Growth of Euro Currency Market -
September 10th, 2010
While opening up of the domestic markets began only around the end of seventies, a truly international financial market had already been born in the mid-fifties and gradually grown in size and scope during sixties and seventies.
This refers to the well-known ‘Eurocurrencies Market’. It is the largest offshore market.
Prior to 1980, Eurocurrencies market was the only truly international financial market of any significance.
It is mainly an inter-bank market trading in time deposits and various debt instruments. What matters is the location of the bank neither the ownership of the bank nor ownership of the deposit.
The prefix "Euro" is now outdated since such deposits and loans are regularly traded outside Europe.
Over the years, these markets have evolved a variety of instruments other than time deposits and short-term loans, e.g. certificates of deposit (CDs), euro commercial paper (ECP), medium- to long- term floating rate loans, eurobonds, floating rate notes and euro medium-term notes (EMTNs).
The difference between Euro markets and their domestic counterparts is one of regulation.
Eurobonds are free from rating and a disclosure requirement applicable to many domestic issues as well as registration with securities exchange authorities.
Emergence of Euro markets:
1. During the 1950s, the erstwhile USSR was earning dollars from the sale of gold and other commodities and wanted to use them to buy grain and other products from the West, mainly from the US.
However, they did not want to keep these dollars on deposit with banks in New York, as they were apprehensive that the US government might freeze the deposits if the cold war intensified.
They approached banks in Britain and France who accepted these dollar deposits and invested them partly in US.
2. Domestic banks in US (as in many other countries) were subjected to reserve requirements, which meant that a part of their deposits were locked up in relatively low yielding assets.
3. The importance of the dollar as a vehicle currency in international trade and finance increased, so many European corporations had cash flows in dollars and hence temporary dollar surpluses.
Due to distance and time zone problems as well as their greater familiarity with European banks, these companies preferred to keep their surplus dollars in European banks, a choice made more attractive by the higher rates offered by Euro banks.
The main factors behind the emergence and strong growth of the Eurodollar markets were the regulations on borrowers and lenders imposed by the US authorities which motivated both banks and borrowers to evolve Eurodollar deposits and loans.
Added to this are the considerations mentioned above, viz. the ability of Euro banks to offer better rates both to the depositors and the borrowers and convenience of dealing with a bank that is closer to home, who is familiar with business culture and practices in Europe.
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