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Hidden Foreign Exchange Debt Swaps

Solitaire

Neoclinus blanchardi
Solitaire
Joined
Jul 25, 2001
Messages
3,065
While perusing banking related issues, I noticed this article:
Dollar Debt In FX Swaps And Forwards: Huge, Missing And Growing.


When a company borrows money to build a plant in a foreign country it finds
itself subject to foreign exchange fees, among other things, that add up over
the life of the loan.

Instead, it can meet with another foreign company who wants to build
a plant in this country. Assuming the same amount of borrowed money
for each company they agree to swap the loans making the loans local
for each company.

Saves money and the owners get a new plant, except no one told them
about the loan.


Looks to be about 100 trillion or about ten times the size of the 2008
housing crisis.

But is it worse than, the same, or better than? I can't decide.
 
I'm not following the part about the owners not knowing about the loan. The owners of what? The company that's taking out a loan to build a plant? They have to know they're building a plant, they're the owners. And they have to know they're servicing a loan - their company is servicing a loan, right?

Anyway, it seems like a fiduciarily responsible way to do business, assuming you can find a willing counterparty with compatible financial interests. Which, apparently, you can. I don't see the problem.
 
There was some really shonky episodes in Australia, where farmers were persuaded to take foreign currency loans at amazing interest rates, but the amount owed insta-ballooned when the Australian dollar fell...
 
theprestige said:
I'm not following the part about the owners not knowing about the loan.
The owners of what? The company that's taking out a loan to build a plant?
They have to know they're building a plant, they're the owners. And they
have to know they're servicing a loan - their company is servicing a loan, right?

Anyway, it seems like a fiduciarily responsible way to do business, assuming
you can find a willing counterparty with compatible financial interests. Which,
apparently, you can. I don't see the problem.
Click to expand...


I found another document on the issue that clarifies the matter,
FX Swaps And Forwards: Missing Global Debt?

The owners get a new plant, but they do not get informed of the loan
arrangements. The debt doesn't appear on the books, so the owners don't
know about it, but the company borrowed the money and has to repay it.

The companies management doesn't list the loan on the books because
its on the behalf of the foreign company, but then they don't list the loan
the foreign company took out on their behalf because they didn't take out
that loan. And the management lists the loan payments as derivatives losses,
which they are not.

So the owners don't know their servicing a loan. Just that the derivatives
loose money at the rate of a loan payment.

The fact that the management twisted accounting rules to violate accounting
principles makes you wonder what other things hide in that dark, dark place.
 
Solitaire said:
I found another document on the issue that clarifies the matter,
FX Swaps And Forwards: Missing Global Debt?

The owners get a new plant, but they do not get informed of the loan
arrangements. The debt doesn't appear on the books, so the owners don't
know about it, but the company borrowed the money and has to repay it.
Click to expand...

This is an incorrect reading of the situation. The owners of the plant in this case would certainly know about the loan arrangement; they're the ones who decided to build the plant in another country, right?

The argument is about how the forwards and swaps should be accounted for on financial statements. When they are well-designed, they do not create some extra debt that is "missing;" instead they reduce or eliminate FX risk. Some forwards and swaps are speculative and those may require different accounting, but that's for FASB to hash out.
 
Brainster said:
This is an incorrect reading of the situation. The owners of the plant in this case would certainly know about the loan arrangement; they're the ones who decided to build the plant in another country, right?

The argument is about how the forwards and swaps should be accounted for on financial statements. When they are well-designed, they do not create some extra debt that is "missing;" instead they reduce or eliminate FX risk. Some forwards and swaps are speculative and those may require different accounting, but that's for FASB to hash out.
Click to expand...

Please. You are interfereing with an Anti Capitalist Rant with fact.
 
dudalb said:
Please. You are interfereing with an Anti Capitalist Rant with fact.
Click to expand...

I figured FASB would shut them up, but I probably could have claimed it was ASPCA and they'd not know the difference.
 
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