What Is a Rollover Risk?

Financial rollover risk is a problem that can occur when refinancing a current debt, with the risk being a higher interest rate. Rollover risk normally can be avoided by paying the debt in full before the refinancing period or if the borrower watches the market and only refinances when interest rates are low. While this can be applied to anyone with a debt, this often is used in conjunction with government, because governments tend to have much more debt than other entities. If this does concern a government, then the risk is better when the debt is domestic.

Interest rates on loans are constantly changing and, while refinancing can help borrowers get a lower interest rate, rollover risk is concerned with getting a higher rate. People who have smaller debts may not see many problems when interest rates increase, but those with larger debts may have to pay a lot of extra money, even if the rates only go up by 1 percent or 2 percent. These rates are based on inflation and the economy, and the rates often change daily, which may increase the potential risk.

There are several ways to reduce or eliminate rollover risk. If the entity is able to pay the debt before the refinance period, then there would be no reason to refinance and the debt will be gone. When this is impossible, people should check the interest rates regularly and refinance the debt when rates are low.

Anyone who owes money should be concerned with rollover risk, especially when a debt period is ending and the debt must be refinanced. While this risk is open to anyone, it most often concerns the government and large businesses. This is because these entities often owe the most money and, when interest rates increase, they may have to pay a much higher amount.

When the government is experiencing rollover risk, it usually is best to have this risk occur domestically. If the government needs more money to pay for internal debts, then it can be printed and used for the debts. Debts in other countries or regions typically are harder to handle. Most countries and regions will not accept the borrower’s domestic money, so it must be transferred into international currency. While the government can print out more money to trade for international currency, this increases inflation and lowers the strength of domestic money, meaning more domestic money is required to make up the debt.