“Should I take a loan in Euro or in Ron?”

During the last month I have been asked several times about Euro and Ron and my forecast. As I have stated to you several times, I expect Ron to devaluate during the following months, as a result of what is happening in the Romanian economy. Lately I have been receiving many emails regarding a potential new loan and if this should be concluded in Euro or in Ron.

“Should I take a loan in Euro or in Ron?”
For example, Emilia I. wrote to me on 20.07.2010 :

“Can you please answer to me? I kindly ask you this, because I appreciate  your approach and the way you inform us about reality. How the things are going .. Is it better (in future in the years after the crisis,) to take a loan from a Bank in Euro or Ron? Currently Euro would be the best option considering that Euribor is low. But what happens if  it will grow? Will it be profitable in RON, even if at the time being  the interest rate is higher?”

If possible, please don’t take any loan at all
The following months are critical about the future of Romanian economy. The best scenario appears to be a depreciation of Ron, reflecting the bad condition of the economy. Some people started talking about worse situations (that if I tell you, I might scare you and I don’t want to). So, if it is possible, please try to avoid a new loan during this period. Especially if it is a consumer loan, which will be almost catastrophic for your family’s budget

Borrow money in the currency you are paid too
In case that you can not… avoid the loan, then I think the answer is simple:

Do you get paid in Euro? Do you receive your salary in a model which calculates Euro / Ron fluctuation? Then choose Euro. Do you get paid in Ron, a fixed amount per month? Then choose Ron.

Borrow money in the currency you are paid too, in order for you to be comfortable in the near future.

Euro: Lower interest, but high risk of depreciation
If you borrow Euro, then you have the following risk: If Ron depreciates, your loan will automatically increase accordingly. So, with a salary of 3.000 Ron / month and a monthly installment of 200 Euro (about 850 Ron today), if Ron depreciates by 20%, your installment will automatically increase by 20% and you will pay 1.020 Ron / month (but still 200 Euro).

Ron: Stable payments but very high interest rate
If you borrow Ron, you will not be afraid of currency problems, but then you will have serious problems by the interest rate. The interest rates in Ron today (except “Prima Casa”, where the State guarantees your loan to the bank) are very high. So the sum you pay will increase way too much, risking your ability to pay it back.

If Romania borrows with Euribor + 5%…
One of the reasons that the economy is frozen is the situation in the banking system and the very expensive (or risky) credits being offered to the citizens, especially the entrepreneurs.

I have been informed that lately the Romanian State is borrowing money paying an interest of Euribor + 5%. If this is correct, what can you expect to happen for smaller or bigger companies? The banks will prefer to borrow the State at a high rate, having the country’s guarantee and the rates for normal people will be even higher. Officially they will continue telling you “yes, we are open, we offer loans but people don’t come to apply for one”, but in reality many banks offer so bad terms, that they prevent any serious healthy client to finally borrow money.

One of the potential problems over the following months…
This is why one of the potential problems over the following months is the following: As Romanian State will try to “stay alive”, borrowing more and more money, it will drain the market from cash, collecting almost all the banks’ reserves. Like this the market will have cash flow problems and the PIB will fall. Then the incomes will fall too, so will the taxes. Less taxes means more loans for the State etc. Once this vicious circle starts, it will continue for long… (but I really hope that it will not start)