Presented To: Presented By:Dr. Vishaka Kutumble Surabhi Kaushal Dolly Samuel MIB 3RD sem
Euro Currency Market Any freely convertible currency, such as $, € or , Yen deposited in a bank outside its country of origin. It is the residency of the bank and not its nationality that determines the “euro” nature of the deposit. The most important international financial markets today. Composed of euro banks who accept/maintain deposits of foreign currency Dominant currency: US$
WHAT IS EURODOLLAR By Euro-dollars is meant all U.S. dollar deposits in banks outside the United States, including the foreign branches of U.S. banks. A Euro-dollar is, however, not a special type of dollar. It bears the same exchange rate as an ordinary U.S. dollar has in terms of other currencies. Euro-dollar transactions are conducted by banks not resident in the United States. For instance, when an American citizen deposits (lends) his funds with a U.S. Bank in London, which may again be used to make advances to a business enterprise in the U.S., then such transactions are referred to as Euro-dollar transactions. All Euro-dollar transactions are, however, unsecured credits.
Contd..The Euro-dollar market has two facets: (i) It is a market which accepts dollar deposits from the non-banking public and gives credit in dollars to the needy non-banking public. (ii) It is an inter-bank market in which the commercial banks can adjust their foreign currency position through inter-bank lending and borrowing.
ORIGINS OF THE EURO-DOLLARMARKETS Euro-dollars have come into existence on account of the Regulation issued by the Board of Governors of the U.S. Federal Reserve System, which does not permit the banks to pay interest to the depositors above a certain limit. As such, banks outside the United States tend to expand their dollar business by offering higher deposit rates and charging lower lending rates, as compared to the banks inside the U.S.
Creation and Multiplication of Euro credits US$ deposit in London-based US Bank or in any European bankAmericaninvestors LIBOR LONDON USA EUROBANK Payment to US company Euro-credit Payment to European company Company Borrower PARIS
EXAMPLE 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.
FACTORS CONTRIBUTING TO THEGROWTH OF EURO MARKETRelaxation of exchange control and resumption of currency convertibility. The general relaxation of exchange control , the stability of the exchange market and the redemption of the currency convertibility in western Europe in 1958 provided an added impetus to the growth of the euro market .The political factors The cold war between the United states and the communist countries also contributed to the euro currency market.Balance of payment deficit of the US Deficit in the balance of payment in US meant an increasing flow of US dollar to those countries which had a surplus with the US
Contd…..The regulation of Q Regulation of Q which fixed the maximum rate of interest payable to the banks in US and the prohibition of payment of interest on deposit for less than 30 days very significantly contributed to the fast growth of the euro market.Innovative banking The advent of the Innovative banking ,spearheaded by the US banks in Europe and the willingness of the banks in the market to operate on a narrow basis also encouraged the growth of euro market.Supply of petrodollars The flow of petro dollar facilitated by the increase in the OPEC’S oil revenue following by the oil price hike since 1973 has been a significant source of growth of Euro currency.
Borrowing instruments in the Euromarkets Banks’ Claims Euro credits: medium to long-term loans denominated in euro-currencies (> 1 year) Stand-by Credit: A commitment to lend up to a specified amount for a specific period, to be used only in a certain contingency. (commitment fee paid on the unused portion of a facility) Euro-commercial paper: short-term euro notes issued by companies < 365 days. Nominal value of notes > $500,000, with corporate and sovereign issuers. Investment grade rating not required. Euro notes are unsecured debt securities <1 year
TYPES OF TRANSACTION Japanese Exporter, earning USD, keeps these USD in London Bank (say AMEX) as Deposit. AMEX bank may use such deposits for lending to a French Importer. Indian exporter, earning Japanese Yen, keeps these Yen in Korea as Deposit Nigerian Importer avails loan in INR from Russia to import machinery from India
BENEFITS OF EURO DOLLAR MARKET Following benefits seem to have accrued to the countries involved in the Euro-dollar market: 1. It has provided a truly international short-term capital market, owing to a high degree of mobility of the Euro- dollars. 2. Euro-dollars are useful the financing of foreign trade. 3. It has enabled the financial institutions to have greater flexibility in adjusting their cash and liquidity positions. 4. It has enabled importers and exporters to borrow dollars for financing trade, at cheaper rates than otherwise obtainable.
CONTD… 5. It has helped in reducing the profit margins between deposit rates and lending rates. 6. It has enhanced the quantum of funds available for arbitrage. 7. It has enabled monetary authorities with inadequate reserves to increase their reserves by borrowing Euro-dollar deposits. 8. It has enlarged the facilities available for short- term investment. 9. It has caused the levels of national interest rates more akin to international influences.
Effects of Euro-dollar Market on International Financial System:Euro-dollar market has affected the international financial system in the following ways: 1. The position of dollar has been strengthened temporarily, since its operations of borrowing of dollars has become more profitable rather than its holdings. 2. It facilitates the financing of balance of payments surpluses and deficits. Especially, countries having deficit balance of payments tend to borrow funds from the Euro- dollar Market, thereby, lightening the pressure of their foreign exchange reserves. 3. It has promoted international monetary cooperation. 4. Over the last decade, the growth of Euro-dollar has helped in easing of the world liquidity problem.
Shortcomings of the Euro-dollarMarketThe Major drawbacks of the Euro-dollar market may be mentioned as under; 1. It may lead banks and business firms to over-trade. 2. It may weaken discipline within the banking communities. 3. It involves a grave danger of sudden large-scale withdrawal of credits to a country. 4. It has rendered official monetary policies less effective for the countries involved.