Fixed or Floating – Is It Time to Swap?

Since January short-term interest rates have moved down more than a full percentage point to their lowest levels in over four years. Thus, while few people are predicting an immediate end to the recession, most bankers contacted agreed the move would have a positive impact on both the banks and the borrowers.

From the banks persective the downturn in interest rates has come at a very opportune moment. One banker from a major money center bank in the United States told Marine Money that the drop would help the banks to strengthen their balance sheets and improve their profits at a time when they are struggling with the new capital adequacy requirements. While refusing to be quoted, he mentioned that this would necessarily mean that borrowers would be looking at higher spreads on their loans, an increase from 25 to 100 basis points.

On the corporate side, the drop will likely have some of the positive psychological effect that is intended by reducing the cost of capital for borrowers. More importantly though, as one senior Norwegian banker said it will have a positive effect on the profits of highly leveraged companies by reducing interest expense and freeing up cash for principal repayment.

This is only an excerpt of Fixed or Floating – Is It Time to Swap?

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