ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel
  • »
  • Business and Employment»
  • History of Business

International Fixed-Income Market Transactions: Euromarkets

Updated on January 19, 2012

Financial-market activity used to occurs entirely within a single country, denominated in given country’s currency. However, as investors buy currencies promising to offer greater returns and as borrowers scour the planet for the cheapest money, a growing share of the financial market activity now goes beyond national boundaries.

The resulting international money market possesses two segments. In one scenario transaction will be arranged in a foreign country in that country’s currency. In another, investors and borrowers execute these transactions in a currency other than that of the country where they take place. The former are simply called foreign transactions, whereas the latter are known as Euromarket transactions - however, no sharp distinction exists between the two any more.

Moscow Narodny Bank, London
Moscow Narodny Bank, London

Balance of Payments

A system of recording all of a country's economic transactions with the rest of the world over a period of one year.

How The Euromarkets Evolved

It has been a century-old practice to use the money of one country to do business in another. Offshore dealings like that usually aimed to avoid taxes, regulation or confiscation.

The name Euromarket was first used to refer to the acceptance of offshore deposits in 1957, in the middle of the cold war, when Moscow Narodny Bank resolved transferring its American currency deposits out of the U.S. to prevent them from being confiscated.

The Soviets transferred their dollars from New York to the French Eurobank and soon after all dollar deposited in European banks came to be referred to as Eurodollars.

This transferred American currency created a new financial market resulting from the Bretton Woods system of fixed exchange rates, around which the post-war non-communist economy of the West revolved.

Gold standard was still an integral part of this system as countries with balance-of-payments deficit had to settle the imbalance in gold reserves to their creditors.

The theory was the diminished gold reserves would inspire the country’s central bank to decrease the money supply thus slowing the economy down and reducing demand for imports, which would in turn bring the balance of payments back into equilibrium.

Security

A document indicating ownership or creditorship; a stock certificate or bond.

Stock Certificate

A certificate establishing ownership of a stated number of shares in a corporation's stock.

Bond

A certificate of debt issued by a government or corporation guaranteeing payment of the original investment plus interest by a specified future date.

The Counterproductive Interest Equalization Tax

In reality, America had been running a persistent balance-of-payments deficit by the end of the '50s and the U.S. gold reserves were dwindling down. Foreigners were issuing large numbers of securities in America and handing over the proceeds for foreign currency to be used at home. This placed even more pressure on U.S. gold stocks. The US government executed a set of policies, including the infamous Interest Equalisation Tax enacted in 1964. This tax was imposed on stocks issued by Europeans claiming 15% of the interests from Americans with the aim of decreasing capital outflows.

Although the tax met its short-term objectives as the "Yankee bond market" for foreigners to sell dollar-denominated bonds rapidly crumbled, investment bankers turned around and started selling dollar-denominated bonds in London insuring the securities would not be taxed by the U.S. With the Interest Equalisation Tax further extended to bank loans in 1965, banks moved dollar-based international lending to London as well. By the time the Interest Equalisation Tax was done away with in 1974, the Euromarket had already become a significant segment of the international financial markets.

Medium Term Note

A corporate note continuously offered by a company to investors through a dealer usually paid back in 5 to 10 years.

Short Term Commercial Paper

An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Paid back in less than 270 days.

International Money Market Activity Today

One shouldn't look at the international market as an exchange or a group of products. It's a decentralised system wherein currencies kept abroad are constantly reloaned without converting to another country's currency.

Most of these Euromarket transactions are actual bank loans to clients or very short-term loans among banks. On the other hand, the securities markets constitute a huge and growing share of international financial activity.

There are three main types of International instruments: bonds, medium-term notes and short-term commercial paper. The US dollar is only one of the currencies used in the Euromarket along with yen, Swiss francs, New Zealand dollars and other freely convertible currencies. However, when the single European currency, the euro, was established in 1999, it quickly took over the role of most important vehicle for issuance of international securities.

When a borrower issues bonds in a foreign currency, it doesn't automatically follows that they need that currency to fund investments. A lot of borrowers will borrow in the currency that promises the best interest rates at a give future date, only to obtain the desired currency on foreign-exchange markets at a later date.

The term Euromarket is less often used today, since lending in a currency other than that of the borrower or lender has now become commonplace.

Comments

    0 of 8192 characters used
    Post Comment

    No comments yet.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: "https://hubpages.com/privacy-policy#gdpr"

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)