Before Iceland went bankrupt in October 2008, many Icelanders devised a creative way to reduce the effective cost of their loan. Back then, the local interest rate was 15.5% and the krona was appreciating fast against other currencies. They then decided that the smart thing to do was to borrow in yen, which had an interest rate of 3.0% and at the same time make a nice sum from currency trade. There are two ways on how the cost of borrowing was reduced here: by borrowing at a cheaper rate (3% versus 15.5%) and the appreciation of the krona.
The bubble eventually broke and with the krona crashing downwards, locals were left with a huge debt. In Michael Lewis`s Boomerang, it was described that there were two ways to sell their Range Rovers when they can`t pay the loan. The first was to ship it to Europe and get paid in a currency that still has value while the second was to burn it and collect the insured sum.
Linking this to the present, there are a couple of was for the cost of borrowing could be reduced when say one wants to buy a house in the US:
1) Borrow in euros. The interest rate in Europe is cheaper than US and the euro has been depreciating against the dollar.
2) Borrow in yen. Same case for the yen, it carries a lower interest rate and it has been depreciating against the dollar.
The challenge would be how to structure such a loan.
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