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With much lower interest rates in EUR than in USD it should be meaningful to borrow the former instead of the latter. Indeed, as reported by various sources (Bloomberg and Reuters for example), EUR-denominated debt is increasingly more popular than the one denominated in USD. But why are investors borrowing in USD at all?

The only point that seems to partially address this point is about liquidity. But the extremely high liquidity of the EURvsUSD makes the objection unconvincing; indeed, why not borrow EUR, change it to USD, and purchase oil/steel/candies with the latter?

Another point might be to avoid exposure to an "unconvincing" carry trade?

Apologies if the question does not fit the scope of the website.

Thank you for your time!

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  • 2
    Individual credit rating does not cross the border.
    – mootmoot
    Dec 9 '19 at 13:47
  • Did you read the articles you linked?
    – quid
    Dec 9 '19 at 18:07
  • A carry trade would involve, for example, borrowing in euros to buy short-term U.S. government bonds. The dollar investment in would be significant collateral for the euro loan and would get a good loan rate. The issuer of an emerging-market bond in euros doesn't get the euro government-bond rate and therefor there isn't a profitable carry-trade available in dollars. The issue of the emerging-market bond in euros is just for funding against tax or royalty revenues and possibly roll-over of previous debt.
    – S Spring
    Dec 9 '19 at 20:57
  • Oh, the issuer of the emerging-market bond in euros, receives the principal amount in euros, sells the euros, and buys their home currency. But because of exchange-rate risk, relative to paying on the bond, they probably just buy the home currency as needed.
    – S Spring
    Dec 10 '19 at 1:44
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It almost always makes the most sense to borrow in your home currency. The reason that there are different interest rates is because there are different inflation expectations. In this case, a lower EUR interest rate means that inflation is expected to be lower in Europe over time than the US.

So let's look at it from a US homeowner's perspective. They are paid in USD and buy a house in USD. If they get a mortgage for the equivalent amount in EUR, then they must make payments in EUR for 30 years. That means that every month they much convert some amount of USD into the mortgage payment equivalent amount in EUR. (we'll ignore transaction fees for this purpose). If US inflation is higher than EUR inflation as expected, then every month they would have to convert a larger amount of USD into EUR. That increase in conversion should cancel out the lower EUR interest rate. When you add in currency exchange fees, it goes from a breakeven to a losing position unless inflation doesn't go as the interest rate suggest.

So the only way a US investor would borrow in EUR if 1) they had a consistent EUR cash flow that would reduce the currency risk or 2) they had a different outlook of inflation than the current interest rates suggest.

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  • Thanks for your answer! I might agree on your point, but in the question I did not specify that I was thinking of it from the perspective of a US resident; rather, I was particularly curious about why are companies in Emerging Markets still borrowing money in USD and not in EUR (I should have specified this in the question!). It seems that your answer does not address that point? Dec 9 '19 at 14:22
  • Not specifically, but the principles are the same - the reason for the difference in rates is different inflation expectations (otherwise there would be an arbitrage opportunity). So EM companies might borrow USD because they do enough business in USD that they don't have currency risk, or they see USD debt as "more stable". Or perhaps USD debt is "cheaper" based on their inflation expectations.
    – D Stanley
    Dec 9 '19 at 14:26
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Because by insuring yourself against currency fluctuations, EUR debt costs exactly as much as USD debt.

If you live in US, you obtain your salary as USD. Thus, by borrowing any other currency, you should ideally insure yourself against currency fluctuations.

Guess what? If EUR debt rate is 1% and USD debt rate is 4%, the cost of the insurance is 3% per year. So, by taking EUR debt and additionally insuring yourself against currency fluctuations, the debt in either currency costs equally. (In practice, there are transaction costs in the insurance, so EUR debt could actually be more expensive.)

If this was not the case, there would be a profitable arbitrage that inverstors would soon notice and the arbitrage would close extremely soon.

The only reason you might want to take debt in a foreign currency is that your income you use to pay that debt is in that currency.

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  • "If EUR debt rate is 1% and USD debt rate is 4%, the cost of the insurance is 3% per year." Can you provide a link showing this to be true?
    – RonJohn
    Dec 9 '19 at 13:53
  • Sure. I just anwered it in money.stackexchange.com/q/117795/36069
    – juhist
    Dec 9 '19 at 14:21
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    The idea is to add the link -- and some text -- to this answer.
    – RonJohn
    Dec 9 '19 at 17:48
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Investors in Europe may be looking for more yield and that can be found in emerging-market government bonds. Then if the bonds are issued in euros instead of dollars then that is more convenient.

Also the emerging-market issuer of the bond in euros pays a lower interest rate than in dollars. However, there is still an interest rate spread between the euro government-bond rate and the emerging-market government-bond rate.

Finally, an emerging-market bond issued in euros has an increase in payment in the emerging-market currency when the euro rises in value against the emerging-market currency. So it might be better or worse to issue the bond in dollars but possibly similar. In either case the bonds are just being issued into a supportive market and the bond issuer takes the exchange-rate risk.

The notable factor is the dollar becoming a little bit less of the world's reserve currency because of more use of the euro.

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