Bad medicine
THE patent medicine men are out with a cure for expensive mortgages. Why, they say, suffer the pain of borrowing pounds? We can arrange you a mortgage in a nice sensible currency, with interest rates in nice sensible single figures. Brokers are busily pushing these foreign-currency mortgages, and one has gone further still, offering a package which will allow you to borrow at ten per cent in European Cur- rency Units (and to bang on about it to your neighbours over drinks.) If you feel like taking up one of these tempting offers, please take my advice, and lie down until the feeling goes away. Do you expect to earn any Ecus to pay the interest? Is your house going to be priced in Ecus? No — you have in fact borrowed to buy a sterling asset, and are servicing the debt out of your sterling income. Bring any other currency into the deal and you have what bankers call a mismatch. It is dangerous exposure, even for professionals. That is what J. Lyons had when they borrowed cheap-looking Swiss francs to finance their Swiss rolls. The Swiss francs did not look so cheap when they had to be paid back — indeed, that was the end of Lyons's inde- pendence. At the same time Dunlop was borrowing German marks. Later, a new finance director found that this supposedly cheap borrowing had cost Dunlop the equivalent of 32 per cent. That, too, proved fatal, though it took longer. As a rule, and as you would expect, the cheaper a currency is to borrow, the more it will cost to repay — but the medicine men will not tell you that.
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