BOV chairman Roderick Chalmers has cautioned against the perception that the Maltese lira is a de facto surrogate currency for the euro. Mr Chalmers was addressing a business seminar and was commenting on Malta’s eventual adoption of the euro and the recent developments wherein Malta joined ERM II with a 100 per cent fixed rate to the euro.
“There is already much talk in the business community to the effect that the Maltese lira is a de facto surrogate currency for the euro – and that there is no exchange risk between the two. I would caution against this point of view”, said Mr Chalmers.
He added: “I would emphasise that my caution is not conditioned by a belief that Malta will not adopt the euro in two years time or so, or that it will not join at the current rate. I am not, repeat not, a proponent of devaluation and nor, I would say, am I expecting one. However, many years of experience have taught me that, for so long as there are two currencies, exchange risk, however infinitesimal, exists between them, and cardinal rule number one in managing a business balance sheet is that you should match the currencies of your assets and liabilities, and match the currencies of your debt with that of your revenues and profits with which you intend to repay that debt. There are, of course, a number of ways of doing this – and one of the services provided by Bank of Valletta is to help our customers to do just that”.
BOV’s chairman said that one thing is certain. “If there are to be tremors and distortion in the currency markets, they will not be for reasons that we can foresee at this time – they will be caused by an event risk outside our control – a natural disaster, a terrorist attack or political upheaval, or some other event that causes global financial disruption that could result in economic uncertainly or turmoil. These unpredictable events – none of which can be on our radar screens at this time – could impact upon views, firmly and justifiably held, on currency alignment”.
He then spoke about his experience in Asia in the 1990s, when businesses became convinced that their local currencies were linked to the US$ under-fixed or managed exchanged rate regimes. At that time, it became cheaper to borrow US$ rather than the local currency – and many businesses did just that, in the mistaken belief that they were not exposing themselves to currency risk. In 1997/1998, a series of complex factors led to turmoil in the financial markets – an event now referred to as the “Asian crisis” – and the impact was devastating. Businesses were wiped out by the exchange losses incurred – and the banks that were happy to lend vast amounts of US$ were very quick to ask for them back. While fully recognising that the circumstances of Asia in the 1990s are very different to those currently prevailing in Malta, it is an example that goes to show that unforeseen events can have a rapid and radical impact on currency alignment expectations.
Mr Chalmers added, “I do believe that early accession to the euro is right for Malta and my current expectation is that Malta will join the euro at the rate as fixed.
“However – and this is the point – until that actually happens, it is just not worth exposing your business to the potential exchange risk for the sake of saving maybe 80 or 100 basis points (0.8 to one per cent) on your borrowing costs for a couple of years.
“That marginal higher cost of borrowing may well prove to be an insurance premium that is well spent.