The Penetration of Financial Instability in Agricultural Credit and Leveraging

Kyosti Pietola, Sami Myyrä and Anna-Maija Heikkila

No 117483, Working papers from Factor Markets, Centre for European Policy Studies

Abstract: This paper describes the aggregate rural capital markets of the EU and the main differences between the markets of its member countries. The results of our study suggest that the agricultural credit markets are still quite segmented and the segments are country- rather than currency- or region-specific. Financial instability in Europe is also penetrating the agricultural sector and the variation of interest rates for agricultural credit is increasing across countries. Perhaps the most dramatic signal of growing financial instability is that the financial leverage (gearing rate) of European farms rose in 2008 by almost 4 percentage points, from 14 to 18%. The 4 percentage-point annual rise was twice the 2 percentage-point rise observed during the economic recession in the late 1980s and early 1990s. The distribution of the financial leverage of agriculture across countries does not, however, reflect the distribution of country-specific risk premiums in the manner that they are observed in government bond yields. Therefore, in those countries that have the weakest financial situation in the public sector and in which the bond markets are encumbered with high country-specific risk premiums, the agricultural sector is not directly exposed to a very large risk of increasing interest rates, since it is not so highly leveraged. For example in Greek and Spanish agriculture, the financial leverage (gearing) rate is only 0.6% and 2.2% respectively, while the highest gearing rates are found elsewhere (in Denmark), reaching 50%.

Keywords: Agricultural and Food Policy; Agricultural Finance (search for similar items in EconPapers)
Pages: 24
Date: 2011-09
New Economics Papers: this item is included in nep-agr
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Citations: View citations in EconPapers (8)

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Related works:
Working Paper: The Penetration of Financial Instability in Agricultural Credit and Leveraging (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:famawp:117483

DOI: 10.22004/ag.econ.117483

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