 1.95 and debt is coverted back to a euro total of €1.3 m.

Leaving aside the speculation on the currencies, how possible would it be to secure such an indexation through an Irish bank, and what are the main risks you see?

http://ideas.repec.org/e/pbu20.html

a lot on it here.

silverharp

Zynks wrote: »

Well, I guess we need to check the background of these moves by Eastern European countries. Did they have a choice? Maybe international markets wouldn't lend in their currencies... Not a valid reference in my view.

it wasnt a matter of not having a choice, they gambled that they would would gain by borrowing in foreign currencies at lower rates v borrowing in domestic currency at higher rates (companies & individuals). There are various reasons for it but it was just an example. However it was assumed that thier currencies would rise in value as they got ready or EU/Euro. lol

It doesnt change the reasoning. look at it from a personal level if you have a mortgage and are feeling lucky why not switch tomorrow to an interest only GBP mortgage? it still comes down to being a longer term currency trade.

Also, you do not 'invest' in currency markets, you speculate.
See below: