It is believed that maintaining a fixed exchange rate encourages residents of a country to borrow in foreign currency. If the domestic currency depreciated but then many of these debtors bankrupt, Explain and comment.
The exchange rate is the amount at which a currency is exchanged with another currency or plain words is the value of a currency of a country other than the country tone.Ka two ways in which the price of a currency is determined kundrejte another currency: according to a fixed rate determined by the Central Bank of the country, which will attempt to use its policies to maintain a fixed exchange rate cts. The second way is by a flexible exchange which is determined by the market. If the exchange rate can move freely, then the price can move quickly in the economy, bringing together all the foreign goods. In special cases, the central banks of countries with a flexible interfere, but rarely.
II. Analysis on the effects of foreign currency loans
A loan in a foreign currency is repayable in a currency other than the currency of the country in which the borrower is resident. Mortgage credit in foreign currency can be used to finance mortgages both personal and corporate mortgages.
The main advantage of the mortgage in a foreign currency is simple: They give you the ability to borrow at a lower rate of interest than in the local currency. This can be achieved by choosing a currency that has the lowest rates of credit interest that we have
The interest rate on a loan in foreign currency are based on interest rates applicable to the currency in which the loan is not expressed and interest rates applicable to the borrower’s local currency itself. Therefore, a foreign currency loans should be considered before it gets better because it is only convenient when interest rates in foreign currency is significantly lower than the interest of the borrower’s local currency.
Borrowers should be aware that they have an obligation to repay in another currency and foreign currency exchange rates change constantly. This means that if the borrower’s domestic currency was strengthening against the currency of denomination of the loan, then it will cost less in local currency borrowers to fully repay the loan. Therefore, we say that, the borrower makes a saving of capital.
Having a fixed exchange rate can be obtained more from credits in a foreign currency given that the loan can benefit you want with best price. Therefore increase the number of kreditorve in foreign currency but not everyone knows QW such loans must be generate short-term because the risks QW they carry are really horrible for further illustrate can take the example of the close of 2011 Hungary wherein the effects of damage caused by the depreciation of the local currency shook the whole system.
A concrete example: Hungary
Owners who financed mortgages in foreign currencies were hit hard during the past eight years, because “no one warned them,” about the risks of foreign currency fluctuations. Foreign currency mortgages were popular in Hungary between 2004 and 2008 as they were significantly cheaper than mortgage loans in Forint (Hungarian currency). As a result, more than 60% of household mortgages are tied to a foreign currency, mostly in Swiss francs. Most Hungarians who took kte type homes with their mortgage loan are overdue, being on the verge of collapse.
The benefits of investing in forex about having a little important detail must always be carried out in the short term benefits may be safe, while mortgage loans istering Short. All those who received short-term loans in mortgage kreditete benefited while depreciation of the domestic currency after paying the price for the most expensive yet.
On the other hand fixed exchange rate pressures found in these përcaktuesse:
i) macroeconomic variables
ii) monetary and financial changes associated with market determined.
iii) The values of the past and expected the same financial market with its autonomous dynamics.
So are these factors that will affect the amendment of the fixed exchange rate. Borrowers with a credit short time, at the same time give their creditors an opinion that when these debts can be settled mature and complete. This thing, this short humamarrësit experience also helps creditors to establish a long-term outlook for borrowers. In the case of devaluation of the national currency borrowers, the borrowers are not alone with this significant risk (ie exchange rate) but also vis creditors. When changing exchange rate and zhverësohet local currency, the borrower shall, within a short period of time to repay the debt (thus having the risk of direct bankruptcy), and to pass this great danger, refinanced their debt existing or extended the maturity date, in order to allow for the possibility borrower to repay the debt but also fits with the entry of a new exchange rate.
Moving from a fixed rate in a zhlerësim currency picked up surprisingly not only borrowers but also investors, and in this case (in the case of the devaluation of the local currency), although obviously would hurt borrowers, again between the two sides will establish a state of fear, freezing financial trading relationship between them. Although seemingly Borrowers are those who are losers, investors are in the same position: the risk of default on debt from the borrower.
But the disadvantages of fixed exchange rates require sacrifices which must therefore be emphasized that even if a country holds fixed and can not be always hold because of the ransom to be paid by you are:
– Major properties required of foreign reserves
– Fixed exchange rates require a government to hold large-scale reserves of foreign currency to maintain the fixed rate
– Such reserves have an opportunity cost.
Losing your freedom in domestic policy – the exchange rate needs can dominate policy and this can not be good for the economy at that point. Interest rates and other policies can be set to the value of the exchange rate rather than macro objectives most important inflation and unemployment.
Fixed rates are volatile – Countries within a fixed rate mechanism often pursue different economic policies, which tends to result of different inflation rates. What this means is that some countries will have low inflation and be very competitive and others will have high inflation and are not very competitive. Uncompetitive countries will be under heavy pressure constantly and may, ultimately, have to devalue. Speculators will know this and thus creates further pressure on that currency and, in turn, the government.
Conflict with other objectives. To maintain a particular level of the exchange rate may conflict with other macroeconomic goals.
If a currency is falling below its bandit government will have to intervene. It can do this by buying foreign currency, but it is only a short-term measure.
The most effective way to increase the value of a currency is to raise interest rates. This will increase the flow of hot money and reduce inflationary pressures.
• However higher interest rates will lead to lower AD and economic growth, if the economy is growing slowly, it could trigger a recession and unemployment will rise.
From as analyzed above, we can say that fixed exchange rates really promote the growth of loans in foreign currency because when we have a fixed exchange rate have the opportunity to benefit from lower interest rates than local currency. But given that fixed exchange rates require sacrifices on the part of central banks such as:
1 foreign high-rays with high costs
2-Restrictions on the Central Bank’s policies
3-fixed rates to reduce the flexibility of the economy to shocks shock
4-fixed exchange rates could lead to current account imbalances. For an overvalued exchange rate can cause a deficit in the current account.
For these reasons always mortgage loans in foreign currency will be bankruptcy for debtors source because it is impossible to maintain in the long term a fixed exchange rate, the subsequent losses are much greater than all the benefits first.
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