European Chamber: Information Europe and Amerika (Florida)

Since governments have tried to use paper money, there are two immutable rules that govern the value of one government’s money in terms of another:

1.	In the long run, exchange rates generally reflect prices and monetary policies.
2.	In the short run, the only certainty is that exchange rates are uncertain.

Because of these uncertainties, governments throughout history have intervened to fix currency exchange rates. In 1944, for example, western world leaders met in Bretton Woods, New Hampshire, to confront the world economic and financial problems that occurred following the Great Depression and World War II. As part of their agreement, the value of the US Dollar, already the world's leading currency at the time, was set at 1/35th of an ounce of gold. The world’s central banks were then asked to keep the exchange rates of their currencies pegged to the dollar's gold content.

Using Germany and its DM as an example, we do see a generally stable exchange rate at about DM 4.00/US$ until the early 1970s as a result of this Bretton Woods fixed exchange rate system. But with the collapse of this system in 1971, the DM/$ exchange rate entered a period of enormous fluctuations in both directions as shown by the high points in the following selected years:

With the introduction of the Euro on January 1, 1999, it was the hope of participating European governments that overall exchange rate stability, especially with the US Dollar, would be fostered by the mandated fixed exchange rates between the currencies inherent to the Euro. However in the twenty-four months of the Euro’s existence we have seen only a fall against the US Dollar reaching nearly 30% in October of 2000.
Now what does this all mean to a European who has purchased real estate in Florida in the last ten years? If that European bought this property for cash and this property has or could generate some rental income, it means that a substantial foreign exchange gain is locked in that property and a portion of that gain could be realized through a US Dollar mortgage.
Consider the following example:

1.	Assume that a European purchased real estate in Florida for $100,000 in cash on December 7, 1995.
2.	On December 7, 1995, this European also exchanged DM 144,000 for $100,000 at the then market exchange rate of DM 1.44/$ in order to close the purchase.
3.	Assume conservatively that the appraised value of this Florida property has stayed at $100,000 in December 2000.
4.	On December 6, 2000, this same European then obtains a $70,000 first mortgage on the property.
5.	On that same date, this European exchanges his $70,000 mortgage loan proceeds for DM 156,800 at the current exchange rate of DM 2.24/$.

In DM terms, this European has thus been able to use this 56 % foreign exchange gain on his US Dollar mortgage loan proceeds with just a 70% loan to property value to cover the entire DM 144,000/$100,000 original purchase price plus achieve a real DM 12,800 (or $5,714) overall gain. Furthermore, if this individual can generate sufficient US Dollar rental income on this property or from other US Dollar sources to cover the loan service on the $70,000 mortgage, the 56 % foreign exchange gain becomes relatively well secured.

The decision to assume debt now, later or never is always an individual decision based upon the best advice available. The risk that this foreign exchange gain will evaporate or increase is also one that each individual must make. Just remember that:

“In the short run, the only certainty is that exchange rates are uncertain.”