Comments on: Reverse carry trade borrowing is deadly http://www.creditwritedowns.com/2008/10/reverse-carry-trade-borrowing-is-deadly.html Finance, Economics and Markets Fri, 10 Feb 2012 00:37:00 +0000 hourly 1 By: Edward Harrison http://www.creditwritedowns.com/2008/10/reverse-carry-trade-borrowing-is-deadly.html#comment-3997 Edward Harrison Thu, 19 Feb 2009 13:44:46 +0000 http://www.creditwritedowns.com/2008/10/reverse-carry-trade-borrowing-is-deadly.html#comment-3997 My terminology "reverse carry trade" seems to be more in favour than I thought. Willem Buiter uses it in his essay about the Eastern European crisis. Here is the link and the quote: <a href="http://blogs.ft.com/maverecon/2009/02/the-return-of-capital-controls/" rel="nofollow">The return of capital controls</a> In most CEE countries, households and non-financial corporations played the reverse carry trade by borrowing in the foreign currencies with the lowest interest rates, oblivious to the exchange risk this involved. These CEE counterparts of Mrs Watanabe did so without having any natural foreign exchange hedges (foreign currency assets or income) and without taking out any synthetic hedges. Households throughout CEE have Swiss-franc-denominated residential mortgages. I am surprised there weren’t more yen-denominated residential mortgages taken out! With the sharp decline in the external value of their currencies (the Polish zloty has declined against the euro by more than 35 percent since its peak in mid-2008, the Hungarian forint by 26 percent and the Czech koruny by 22 percent), the real value of their debt and debt service has increased sharply. Fortunately, most of these mortgages have long remaining maturities. My terminology “reverse carry trade” seems to be more in favour than I thought. Willem Buiter uses it in his essay about the Eastern European crisis. Here is the link and the quote:

The return of capital controls

In most CEE countries, households and non-financial corporations played the reverse carry trade by borrowing in the foreign currencies with the lowest interest rates, oblivious to the exchange risk this involved. These CEE counterparts of Mrs Watanabe did so without having any natural foreign exchange hedges (foreign currency assets or income) and without taking out any synthetic hedges. Households throughout CEE have Swiss-franc-denominated residential mortgages. I am surprised there weren’t more yen-denominated residential mortgages taken out! With the sharp decline in the external value of their currencies (the Polish zloty has declined against the euro by more than 35 percent since its peak in mid-2008, the Hungarian forint by 26 percent and the Czech koruny by 22 percent), the real value of their debt and debt service has increased sharply. Fortunately, most of these mortgages have long remaining maturities.

]]> By: AnonymouSpain http://www.creditwritedowns.com/2008/10/reverse-carry-trade-borrowing-is-deadly.html#comment-2584 AnonymouSpain Thu, 15 Jan 2009 22:31:08 +0000 http://www.creditwritedowns.com/2008/10/reverse-carry-trade-borrowing-is-deadly.html#comment-2584 Some people in Spain have been encouraged by their banks (!!!) to move their mortgages to yen, in order to avoid the higher EURIBOR rates we have seen in the past 2 years. I gather the bank gets some fees for the operation, and the customer bears all the risk. Some people in Spain have been encouraged by their banks (!!!) to move their mortgages to yen, in order to avoid the higher EURIBOR rates we have seen in the past 2 years. I gather the bank gets some fees for the operation, and the customer bears all the risk.

]]> By: Edward Harrison http://www.creditwritedowns.com/2008/10/reverse-carry-trade-borrowing-is-deadly.html#comment-555 Edward Harrison Sun, 02 Nov 2008 13:33:00 +0000 http://www.creditwritedowns.com/2008/10/reverse-carry-trade-borrowing-is-deadly.html#comment-555 fair enough. No one uses that term. But, I have done so to highlight the different risks in hedge funds or banks or hospitals or sovereigns borrowing in foreign currencies versus borrowing in their home currency.<br/><br/>Because of currency risk, one could see the real cost of their liabilities sky rocket by borrowing in foreign currency. To my mind, borrowing in a foreign currency is much riskier than investing in one. fair enough. No one uses that term. But, I have done so to highlight the different risks in hedge funds or banks or hospitals or sovereigns borrowing in foreign currencies versus borrowing in their home currency.

Because of currency risk, one could see the real cost of their liabilities sky rocket by borrowing in foreign currency. To my mind, borrowing in a foreign currency is much riskier than investing in one.

]]> By: Anonymous http://www.creditwritedowns.com/2008/10/reverse-carry-trade-borrowing-is-deadly.html#comment-554 Anonymous Sun, 02 Nov 2008 08:58:00 +0000 http://www.creditwritedowns.com/2008/10/reverse-carry-trade-borrowing-is-deadly.html#comment-554 I don't think this is a reserve carry trade. It is a bona fide carry trade. You are borrowing in a lower yielding currency and investing in higher yielding assets. This is no different than US-based hedge funds borrowing in yen to fund their dollar-denominated speculations. I don’t think this is a reserve carry trade. It is a bona fide carry trade. You are borrowing in a lower yielding currency and investing in higher yielding assets. This is no different than US-based hedge funds borrowing in yen to fund their dollar-denominated speculations.

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