Chapter 4

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INTERNATIONAL FINANCIAL MARKETS

CONCEPTS
1. Distinction between Euro Credit and Euro Bond Mar et Both Euro bonds and Euro credit (Euro currency) financing ha e their ad antages and disad antages! "or a gi en co#pany$ under specific circu#stances$ one #ethod of financing #ay be preferred to the other! The #a%or differences are& 1! Cost of borro'ing Euro bonds are issued in both fi(ed rate and f)oating rate for#s! "i(ed rate bonds are an attracti e e(posure #anage#ent too) since the *no'n )ong+ter# currency inf)o's can be offset by the *no'n )ong+ter# outf)o's in the sa#e currency! ,n contrast$ Euro currency )oans carry ariab)e rates! -! .aturity Euro bonds ha e )onger #aturities 'hi)e the period of borro'ing in the Euro currency #ar*et has tended to )engthen o er ti#e! 3! Si/e of the issue Ear)ier$ the funds a ai)ab)e for )ending at any ti#e ha e been #uch #ore in the inter+ban* #ar*et than in the bond #ar*et! But of )ate$ this situation does not ho)d true! .oreo er$ a)though in the past the f)otation costs of a Euro currency )oan ha e been #uch )o'er than a Euro bond (about 0!1 2 of the tota) )oan a#ount ersus about -!-1 2 of the face a)ue of a Euro bond issue)$ co#pensation has 'or*ed to )o'er Euro bond f)otation costs! 4! ")e(ibi)ity ,n a Euro bond issue$ the funds #ust be dra'n in one su# on a fi(ed date and repaid according to a fi(ed schedu)e$ un)ess the borro'er pays a substantia) prepay#ent pena)ty! By contrast$ the dra'do'n in a f)oating rate )oan can be staggered to suit the borro'er3s needs and can be repaid in 'ho)e or in part at any ti#e$ often 'ithout pena)ty! .oreo er$ a Euro currency )oan 'ith a #u)ti+currency c)ause enab)es the borro'er to s'itch currencies on any ro))+o er date$ 'hereas s'itching the deno#ination of a Euro bond fro# currency 4 to currency B 'ou)d re5uire a cost)y$ co#bined$ refunding and reissuing operation! 1! Speed "unds can be raised by a *no'n borro'er ery 5uic*)y in the Euro currency #ar*et! Often$ a period of t'o to three 'ee*s shou)d suffice! 4 Euro bond financing genera))y ta*es #ore ti#e$ though the difference is beco#ing )ess significant! !. Euro Credit Mar et Euro credit or Euro 6oans are the )oans e(tended for one year or )onger! The #ar*et that dea)s in such )oans is ca))ed Euro Credit .ar*et! The co##on #aturity for euro credit )oans is 1 years! Since Euro ban*s accept short+ter# deposits and pro ide )ong+ter# )oans$ it is )i*e)y that asset )iabi)ity #is#atch #ay arise! To a oid this Euro ban*s often e(tend f)oating rate euro credit )oans fi(ed to so#e #ar*et interest rate! The 6ondon ,nter Ban* Offer 7ate (6,BO7) is the #ost co##on)y used interest rate! ,t is the rate charged for )oans bet'een Euro Ban*s! "artici#ants in Euro credit Mar et The #a%or )ending ban*s in the Euro credit #ar*et are Euro ban*s$ 4#erican$ 8apanese$ British$ S'iss$ "rench$ 9er#an and 4sian (specia))y that of Singapore) ban*s$ Che#ica) Ban*$ 8P .organ$ Citicorp$ Ban*ers Trust$ Chase .anhattan Ban*$ "irst Nationa) Ban* of Chicago$ Barc)ay:s Ban*$ Nationa) ;est#inster$ BNP$ etc! 4#ong the borro'ers$ there are ban*s$ #u)tinationa) groups$ pub)ic uti)ities$ go ern#ent agencies$ )oca) authorities$ etc!

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Dea$in% in Euro credits ;hen a borro'er approaches a ban* for Euro credit$ a for#a) docu#ent is prepared on beha)f of potentia) borro'ers! This docu#ent contains the principa) ter#s and conditions of )oan$ ob%ecti es of )oan and detai)s of the borro'er! Before )aunching syndication$ the approached ban* decides pri#ari)y$ in consu)tation 'ith the borro'er$ on a strategy to be adopted$ i!e! 'hether to approach a )arge #ar*et or a restricted nu#ber of ban*s to for# the syndicate! Each of the ban*s in syndicate )ends a part of the )oan! The duration of this operation is nor#a))y about < to = 'ee*s! Se era) c)auses #ay be introduced in the contract of Euro+debt& > Pari-passu clause that pre ents the borro'er fro# contracting ne' debts that subordinate the interest of )enders? > Exchange option clause that a))o's the 'ithdra'a) of a part or tota)ity of )oan in another currency? > Negative guarantee clause that co##its the borro'er not to contract other debts that subordinate the interest of )enders! C&aracteristics o' Euro credit 4 #a%or part (#ore than =0 2) of the Euro debts is #ade in @S do))ars! The second (but far behind) is Pound Ster)ing fo))o'ed by Aeutsch #ar*$ 8apanese yen$ S'iss franc and others! .ost of the syndicated debts are of the order of B10 #i))ion! 4s far as the upper )i#its are concerned$ a#ounts in o) ed are of as high #agnitude as B1 bi))ion and #ore! ,n 1CC0$ Euro tunne) borro'ed B<!= bi))ion! On an a erage$ #aturity periods are of about fi e years (in so#e cases it is about -0 years)! The rei#burse#ent of the )oan #ay ta*e p)ace in one go (bu))et) or in se era) insta))#ents! The interest rate on Euro debt is ca)cu)ated 'ith respect to a rate of reference$ increased by a #argin (or spread)! The rates are a ai)ab)e and genera))y rene'ab)e (ro)) o er credit) e ery si( #onths$ fi(ed 'ith reference to 6,BO7! The 6,BO7 is the rate of #oney #ar*et app)icab)e to short+ter# credits a#ong the ban*s of 6ondon! The reference rate can e5ua))y be P,BO7 at Paris and ",BO7 at "ran*furt$ etc! ,t is re ised regu)ar)y! The #argin depends on the supp)y and de#and of the capita) as a)so on the degree of the ris* of these credits and the rating of borro'ers! "inancia) institutions are in igorous co#petition! There is an acti e secondary #ar*et of Euro debts! Nu#erous techni5ues a))o' ban*s to se)) their tit)es in this #ar*et! (. Euro Bond Mar et Euro Bond issue is one deno#inated in a particu)ar currency but so)d to in estors in nationa) capita) #ar*ets other than the country that issued the deno#inating currency! 4n e(a#p)e is a Autch borro'er issuing A.+ deno#inated bonds to in estors in the @D$ S'it/er)and and the Nether)ands! The Eurobond #ar*et is the )argest internationa) bond #ar*et$ 'hich is said to ha e originated in 1C<3 'ith an issue of Eurodo))ar bonds by 4utostrade$ an ,ta)ian borro'er! The #ar*et has since gro'n enor#ous)y in si/e and 'as 'orth about B 4-= bi))ion in 1CC4! Eurobond #ar*ets in a)) currencies e(cept the 8apanese Een are 5uite free fro# any regu)ation by the respecti e go ern#ents! Straight bonds are priced 'ith reference to a bench#ar*$ typica))y treasury issues! Thus a Eurodo))ar bond 'i)) be priced to a yie)d a ET. (Eie)d+to+.aturity) so#e'hat abo e the @S treasury bonds of si#i)ar #aturity$ the spread depending upon the borro'ers ratings and #ar*et conditions! ")oatation costs of the Eurobond are co#parati e)y higher than costs indicated 'ith syndicated Eurocredits! ). Euro C"s Co##ercia) paper is a corporate short+ter#$ unsecured pro#issory note issued on a discount to yie)d basis! Co##ercia) paper #aturities genera))y do not e(ceed -F0 days! Co##ercia) paper represents a cheap and f)e(ib)e source of funds ;hi)e CPs are negotiab)e$ secondary #ar*ets tend to be not ery acti e since #ost in estors ho)d the paper to #aturity!

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The e#ergence of the Euro Co##ercia) Paper (ECP) is #uch #ore recent! ,t e o) ed as a natura) cu)#ination of the Note ,ssuance "aci)ity and de e)oped rapid)y in an en iron#ent of securitisation and disinter#ediation of traditiona) ban*ing! CP has a)so de e)oped in the do#estic seg#ents of so#e European countries offering attracti e funding opportunities to resident entities! *. Euro CDs 4 Certificate of Aeposit (CA) is a negotiab)e instru#ent e idencing a deposit 'ith a ban*! 4 CA is a #ar*etab)e instru#ent so that the in estor can dispose it off in the secondary #ar*et 'hene er cash is needed! The fina) ho)der is paid the face a)ue on #aturity a)ong 'ith the interest! ,t is used by the co##ercia) ban*s as short+ ter# funding instru#ents! Euro CAs are #ain)y issued in 6ondon by ban*s! ,nterest on CAs 'ith #aturity #ore than a year is paid annua))y than se#i+annua))y! +. Internationa$ Ca#ita$ Mar ets ,nternationa) Capita) .ar*ets ha e co#e into e(istence to cater to the need of internationa) financing by econo#ies in the for# of short$ #ediu# or )ong+ter# securities or credits! These #ar*ets a)so ca))ed Euro #ar*ets$ are the #ar*ets on 'hich Euro currencies$ Euro bonds$ Euro shares and Euro bi))s are tradedGe(changed! O er the years$ there has been a pheno#ena) gro'th both in o)u#e and types of financia) instru#ents transacted in these #ar*ets! Euro currency deposits are the deposits #ade in a ban*$ situated outside the territory of the origin of currency! "or e(a#p)e$ Euro do))ar is a deposit #ade in @S do))ars in a ban* )ocated outside the @S4? )i*e'ise$ Euro ban*s are the ban*s in 'hich Euro currencies are deposited! They ha e ter# deposits in Euro currencies and offer credits in a currency other than that of the country in 'hich they are )ocated! 4 distincti e feature of the financia) strategy of #u)tinationa) co#panies is the 'ide range of e(terna) ser ices of funds that they use on an ongoing basis! British Te)eco##unication offers stoc* in 6ondon$ Ne' Eor* and To*yo$ 'hi)e S'iss Ban* Corporation+$ aided by ,ta)ian$ Be)gian$ Canadian and 9er#an ban*s+ he)ps corporations se)) S'iss franc bonds in Europe and then s'ap the proceeds bac* into @S do))ars! "ir#s ha e three genera) sources of funds a ai)ab)e& (i) interna))y generated cash$ (ii) short+ter# e(terna) funds$ and (iii) )ong+ter# e(terna) funds! E(terna) in est#ent co#es in the for# of debt or e5uity$ 'hich are genera))y negotiab)e (tradab)e) instru#ents! The pattern of financing aries fro# country to country! Co#panies in the @D get an a erage of <0+F02 of their funds fro# interna) sources! 9er#an co#panies get about 40+102 of their funds fro# e(terna) supp)iers! ,n 1CF1$ 8apanese co#panies got #ore than F02 of their #oney fro# outside sources$ but this pattern has since re ersed? #a%or chun*s of finances co#e fro# interna) sources! 4nother significant aspect of financing beha iour is that debt accounts for the o er'he)#ing share of e(terna) finance! ,ndustry sources of e(terna) finance a)so differ 'ide)y fro# country to country! 9er#an and 8apanese co#panies ha e re)ied hea i)y on ban* borro'ing$ 'hi)e the @S and British industry raised #uch #ore #oney direct)y fro# financia) #ar*ets by the sa)e of securities! Ho'e er$ in a)) countries$ ban* borro'ing is on a dec)ine! There is a gro'ing tendency for corporate borro'ing to ta*e the for# of negotiab)e securities issued in the pub)ic capita) #ar*ets rather than in the for# of co##ercia) ban* )oans! This process *no'n as securitisation is #ost pronounced a#ong the 8apanese co#panies! ,. "etro Do$$ar Auring the oi) crises of 1CF3$ the Capita) #ar*ets ha e p)ayed a ery i#portant ro)e! They accepted the do))ar deposits fro# oi) e(porters and channe)ed the funds to the borro'ers in other countries! This is ca))ed Irecyc)ing the petrodo))ars3!

-. .un Bonds

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4 %un* bond is issued by a corporation or #unicipa)ity 'ith a bad credit rating! ,n e(change for the ris* of )ending #oney to a bond issuer 'ith bad credit$ the issuer pays the in estor a higher interest rate! JHigh+yie)d bondJ is a nicer na#e for %un* bond The credit rating of a high yie)d bond is considered Jspecu)ati eJ grade or be)o' Jin est#ent gradeJ! This #eans that the chance of defau)t 'ith high yie)d bonds is higher than for other bonds! Their higher credit ris* #eans that J%un*J bond yie)ds are higher than bonds of better credit 5ua)ity! Studies ha e de#onstrated that portfo)ios of high yie)d bonds ha e higher returns than other bond portfo)ios$ suggesting that the higher yie)ds #ore than co#pensate for their additiona) defau)t ris*! 8un* bonds beca#e a co##on #eans for raising business capita) in the 1C=0s$ 'hen they 'ere used to he)p finance the purchase of co#panies$ especia))y by )e eraged buyouts$ the sa)e of %un* bonds continued to be used in the 1CC0s to generate capita) /. Sa0urai Bonds They are pub)ic)y issued yen deno#inated bonds! They are issued by non+8apanese entities! The 8apanese .inistry of "inance )ays do'n the e)igibi)ity guide)ines for potentia) foreign borro'ers! These specify the #ini#u# rating$ si/e of issue$ #aturity and so forth! ")oatation costs tend to be high! Pricing is done 'ith respect to 6ong+ter# Pri#e 7ate! Shibosai Bonds They are pri ate p)ace#ent bonds 'ith distribution )i#ited to ban*s and institutions! The e)igibi)ity criteria are )ess stringent but the .O" sti)) #aintains contro)! Shogun G 9eisha Bonds They are pub)ic)y f)oated bonds in a foreign currency 'hi)e 9eisha are their pri ate counterparts! 11. 2an ee Bonds These are do))ar deno#inated bonds issued by foreign borro'ers! ,t is the )argest and #ost acti e #ar*et in the 'or)d but potentia) borro'ers #ust #eet ery stringent disc)osure$ dua) rating and other )isting re5uire#ents$ options )i*e ca)) and put can be incorporated and there are no restrictions on si/e of the issue$ #aturity and so forth! Ean*ee bonds can be offered under ru)e 144a of Sec! These issues are e(e#pt fro# e)aborate registration and disc)osure re5uire#ents but rating$ 'hi)e not #andatory is he)pfu)! "ina))y )o' rated or unrated borro'ers can #a*e pri ate p)ace#ents! Higher yie)ds ha e to be offered and the secondary #ar*et is ery )i#ited!

DESCRI"TI3E
1. Trace t&e de4e$o#0ent o' t&e Internationa$ Ca#ita$ Mar ets The financia) re o)ution has been characteri/ed by both a tre#endous 5uantitati e e(pansion and an e(traordinary 5ua)itati e transfor#ation in the institutions$ instru#ents and regu)atory structures! 9)oba) financia) #ar*ets are a re)ati e)y recent pheno#enon! Prior to 1C=0$ nationa) #ar*ets 'ere )arge)y independent of each other and financia) inter#ediaries in each country operated principa))y in that country! The foreign e(change #ar*et and the Eurocurrency and Eurobond #ar*ets based in 6ondon 'ere the on)y #ar*ets that 'ere tru)y g)oba) in their operations! "inancia) #ar*ets e ery'here ser e to faci)itate transfer of resources fro# surp)us units (sa ers) to deficit units (borro'ers)$ the for#er atte#pting to #a(i#i/e the return on their sa ings 'hi)e the )atter )oo*ing to #ini#i/e their borro'ing costs! 4n efficient financia) #ar*et thus achie es an opti#a) a))ocation of surp)us funds bet'een a)ternati e uses! Hea)thy financia) #ar*ets a)so offer the sa ers a range of instru#ents enab)ing the# to di ersify their portfo)ios!

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Globalization of financia) #ar*ets during the eighties has been dri en by t'o under)ying forces! Growing (and continually shifting) imbalance bet'een sa ings and in est#ent 'ithin indi idua) countries$ ref)ected in their current account ba)ances$ has necessitated #assi e cross+border financia) f)o's! "or instance$ during the )ate se enties$ the #assi e surp)uses of the OPEC countries had to be recyc)ed$ i!e! fed bac* into the econo#ies of oi) i#porting nations! Auring the eighties$ the )arge current account deficits of the @S had to be financed pri#ari)y fro# the #ounting surp)uses in 8apan and 9er#any! Auring the nineties$ de e)oping countries as a group ha e e(perienced huge current account deficits and ha e a)so had to resort to internationa) financia) #ar*ets to bridge the gap bet'een inco#es and e(penditures$ as the o)u#e of concessiona) aid fro# officia) bi)atera) and #u)ti)atera) sources has fa))en far short of their percei ed needs! The other #oti e force is the increasing preference on the part of investors for international diversification of their asset portfolios This 'ou)d resu)t in gross cross+border financia) f)o's! ,n estigators ha e estab)ished that significant ris* reduction is possib)e ia g)oba) di ersification of portfo)ios! These de#and+side forces acco#panied by liberalization and geographical integration of financia) #ar*ets has )ed to enor#ous gro'th in cross+border financia) transactions! ,n irtua))y a)) #a%or industria) econo#ies$ significant deregulation of the financia) #ar*ets has a)ready been effected or is under 'ay! "unctiona) and geographic restrictions on financia) institutions$ restrictions on the *ind of securities they can issue and ho)d in their portfo)ios$ interest rate cei)ings$ barriers to foreign entities accessing nationa) #ar*ets as borro'ers and )enders and to foreign financia) inter#ediaries offering arious types of financia) ser ices ha e been a)ready dis#ant)ed or are being gradua))y eased a'ay! "ina))y$ the #ar*ets the#se) es ha e pro ed to be highly innovative! responding rapidly to changing investor preferences and increasingly complex needs of the borrowers by designing new instruments and highly flexible ris" management products The resu)t of these processes has been the e#ergence of a ast$ sea#)ess g)oba) financia) #ar*et transcending nationa) boundaries! But contro) and go ern#ent inter ention ha e not entire)y disappeared! E!g! South East 4sia+ Dorea$ Tai'an$ etc+ per#it on)y )i#ited access to foreign in estors! Ho'e er$ despite these reser ations$ the do#inant trend is to'ards g)oba)i/ation of financia) #ar*ets! ,nternationa) financia) #ar*ets can de e)op any'here$ pro ided that local regulations permit the mar"et and potential users are attracted to it! The #ost i#portant internationa) financia) centers are 6ondon$ To*yo and Ne' Eor*! 4)) the #a%or industria) countries ha e i#portant do#estic financia) #ar*ets as 'e)) but on)y so#e such as 9er#any and "rance are a)so i#portant internationa) financia) centers! On the other hand$ e en though so#e countries ha e re)ati e)y uni#portant do#estic financia) #ar*ets$ they are i#portant 'or)d financia) centers such as S'it/er)and$ 6u(e#bourg$ Singapore and Hong Dong! ,nternationa) Capita) .ar*ets$ a)so ca))ed Euro #ar*ets$ are the #ar*ets on 'hich Euro currencies? Euro bonds$ Euro e5uity and Euro bi))s are e(changed! ,nternationa) financing in the for# of short+$ #ediu#+ or )ong+ter# securities or credits has beco#e necessary for the internationa) econo#y! "inancing techni5ues ha e di ersified$ o)u#es dea)t ha e increased and the process is continuing to gro'! Notab)e de e)op#ents in internationa) capita) #ar*ets can be traced to the end of 1C10s! There are se era) reasons for their gro'th! The significant ones are& Trans'er o' assets o' erstw&i$e So4iet 5nion to Euro#e. ,n the 1C10s and ear)y 1C<0s$ the for#er So iet @nion and So iet+b)oc countries so)d go)d and co##odities to raise hard currency! Because of anti+So iet senti#ent$ these Co##unist countries 'ere afraid of depositing their @S do))ars in @S ban*s for fear that the deposits cou)d be fro/en or ta*en! ,nstead they deposited their do))ars in a "rench Ban* 'hose te)e( address 'as Euro+Ban*! Since that ti#e$ do))ar deposits outside the @S ha e been ca))ed Eurodo))ars and ban*s accepting Eurocurrency deposits ha e been ca))ed Euro ban*s! ,nternationa) capita) #ar*ets subse5uent)y ca#e to be *no'n as Euro #ar*ets! Restricti4e 0easures ta en b6 t&e ad0inistration. Se era) regu)atory #easures (initiated particu)ar)y in the @S4) a)so contributed (in an indirect #anner) to the de e)op#ent of ,nternationa) capita) #ar*ets! The i#portant ones are as fo))o's&

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#egulation $%$ ,n 1C<0$ 7egu)ation :K: in the @S4 fi(ed a cei)ing on interest rates offered by 4#erican ban*s on ter# deposits and prohibited the# to re#unerate the deposits 'hose ter# 'as )ess than 30 days! Besides$ at the end of the 1C<0s$ the "edera) 7eser e reduced the gro'th of tota) #onetary #ass! The #oney #ar*et rate 'ent up! 4#erican ban*s borro'ed on the Euro do))ar #ar*et$ 'hich resu)ted in& > The increase of indebtedness of these ban*s on the Euro do))ar #ar*et? > The f)ight of 4#erican Capita)$ attracted by the interest rate on Euro #ar*et! &ax of interest e'ualization ,n 1C<3$ ta( 'as i#posed on the purchase of foreign securities (portfo)io in est#ents) by 4#erican residents! The ob%ecti e 'as to reduce the deficit of BOP of the @S4 and to estab)ish e5ui)ibriu# in internationa) structure of interest rates! ,n fact$ in order to a oid ta( pay#ent$ so#e co#panies )aunched the issue of do))ar bonds outside the @S4! This contributed to the gro'th of Euro do))ar #ar*et! 7ea)i/ing its ad erse effects$ subse5uent)y$ the ta( 'as 'ithdra'n in 1CF4! Program of voluntary restrictions on investments The @S4 initiatedGi#posed arious restrictions on its financia) syste# to tac*)e BOP prob)e#s! "or instance$ ban*s 'ere directed not to )end or in est in foreign operations beyond the )i#its of the pre ious year(s)! 4s a resu)t$ the business co##unity fe)t a scarcity of funds! This in turn )ed the# to ta*e recourse to the Euro do))ar #ar*et! Di''erentia$ o' A0erican $endin% and borrowin% rates. The interest rate paid by 4#erican ban*s 'as )o'$ is+ L+ is$ the e(pected rate fro# borro'ers! European ban*s a ai)ed of this opportunity? they offered higher rates of interest at the cost of contenting the#se) es 'ith s#a))er #argins than those offered by 4#erican ban*s$ to attract in estors! They cou)d do so by operating on Euro do))ar #ar*ets$ 'hich 'ere not sub%ect to interest+rate and other regu)ations! "or instance$ ban*s 'ere neither constrained to respect a certain co#pu)sory reser e ratio on their deposits in Euro do))ars nor constrained to #aintain their interest rates be)o' a certain cei)ing! There #ay be other reasons as 'e)) for de e)op#ent of Euro do))ars! 9)oba)i/ation of big #u)tinationa)s has further boosted this de e)op#ent! The financing syste# practiced hitherto a)so 'as not ab)e to respond to capita) needs of the internationa) econo#y! Indian entities began accessing e(terna) capita) #ar*ets to'ards the end of the se enties as gradua))y the a#ount of concessiona) assistance beca#e inade5uate to #eet the increasing needs of the econo#y! The initia) forays 'ere )o'+*ey! The pace acce)erated around #id+eighties$ but e en the authorities adopted a se)ecti e approach and per#itted on)y a fe' se)ect ban*s$ a)) ,ndia financia) institutions and )arge pub)ic and pri ate sector co#panies to access the #ar*et! 4fter )ibera)i/ation$ during 1CC3+C4 there 'as a sharp increase in the a#ount of funds raised by corporate entities for# the g)oba) debt and e5uity #ar*ets! ,ndia3s borro'ings ha e #ain)y been by 'ay of syndicated ban* )oans$ buyers3 credits and )ines of credits! Other instru#ents such as foreign and Euro bonds ha e been e#p)oyed )ess fre5uent)y though a nu#ber of co#panies #ade issues of Euro con ertib)e bonds after 1CC3! Prior to that on)y ape( financia) institutions and the pub)ic sector giant ON9C had tapped the 9er#an$ S'iss$ 8apanese$ and Euro do))ar bond #ar*ets! Throughout the eighties$ there 'as a steady i#pro e#ent in the #ar*et3s perception of the credit'orthiness of ,ndian borro'ers (#anifested in the steady dec)ine in the spreads they had to pay o er 6,BO7 in the case of Euro )oans)! The 1CC0+ C1 crisis sent ,ndia3s so ereign rating be)o' in est#ent grade and the foreign debt #ar*ets irtua))y dried up to be opened up again after 1CC3! !. Describe t&e 0ec&anis0 o' t&e Euro Bond Mar et. Euro Bond& issue is one deno#inated in a particu)ar currency but so)d to in estors in nationa) capita) #ar*ets other than the country that issued the deno#inating currency! 4n e(a#p)e is a Autch borro'er issuing A.+ deno#inated bonds to in estors in the @D$ S'it/er)and and the Nether)ands! The Eurobond #ar*et is the )argest internationa) bond #ar*et$ 'hich is said to ha e originated in 1C<3 'ith an issue of Eurodo))ar bonds by 4utostrade$ an ,ta)ian borro'er! The #ar*et has since gro'n enor#ous)y in si/e and 'as 'orth about B 4-= bi))ion in 1CC4!

<

Chapter 4

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Eurobond #ar*ets in a)) currencies e(cept the 8apanese Een are 5uite free fro# any regu)ation by the respecti e go ern#ents! Straight bonds are priced 'ith reference to a bench#ar*$ typica))y treasury issues! Thus a Eurodo))ar bond 'i)) be priced to a yie)d a ET. (Eie)d+to+.aturity) so#e'hat abo e the @S treasury bonds of si#i)ar #aturity$ the spread depending upon the borro'ers ratings and #ar*et conditions! ")oatation costs of the Eurobond are co#parati e)y higher than costs indicated 'ith syndicated Eurocredits! Pri#ary #ar*et& 4 borro'er desiring to raise funds by issuing Euro bonds to the in esting pub)ic 'i)) contact an in est#ent ban*er and as* it to ser e as )ead #anager of an under'riting syndicate that 'i)) bring the bonds to #ar*et! The under'riting syndicate is a group of in est#ent ban*s$ #erchant ban*s$ and the #erchant ban*ing ar#s of co##ercia) ban*s that specia)i/e in so#e phase of pub)ic issuance! The )ead #anager 'i)) usua))y in ite co #anagers to for# a #anaging group to he)p negotiate ter#s 'ith the borro'er$ ascertain #ar*et conditions and #anage the issuance! The #anaging group a)ong 'ith other ban*s$ 'i)) ser e as under'riters for the issue$ that is$ they 'i)) co##it their o'n capita) to buy the issue fro# the borro'er at a discount fro# the issue price$ if they are unab)e to p)ace the bonds 'ith in estors! The discount or the under'riting spread is typica))y in the - or -!12 range! .ost of the under'riters a)ong 'ith other ban*s 'i)) be a part of the p)ace#ent or se))ing group that se))s the bonds to the in esting pub)ic! The tota) e)apsed ti#e fro# the decision date of the borro'er to issue Eurobonds unti) net proceeds fro# the sa)e are recei ed is typica))y 1 to < 'ee*s! The )ead #anager prepares a pre)i#inary prospectus focusing on econo#ic and financia) characteristics of the pro%ect and financia) standing of the borro'er! 4fter ha ing consu)ted a certain nu#ber of ban*s$ the )ead #anager decides on the interest rate! Subse5uent)y$ the issue price is fi(ed! C)auses of rei#burse#ent before #aturity are pro ided for! 4fter$ the issue ad ertising is done in ,nternationa) Press in the for# of to#bstone! This to#bstone indicates the )ead #anager$ co+)ead #anagers and #e#bers of the guarantee syndicate! Secondary .ar*et& Eurobonds purchased in the pri#ary #ar*et can be reso)d before their #aturities in the secondary #ar*et! The secondary #ar*et is an o er the counter #ar*et 'ith principa) trading in 6ondon! Ho'e er$ i#portant trading is a)so done in other #a%or European cities! The bonds are 5uoted in percentage of their a)ue$ 'ithout ta*ing into account the coupon a)ready running! The secondary #ar*et co#prises of #ar*et #a*ers and bro*ers! .ar*et #a*ers stand ready to buy or se)) for their o'n account by 5uoting a t'o 'ay bid and as* prices! .ar*et traders trade direct)y 'ith one another$ through a bro*er$ or 'ith retai) custo#ers! The bid+as* is their on)y profit! Bro*ers accept buy or se)) orders fro# #ar*et #a*ers and then atte#pt to find a #atching party for the other side of the trade? they #ay a)so trade for their o'n account! Bro*ers charge a s#a)) co##ission to the #ar*et #a*ers that engaged the#! They do not dea) direct)y 'ith retai) c)ients! E7tra In'or0ation ;hat is a bondM 4 bond is a )oan and you are the )ender! The borro'er is usua))y the go ern#ent$ a state$ a )oca) #unicipa)ity or a big co#pany )i*e 9enera) .otors! 4)) of these entities need #oney to operate ++ to fund the federa) deficit$ for instance$ or to bui)d roads and finance factories ++ so they borro' capita) fro# the pub)ic by issuing bonds! ;hen a bond is issued$ the price you pay is *no'n as its Jface a)ue!J Once you buy it$ the issuer pro#ises to pay you bac* on a particu)ar day ++ the J#aturity dateJ ++ at a predeter#ined rate of interest ++ the Jcoupon!J Say$ for instance$ you buy a bond 'ith a B1$000 face a)ue$ a 12 coupon and a 10+year #aturity! Eou 'ou)d co))ect interest pay#ents tota)ing B10 in each of those 10 years! ;hen the decade 'as up$ you:d get bac* your B1$000 and 'a)* a'ay!

Chapter 4

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4 *ey difference bet'een stoc*s and bonds is that stoc*s #a*e no pro#ises about di idends or returns! 9enera) E)ectric:s di idend #ay be as regu)ar as a heartbeat$ but the co#pany is under no ob)igation to pay it! 4nd 'hi)e 9E stoc* spends #ost of its ti#e #o ing up'ard$ it has been *no'n to spend #onths ++ e en years ++ going the other 'ay! ;hen 9E issues a bond$ ho'e er$ the co#pany guarantees to pay bac* your principa) (the face a)ue) p)us interest! ,f you buy the bond and ho)d it to #aturity$ you *no' e(act)y ho' #uch you:re going to get bac* (in #ost cases$ any'ay)! That:s 'hy bonds are a)so *no'n as Jfi(ed+inco#eJ in est#ents ++ they assure you a steady payout or year)y inco#e! 4nd a)though they can carry p)enty of ris*$ this regu)ar inco#e is 'hat #a*es the# inherent)y )ess o)ati)e than stoc*s! 8$oba$ Bond9 They ha e a #ini#u# a)ue of B1 bi))ion and are effected si#u)taneous)y in Europe$ 4#erica and 4sia! The sa)ient features of these bonds are that they per#it to raise ery high a#ounts! They offer ery high )i5uidity since they are 5uoted on se era) e(changes 'hi)e secondary #ar*et functions round the c)oc*$ 'ith unifor# price a)) o er the 'or)d! They are especia))y used by go ern#ents$ pub)ic enterprises$ internationa) organisations and pri ate financia) institutions! E(terna) Bond .ar*et& The e(terna) bond #ar*et refers to bond trading acti ity 'herein the bonds are under'ritten by an internationa) syndicate$ are offered in se era) countries si#u)taneous)y$ are issued outside any country:s %urisdiction$ and are not registered! The Eurobond #ar*et is a #a%or e(terna) bond #ar*et! The e(terna) bond #ar*et co#bined 'ith the interna) bond #ar*et co#prises the g)oba) bond #ar*et! E(a#p)es of an e(terna) bond are the Jg)oba) bond$J issued by the ;or)d Ban*$ and Eurodo))ar bonds! ,nterna) Bond .ar*et& The interna) bond #ar*et refers to a)) bond trading acti ity in a gi en country and is co#prised of both a do#estic bond #ar*et and a foreign bond #ar*et! 4)so referred to as the Jnationa) bond #ar*et!J The interna) and e(terna) bond #ar*ets co#prise the g)oba) bond #ar*et Bu))dog Bonds& 4 ster)ing deno#inated foreign bond$ priced 'ith reference to the @D gi)ts! 7e#brandt Bond& Aeno#inated in the Autch gui)der! ("or #ore infor#ation$ p)ease refer to page 104+101 in P 9 4pte) (. :&at are t&e di''erent internationa$ 'inancia$ 0ar ets; The internationa) financia) #ar*ets consist of the credit #ar*et$ #oney #ar*et$ bond #ar*et and e5uity #ar*et! The internationa) credit #ar*et$ a)so ca))ed Euro credit #ar*et$ is the #ar*et that dea)s in #ediu# ter# Euro credit or Euro )oans! ,nternationa) ban*s and their c)ients co#prise the Eurocurrency #ar*et and for# the core of the internationa) #oney #ar*et! There are se era) other #oney #ar*et instru#ents such as the Euro Co##ercia) Paper (ECP) and the Euro Certificate of Aeposit (ECA)! "oreign bonds and Eurobonds co#prise the internationa) bond #ar*et! There are se era) types of bonds such as f)oating rate bonds$ /ero coupon bonds$ deep discount bonds$ etc! The internationa) e5uity #ar*et te))s us ho' o'nership in pub)ic)y o'ned corporations is traded throughout the 'or)d! This co#prises both$ the pri#ary sa)e of ne' co##on stoc* by corporations to initia) in estors and ho' pre ious)y issued co##on stoc* is traded bet'een in estors in the secondary #ar*ets!

Internationa$ Financia$ Mar et< =%enera$< can be used in an6>

The )ast t'o decades ha e 'itnessed the e#ergence of a ast financia) #ar*et across nationa) boundaries enab)ing #assi e cross+border capita) f)o's fro# those 'ho ha e surp)us funds and a search of high returns to those

Chapter 4

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see*ing )o'+cost funding! The degree of #obi)ity of capita)$ the g)oba) dispersa) of the finance industry and the enor#ous di ersity of #ar*ets and instru#ents$ 'hich a fir# see*ing funds can tap$ is so#ething ne'! .a%or OECA (Organi/ation for Econo#ic Co+operation and Ae e)op#ent) countries had began deregulating and liberalizing their financia) #ar*ets to'ards the end of se enties! ;hi)e the process 'as far fro# s#ooth$ the o era)) trend 'as in the direction of relaxation of controls$ 'hich ti)) then had co#part#enta)i/ed the g)oba) financia) #ar*ets! E(change and capita) contro)s 'ere gradua))y re#o ed$ non+residents 'ere a))o'ed freer access to nationa) capita) #ar*ets and foreign ban*s and financia) institutions 'ere per#itted to estab)ish their presence in the arious nationa) #ar*ets! ;hi)e opening up of the do#estic #ar*ets began on)y around the end of se enties$ a tru)y internationa) financia) #ar*et had a)ready been born in the #id+fifties and gradua))y gro'n in si/e and scope during si(ties and se enties! This refers to the Euro currencies .ar*et 'here borro'er (in estor) fro# country 4 cou)d raise (p)ace) funds fro# ('ith) financia) institutions )ocated in country B$ deno#inated in the currency of country C! Auring the eighties and nineties$ this #ar*et gre' further in si/e$ geographica) scope and di ersity of funding instru#ents! ,t is no #ore a JeuroJ #ar*et but a part of the genera) category ca))ed Noffshore #ar*etsO! 4)ongside )ibera)i/ation$ other 5ua)itati e changes ha e been ta*ing p)ace in the g)oba) financia) #ar*ets! 7e#o a) of restrictions has resu)ted into geographical integration of the #a%or financia) #ar*ets in the OECA countries! 9radua))y this trend is spreading to de e)oping countries #any of 'hich ha e opened up their #ar*ets+ at )east partia))y+to non+resident in estors$ borro'ers and financia) institutions! 4nother noticeab)e trend is functional integration! The traditiona) distinctions bet'een different financia) institutions+co##ercia) ban*s$ in est#ent ban*s$ finance co#panies$ etc!+ are gi ing 'ay to di ersified entities that offer the fu)) range of financia) ser ices! The ear)y part of eighties sa' the process of disintermediation get under'ay! High)y rated issuers began approaching in estors direct)y rather than going through the ban* )oan route! On the other side$ debt crisis in the de e)oping countries$ adoption of capita) ade5uacy nor#s and intense co#petition$ forced co##ercia) ban*s to rea)i/e that their traditiona) business of accepting deposits and #a*ing )oans 'as not enough to guarantee their )ong+ter# sur i a) and gro'th! They began )oo*ing for ne' products and #ar*ets! Concurrent)y$ the internationa) financia) en iron#ent 'as beco#ing #ore o)ati)e+ there 'ere f)uctuations in interest and e(change rates! These forces ga e rise to innovative forms of funding instruments and tre#endous ad ances in ris* #anage#ent! The decade sa' increasing acti ity in and sophistication of the deri ati es3 #ar*et$ 'hich had begun e#erging in the se enties! Ta*en together$ these de e)op#ents ha e gi en rise to a g)oba))y integrated financia) #ar*etp)ace in 'hich entities in need of short+ or )ong+ter# funding ha e a #uch 'ider choice than before in ter#s of #ar*et seg#ent$ #aturity$ currency of deno#ination$ interest rate basis$ incorporating specia) features and so forth! The sa#e f)e(ibi)ity is a ai)ab)e to in estors to structure their portfo)ios in )ine 'ith their ris*+return tradeoffs and e(pectations regarding interest rates$ e(change rates$ stoc* #ar*ets and co##odity prices! ). List out t&e %rowt& and 'unctions o' Eurocurrenc6 0ar ets ;hi)e opening up of the do#estic #ar*ets began on)y around the end of se enties$ a tru)y internationa) financia) #ar*et had a)ready been born in the #id+fifties and gradua))y gro'n in si/e and scope during si(ties and se enties! This refers to the 'e))+*no'n IEurocurrencies .ar*et3! ,t is the )argest offshore #ar*et! Prior to 1C=0$ Eurocurrencies #ar*et 'as the on)y tru)y internationa) financia) #ar*et of any significance! ,t is #ain)y an inter+ban* #ar*et trading in ti#e deposits and arious debt instru#ents! ;hat #atters is the )ocation of the ban* neither the o'nership of the ban* nor o'nership of the deposit! The prefi( (Euro( is no' outdated since such deposits and )oans are regu)ar)y traded outside Europe!

Chapter 4

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O er the years$ these #ar*ets ha e e o) ed a ariety of instru#ents other than ti#e deposits and short+ter# )oans$ e!g! certificates of deposit (CAs)$ euro co##ercia) paper (ECP)$ #ediu#+ to )ong+ ter# f)oating rate )oans$ eurobonds$ f)oating rate notes and euro #ediu#+ter# notes (E.TNs)! The difference bet'een Euro #ar*ets and their do#estic counterparts is one of regu)ation! Eurobonds are free fro# rating and a disc)osure re5uire#ent app)icab)e to #any do#estic issues as 'e)) as registration 'ith securities e(change authorities! E#ergence of Euro #ar*ets& 1! Auring the 1C10s$ the erst'hi)e @SS7 'as earning do))ars fro# the sa)e of go)d and other co##odities and 'anted to use the# to buy grain and other products fro# the ;est$ #ain)y fro# the @S! Ho'e er$ they did not 'ant to *eep these do))ars on deposit 'ith ban*s in Ne' Eor*$ as they 'ere apprehensi e that the @S go ern#ent #ight free/e the deposits if the co)d 'ar intensified! They approached ban*s in Britain and "rance 'ho accepted these do))ar deposits and in ested the# part)y in @S! -! Ao#estic ban*s in @S (as in #any other countries) 'ere sub%ected to reser e re5uire#ents$ 'hich #eant that a part of their deposits 'ere )oc*ed up in re)ati e)y )o' yie)ding assets! 3! The i#portance of the do))ar as a ehic)e currency in internationa) trade and finance increased$ so #any European corporations had cash f)o's in do))ars and hence te#porary do))ar surp)uses! Aue to distance and ti#e /one prob)e#s as 'e)) as their greater fa#i)iarity 'ith European ban*s$ these co#panies preferred to *eep their surp)us do))ars in European ban*s$ a choice #ade #ore attracti e by the higher rates offered by Euro ban*s! The #ain factors behind the e#ergence and strong gro'th of the Eurodo))ar #ar*ets 'ere the regu)ations on borro'ers and )enders i#posed by the @S authorities 'hich #oti ated both ban*s and borro'ers to e o) e Eurodo))ar deposits and )oans! 4dded to this are the considerations #entioned abo e$ i/! the abi)ity of Euro ban*s to offer better rates both to the depositors and the borro'ers and con enience of dea)ing 'ith a ban* that is c)oser to ho#e$ 'ho is fa#i)iar 'ith business cu)ture and practices in Europe!

SHO7T NOTES
1. "artici#ants in Internationa$ "ro?ect Financin% @ a> S#onsors b> Lenders Sponsors These are partners in the pro%ect 'ho bring in the e5uity capita) or ris* capita)! Being so$ they are *een)y interested in the successfu) co#p)etion of the pro%ect and shou)der #a%or responsibi)ities as regards its e(ecution! The fact that they bring in the e5uity capita) is an indication of their interest! 4)so the a#ount of e5uity that they bring has a #ar*ed bearing on the e(tent of debt that can be raised for the pro%ect! So#eti#es peop)e 'ho bring in the e5uity capita) are %ust the initiators of the pro%ect! ,nc)uded in this category are #u)tinationa) fir#s$ future buyers of products or ser ices of the pro%ect$ the pub)ic or pri ate in estors$ internationa) organisations$ de e)op#ent ban*s etc! 6enders They bring in the debt capita)! "inancing of a big pro%ect necessitates inter ention of a ban*ing poo) consortiu# co#posed of ban*s$ nationa) or internationa) financia) institutions$ e(port financing institutions etc! 9uarantors 9uarantees #aybe pro ided by ban*s$ pub)ic financing organisations$ internationa) financia) institutions$ pri ate insurance co#panies etc! Pro%ect Operators 4n operating co#pany inter enes in the erection of the pro%ect! ,t brings its organisationa) *no'+ho' to #anage the pro%ect!

10

Chapter 4
!. Ris s associated wit& internationa$ #ro?ects< 'inancia$A #o$itica$A ot&ers

Page 11 of 13

1! "inancia) ris* ,n genera)$ internationa) pro%ects are prone to greater financia) ris* as a bu)* of finance is in the for# of debt! The #a%or factors affecting financia) ris* are degree of indebtedness$ the ter#s and conditions of repay#ent of debt and currency used! So#e pro%ects 'i)) ha e e(penses and re enues that in o) e se era) currencies! 4s a resu)t the e(change rate ris* is ery high! Pro%ects #aybe financed 'ith f)oating rates! ,n ie' of the o)ati)ity obser ed on the rates )i*e 6,BO7$ the interest rate ris* is a)so significant! Therefore it is necessary to p)an the co erage of a)) these ris*s! -! "oreign E(change 7is* 4s corporations e(pand their internationa) acti ities$ they begin to ac5uire foreign assets and foreign )iabi)ities! 4s e(change rates change$ the a)ues of these foreign assets and )iabi)ities change according)y! "or a corporation$ e(change rate ris* is the sensiti ity of the a)ue of the corporation 'hen the e(change rates change! Ob ious)y$ the change in the corporation a)ue is re)ated to the net change in the a)ues of the foreign assets and foreign )iabi)ities! (E!g! foreign direct in est#ent$ foreign e(change )oss$ sa)es and inco#e fro# foreign sources!) 3! Econo#ic 7is* Econo#ic ris* is ris* created by changes in the econo#y! Typica))y$ it is re)ated to techno)ogica) changes$ the actions of co#petitors$ shifts in consu#er preferences$ etc! ,dea))y$ a pure do#estic fir# is affected on)y by do#estic econo#ic conditions + the do#estic econo#ic ris*! Ho'e er$ in today:s integrated 'or)d econo#y$ the concept of a pure do#estic fir# has )ess practica) re)e ance! .any fir#s that appear strict)y pure do#estic confront foreign econo#ic ris* indirect)y! (E!g!& )oca) restaurantGdept store$ rea) estate agent) 4! Po)itica) 7is* Po)itica) ris* is ris* created by po)itica) changes or instabi)ity in a country! These factors inc)ude$ but are not )i#ited to$ nationa)i/ation$ confiscation$ price contro)s$ foreign e(change and capita) contro)s$ ad#inistrati e hurd)es$ uncertain property rights$ discri#inati e or arbitrary regu)ations on business practices (hiring$ contract negotiation)$ ci i) 'ars$ riots$ terroris#$ etc! Each country in the 'or)d presents a different po)itica) profi)e and represents a uni5ue source of po)itica) ris* that fir#s #ust assess and #anage 'hen they #a*e foreign in est#ents! ,n order to #ini#i/e this ris*$ )oca) in estors or the )oca) go ern#ent #ay be associated 'ith the pro%ect! ,nsurance against po)itica) ris* is another usefu) techni5ue reco##ended for the purpose! )hat constitutes political ris" and how to measure it* The po)itica) ris* #anage#ent typica))y in o) es& + ,dentifying po)itica) ris* and its )i*e)y conse5uences + Ae e)oping po)icies in ad ance to cope 'ith the possibi)ity of po)itica) ris* + Strengthening a fir#:s bargaining position + Ae ising #easures to #a(i#i/e co#pensation in the e ent of e(propriation Country 7is*& ,t refers to e)e#ents of ris* inherent in doing business in the econo#ic$ socia)$ and po)itica) en iron#ent of another country! 1! Counter party 7is* + The ris* that a counter party 'i)) defau)t on a financia) ob)igation! <! 6i5uidity 7is* +The ris* that a financia) position cannot be so)d 5uic*)y at pre ai)ing prices! F! Ae)i ery 7is* + The ris* that a buyer 'i)) not de)i er pay#ent of funds after a se))er has de)i ered securities or foreign e(change that 'ere purchased!

11

Chapter 4

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=! 7o))o er 7is* + The ris* of being c)osed out fro# a financia) #ar*et and unab)e to rene' (or ro)) o er) a short+ter# contract! C! Other ris*s + Other ris*s re)ate to the ris* of cost o erruns and bad #anage#ent! (. Financin% o' MNCs in $oca$ or internationa$ 0ar et Pro%ect financing #ay be defined as financing of an econo#ic unit$ )ega))y independent$ created 'ith a ie' to setting up of a big pro%ect$ 'hich is co##ercia))y profitab)e and financia))y iab)e! Pro%ect is considered as a distinct )ega) entity and is financed$ to a #ar*ed e(tent$ by debt (<1 to F1 percent)! Therefore the ris* to be borne is substantia)! There are t'o #a%or #ethods of financing internationa) pro%ects& 1! "inancing 'ith tota) ris* borne by )enders 'here on)y the future cashf)o's ensure the rei#burse#ent of the )oan! This #ethod of financing 'as used in petro)eu# and gas industry in the @S4 and Canada! Aue to increased )e e) of ris*s$ this #ethod of pro%ect financing is genera))y not preferred! -! ,n another type of financing$ both the )ender and the pro#oter share the ris*! The prob)e# so#eti#es encountered in this #ethod is to decide the proportion in 'hich the ris* is to be shared bet'een t'o parties! Do0estic 4Bs O''s&ore 0ar ets "inancia) assets and )iabi)ities deno#inated in a particu)ar currency + say the S'iss "ranc + are traded are pri#ari)y in the nationa) financia) #ar*ets of that country! These financia) #ar*ets are *no'n as IAo#estic .ar*ets3! ,n case of #any con ertib)e currencies they are traded in the financia) #ar*ets outside the country of that currency! These financia) #ar*ets are *no'n as IOffshore .ar*ets3! ;hi)e it is true that neither both #ar*ets 'i)) offer both the financing options nor any entity can access a)) seg#ents of a particu)ar #ar*et$ it is true genera))y that a gi en entity has an access to both the seg#ents of the #ar*ets for p)acing as 'e)) as raising funds! There are theories by e(perts that suggest that there are no t'o types of financia) #ar*ets ( viz Ao#estic and offshore #ar*ets) but e erything is a part of sing)e I9)oba) "inancia) .ar*et3! Si#i)arity E(perts suggest that Iarbitrage3 'i)) ensure that both these #ar*ets 'i)) be c)ose)y )in*ed together in ter#s of costs of funding and returns on assets Aifferences Both of these #ar*ets significant)y differ on the I7egu)atory di#ension3! .a%or seg#ents of the do#estic #ar*ets are sub%ect to strict super ision by the re)e ant authorities such as SEC in @S$ .inistry of "inance in 8apan and the S'iss Nationa) Ban* in S'it/er)and! These authorities regu)ate foreign (non+resident) entities3 access to the pub)ic capita) #ar*ets in their countries by )aying do'n e)igibi)ity criteria$ disc)osure P accounting nor#s and registration P rating re5uire#ents (si#i)ar)y for do#estic ban*s$ reser e re5uire#ents and deposit insurance)! The offshore #ar*ets on the other hand ha e #ini#a) regu)ation and often no registration! "ina))y it #ust be noted that though the nature of regu)ation continues to distinguish Ao#estic fro# the offshore #ar*ets$ there are seg#ents )i*e Pri ate P)ace#ents$ @n)isted Bonds$ Ban* )oans etc! in do#estic #ar*ets 'here regu)ation tends to be the )east!

1-

Chapter 4
). Eurocurrenc6 Mar ets

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;hi)e opening up of the do#estic #ar*ets began on)y around the end of se enties$ a tru)y internationa) financia) #ar*et had a)ready been born in the #id+fifties and gradua))y gro'n in si/e and scope during si(ties and se enties! This refers to the 'e))+*no'n IEurocurrencies .ar*et3! ,t is the )argest offshore #ar*et! Prior to 1C=0$ Eurocurrencies #ar*et 'as the on)y tru)y internationa) financia) #ar*et of any significance! ,t is #ain)y an inter+ban* #ar*et trading in ti#e deposits and arious debt instru#ents! ;hat #atters is the )ocation of the ban* neither the o'nership of the ban* nor o'nership of the deposit! The prefi( (Euro( is no' outdated since such deposits and )oans are regu)ar)y traded outside Europe! O er the years$ these #ar*ets ha e e o) ed a ariety of instru#ents other than ti#e deposits and short+ter# )oans$ e!g! certificates of deposit (CAs)$ euro co##ercia) paper (ECP)$ #ediu#+ to )ong+ ter# f)oating rate )oans$ eurobonds$ f)oating rate notes and euro #ediu#+ter# notes (E.TNs)! The #ain factors behind the e#ergence and strong gro'th of the Eurodo))ar #ar*ets 'ere the regu)ations on borro'ers and )enders i#posed by the @S authorities 'hich #oti ated both ban*s and borro'ers to e o) e Eurodo))ar deposits and )oans! 4dded to this are the considerations #entioned abo e$ i/! the abi)ity of euro ban*s to offer better rates both to the depositors and the borro'ers and con enience of dea)ing 'ith a ban* that is c)oser to ho#e$ 'ho is fa#i)iar 'ith business cu)ture and practices in Europe! *. E7terna$ Bond Mar et The e(terna) bond #ar*et refers to bond trading acti ity 'herein the bonds are under'ritten by an internationa) syndicate$ are offered in se era) countries si#u)taneous)y$ are issued outside any country:s %urisdiction$ and are not registered! The Eurobond #ar*et is a #a%or e(terna) bond #ar*et! The e(terna) bond #ar*et co#bined 'ith the interna) bond #ar*et co#prises the g)oba) bond #ar*et! E(a#p)es of an e(terna) bond are the Jg)oba) bond$J issued by the ;or)d Ban*$ and Eurodo))ar bonds! The E(terna) Bond .ar*et co#prises of the & "oreign Bond .ar*et and Euro Bond .ar*et "oreign Bond& issue is one offered by a foreign borro'er to the in estors in a nationa) capita) #ar*et and deno#inated in that nations currency! 4n e(a#p)e is 9er#an .NC issuing do))ar deno#inated bonds to the @!S! in estors! Euro Bond& issue is one deno#inated in a particu)ar currency but so)d to in estors in nationa) capita) #ar*ets other than the country that issued the deno#inating currency! 4n e(a#p)e is a Autch borro'er issuing A.+ deno#inated bonds to in estors in the @D$ S'it/er)and and the Nether)ands!

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