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The Penetration of Financial Instability in Agricultural Credit and Leveraging

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  • Pietola, Kyösti
  • Myyrä, Sami
  • Heikkilä, Anna-Maija

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%.

Suggested Citation

  • Pietola, Kyösti & Myyrä, Sami & Heikkilä, Anna-Maija, 2011. "The Penetration of Financial Instability in Agricultural Credit and Leveraging," Factor Markets Working Papers 97, Centre for European Policy Studies.
  • Handle: RePEc:eps:fmwppr:97
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    2. Angelova, Biljana & Bojnec, Štefan, 2011. "Developments in the Agricultural and Rural Capital Market of the Former Yugoslav Republic of Macedonia," Factor Markets Working Papers 110, Centre for European Policy Studies.
    3. E. C. Mamatzakis & C. Staikouras, 2020. "Testing for the effects of credit crunch on agriculture investment in the EU," Bulletin of Economic Research, Wiley Blackwell, vol. 72(4), pages 434-450, October.
    4. Zsuzsanna SZÉLES & Zoltán ZÉMAN & Sándor J. ZSARNÓCZAI, 2014. "The developing trends of Hungarian agricultural loans in the term of 1995 and 2012," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 60(7), pages 323-331.
    5. Curtiss, Jarmila, 2012. "Determinants of Financial Capital Use: Review of theories and implications for rural businesses," Working papers 122846, Factor Markets, Centre for European Policy Studies.
    6. Petrick, Martin & Kloss, Mathias, 2012. "Drivers of agricultural capital productivity in selected EU member states," Working papers 132838, Factor Markets, Centre for European Policy Studies.
    7. Széles, Zsuzsanna & Pataki, László & Aranka, Baranyi & Széles, Zoltán, 2014. "External Methods of Financing for Hungarian Agricultural Enterprises," Roczniki (Annals), Polish Association of Agricultural Economists and Agribusiness - Stowarzyszenie Ekonomistow Rolnictwa e Agrobiznesu (SERiA), vol. 2014(5).

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