WHAT IS A 'Hard Loan'

A hard loan is a foreign loan that must be paid in hard currency, or the currency of a nation that has stability and a reputation abroad for economic strength.

BREAKING DOWN 'Hard Loan'

A hard loan is a type of loan between a lender and borrower in two different counties and is denominated by hard currency. Hard currency is a monetary system that is widely accepted around the world as a form of payment for goods and services. It usually comes from a country that has a strong economic and political standing. A hard currency is expected to remain relatively stable through a short period of time, and to be highly liquid in the forex or foreign exchange (FX) market.

For example, a loan agreement between a Brazilian company and an Argentinean company where the debt is to be paid in U.S. dollars is a type of hard loan because U.S. dollars are considered to be hard currency and more stable than Brazilian or Argentinean dollars. A hard loan substantially reduces the risk that would exist if the loan were denominated in less-stable currencies.

Hard Currency

The value of a currency is mostly based off of economic fundamentals such as gross domestic product (GDP) and employment. The international strength of the U.S. dollar is reflective of America's GDP which, as of 2016, stood first in the world at $18.57 trillion. China and India had the second and seventh, respectively, ranked GDPs in the world, but neither the Chinese yuan nor the Indian rupee is considered a hard currency. This helps explain how central bank policies and stability in a country's money supply also factor into exchange rates. The U.S. dollar is considered to be the world's foreign reserve currency, which is the reason it is used in 70 percent of international trade transactions.

One measure of a hard currency is its liquidity in the forex or foreign exchange market. FX is the market in which currencies are traded, and the forex market is the largest, most liquid market in the world, with average traded values that of trillions of dollars per day. The FX market includes all of the currencies in the world. Forex  transactions take place on either a spot or a forward basis, and are executed over the counter and around the clock. There is no centralized market for forex transactions. The largest foreign exchange markets are located in major financial centers like London, New York, Singapore, Tokyo, Frankfurt, Hong Kong and Sydney.

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