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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%.

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Bibliographic Info

Paper provided by Centre for European Policy Studies in its series Factor Markets Working Papers with number 97.

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Length: 24 pages
Date of creation: Sep 2011
Date of revision:
Handle: RePEc:eps:fmwppr:97

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  1. V. Eldon Ball & W. A. Lindamood & Richard Nehring & Carlos San Juan Mesonada, 2008. "Capital as a factor of production in OECD agriculture: measurement and data," Applied Economics, Taylor & Francis Journals, vol. 40(10), pages 1253-1277.
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  3. Bester, H., 1990. "The Role Of Collateral In A Model Of Debt Renegotiation," Papers 9060, Tilburg - Center for Economic Research.
  4. Stéphane Blancard & Jean-Philippe Boussemart & Walter Briec & Kristiaan Kerstens, 2006. "Short- and Long-Run Credit Constraints in French Agriculture: A Directional Distance Function Framework Using Expenditure-Constrained Profit Functions," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 88(2), pages 351-364.
  5. Pavel Ciaian & Johan F.M. Swinnen, 2009. "Credit Market Imperfections and the Distribution of Policy Rents," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(4), pages 1124-1139.
  6. Binswanger, Hans P. & Deininger, Klaus, 1997. "Explaining agricultural and agrarian policies in developing countries," Policy Research Working Paper Series 1765, The World Bank.
  7. Carter, Michael R., 1988. "Equilibrium credit rationing of small farm agriculture," Journal of Development Economics, Elsevier, vol. 28(1), pages 83-103, February.
  8. Catherine Benjamin & Euan Phimister, 2002. "Does Capital Market Structure Affect Farm Investment? A Comparison using French and British Farm-Level Panel Data," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(4), pages 1115-1129.
  9. Boot, Arnoud W A & Thakor, Anjan V & Udell, Gregory F, 1991. "Secured Lending and Default Risk: Equilibrium Analysis, Policy Implications and Empirical Results," Economic Journal, Royal Economic Society, vol. 101(406), pages 458-72, May.
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Cited by:
  1. 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.
  2. Sahrbacher, Christoph & Ostermeyer, Arlette & Sahrbacher, Amanda, 2013. "Simulation Results of AgriPoliS about Diminishing Capital Subsidies and Restrictions," Working Papers 157114, Factor Markets, Centre for European Policy Studies.
  3. Angelova, Biljana & Bojnec, Stefan, 2011. "Developments in the Agricultural and Rural Capital Market of the Former Yugoslav Republic of Macedonia," Working Papers 117490, Factor Markets, Centre for European Policy Studies.
  4. 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.
  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.

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