10 July 1998

Note of caution over euro loans

By Robert Harris

EURO loans should be treated with caution, because adverse exchange rate swings could more than outweigh savings from reduced interest payments.

The warning comes from Gary Markham of accountants Grant Thornton, following a plethora of euro account launches by banks.

Even farmers who receive subsidy payments in euros, which may be possible next year, may face trouble, despite the apparent removal of exchange rate risk, he advises.

At first sight, such loans appear attractive because euro interest rates may be set at half the sterling rate. That would leave a farmer with a current average interest bill of £15/acre paying the equivalent of just £7.50/acre in euros. However, subsidy payments equate to £100/acre upwards.

"Although farmers may be able to pay for certain inputs in euros, that will still leave a lot in their system. At some point, the farmer will have to convert those euros into sterling to pay for labour and other costs, leaving him open to exchange rate risk, which could easily exceed the £7.50/acre he saves."

Although subsidy payment in both euros and sterling makes a euro loan more attractive, farmers would still need to budget carefully to match euro income to spend in order to minimise exchange-rate risk, adds Mr Markham.

The AMC accepts such loans may not be right for all. "We would caution against rushing in because the headline says inflation is a % or two lower," says the companys David Parfitt.

He agrees that the number of people to benefit will depend greatly on whether subsidies can be paid in different currencies.

However, farmers who are competent enough to hedge exchange exposure, or who have taken sound financial advice, stand to gain, he maintains.