EUROMARKET i

These can broadly be classified as Eurocurrency and Eurobond markets. We want to focus on how MNCs can use these international markets to meet their financing requirements. A. Eurocurrency market Definition and background: The Eurocurrency market consists of banks (called Eurobanks) that accept deposits and make loans in foreign currencies. A Eurocurrency is a freely convertible currency deposited in a bank located in a country which is not the native country of the currency. The deposit can be placed in a foreign bank or in the foreign branch of a domestic US bank. [Note of caution! The prefix Euro has little or nothing to do with the newly emerging currency in Europe.] In the Eurocurrency market, investors hold short-term claims on commercial banks which intermediate to transform these deposits into long-term claims on final borrowers. The Eurocurrency market is dominated by US $ or the Eurodollar. Occasionally, during weak dollar periods (latter part of 1970s and 1980s), the EuroSwiss franc and the EuroDM markets increased in importance. The Eurodollar market originated post WWII in France and England thanks to the fear of Soviet Bloc countries that dollar deposits held in the US may be attached by US citizens with claims against communist governments!

Thriving on government regulation: By using Euromarkets, banks and financiers are able to circumvent / avoid certain regulatory costs and restrictions. Some examples are: a) Reserve requirements b) Requirement to pay FDIC fees c) Rules or regulations that restrict competition among banks Continuing government regulations and taxes provide opportunities to engage in Eurocurrency transactions. However, ongoing erosion of domestic regulations have rendered the cost and return differentials much less significant than before. As a result, the domestic money market and Eurocurrency markets are closely integrated for most major currencies, effectively creating a single worldwide money market for each participating currency. Illustration I:German firm sells medical equipment to institutional buyer in the US. It receives a US$ check drawn on Citicorp, NY. Initially this check is deposited in a checking account for dollar working capital use. But to earn a higher return (or rate of interest) on the $ 1 million the German firm decides to place the funds in a time deposit with a bank in London, UK. One million Eurodollars have thus been created by substituting a dollar account in a London bank for the dollar account held in NY. Notice that no US $ left NY but ownership of the US deposit has moved from a foreign corporation to a foreign bank. The London bank would not like to leave the funds idle in NY account. If a government or commercial borrower is unavailable, the London bank will place the $ 1 million in the London

interbank market. The interest rate at which such interbank loans are made is called the London interbank offer rate (LIBOR). --This example demonstrates that the Eurocurrency market is a chain of deposits and a chain of borrowers and lenders. The majority of Eurocurrency transactions involve transferring control of deposits from one Eurobank to another Eurobank. Loans to non- Eurobank borrowers account for less than half of all Eurocurrency loans. The Eurocurrency market operates like any other financial market, but for the absence of government regulations on loans that can be made and interest rates that can be charged. Eurocurrency loans Eurocurrency loans are made on a floating rate basis. Interest rates on loans to governments, corporations and nonprime banks are set at a fixed margin above LIBOR for a given period and currency. B. Eurobond markets Eurobonds are bonds sold outside the country whose currency they are dominated in. They are similar in many ways to public debt sold in domestic capital markets. However, the Eurobond market is entirely free of official regulation and is self-regulated by the Association of International Bond Dealers. Borrowers in the Eurobond market are typically well known and have impeccable credit ratings (for example, developed countries, international institutions, and large MNCs). The Eurobond market has grown rapidly in the last two decades, and it exceeds the Eurocurrency market in size. i)Currency denomination About 75 % of Eurobonds are dollar denominated. The most important nondollar currencies for Eurobond issues are DM and FF (now rapidly replaced by the euro), the JY and the BP [The Swiss central bank ban has led to the absence of SF Eurobonds]. ii)Fixed rate Eurobonds Fixed-rate Eurobonds pay coupons once a year, unlike the semiannual coupon, domestic bonds in the US market. Borrowers compare the all-in cost, that is, the effective interest rate, on Eurobonds and domestic bonds. This interest rate is calculated as the discount rate that equates the present value of the future interest and principal payments to the net proceeds received by the issuer, or as the IRR of the bond. iii) Comparing Eurobond issue with a US domestic issue To compare a Eurobond issue with a US domestic issue, therefore, the all-in cost of funds on an annual basis must be converted to a semiannual basis or vice versa. Ii

( Article pour le Palgrave Dictionnary of Transnational History

(P.Y. Saunier et A. Iriye, eds)) Euromarkets (occasionally called xenomarkets) are markets on which banks deal in a currency other than their own. For example, eurodollars are dollars held by banks outside the United States. The prefix euro refers to the fact that such deposits first appeared in Europe in around 1955. The origins of the eurodollar are traceable partly to the Cold War, when the USSR (in particular) desperately needed international liquidity dollars - but did not want to hold them in the United States. The rise of the dollar as an international currency encouraged companies worldwide to hold dollar cash reserves, and banks to ask for dollars on deposit. Some countries decided that such deposits did not need to be so closely regulated as deposits in the national currency because they did not affect the internal

money supply. This produced a very liberal loan market, particularly in comparison with the prevailing heavy postwar regulation. On top of that, Americas Q regulation (put in place by the 1933 Glass Steagall Act) set a ceiling on the interest rates payable on bank deposits and so savers looked for more attractive rates elsewhere. Similarly, eurobonds benefited from an equalisation tax imposed in 1963 on interest payable on foreign issues placed in the USA. London played a key role in the development of euromarkets. Eurodollar loans, still negligible in 1958, rose to 25 billion dollars in 1968 and 130 billion in 1973. At that time London accounted for almost 80% of the market, which was still largely controlled by London branches of foreign banks mostly American, but also some French, Japanese and German. By 1975 there were 243 such subsidiaries in London. While the main incentive for the development of euromarkets was the avoidance of national regulations, their development also helped to weaken those same regulations by providing both borrowers and lenders with alternatives to nationally regulated solutions. The logical outcome of euromarkets was the liberalisation of capital movements. They undoubtedly represented one nail in the coffin of the Bretton Woods fixed exchange rate scheme, which assumed that central banks were capable of controlling exchange rates; this they could only do if they could control capital flows, at least in the short term. At present, the term euromarket is less often employed, since lending in a currency other than that of the borrower or lender has now become commonplace.