EUROCURRENCIES
EUROCURRENCIES
The Eurocurrency market is an important source of debt available to the MNE. A Eurocurrency is any currency that is banked outside of its country of origin. Eurodollars, which constitute a fairly consistent 65-80 percent of the market, are dollars banked outside of the United States. Dollars held by foreigners on deposit in the United States are not Eurodollars, but dollars held at branches of U.S. or other banks outside of the United States are Eurodollars. Similar markets exist for Euro-Japanese yen (Euro-Yen), Euro-German marks (Euro-Deutsche marks), and other currencies, such as British pounds, Swiss francs, and French francs.
The Eurocurrency market is worldwide. Large transactions take place in Asia (Hong Kong and Singapore), the Caribbean (the Bahamas and the Cayman Islands), and Canada, as well as in London and other European centers. However, London is the key center for the Eurocurrency market, given that nearly 20 percent of all Eurocurrency transactions in 1989 took place in London. Luxembourg is the center for Euro-Deutsche mark deposits, with Brussels and Paris the centers for Euro-Sterling deposits.5
The major sources of Eurodollars are: (1) foreign governments or individuals who want to hold dollars outside of the United States; (2) multinational corporations with cash in excess of current needs; (3) European banks with foreign currency in excess of current needs; and (4) the reserves of countries such as Japan, Taiwan, and Germany that have large balance-of-trade
surpluses. The demand for Eurocurrencies comes from individuals, firms, and
governments that require funds for operating capital, investment, and the
payment of principal and interest on debt. Eurocurrencies exist partly for the
convenience and security of the user and partly because of the cheaper lend-
ing rates for the borrower and better yield for the lender. The security issue
arose because some governments feared currency controls in the United
' States and decided that they wanted to,hold their U.S. dollars offshore.
Eurocurrency Expansion
The key to Eurocurrency expansion is the fractional reserve concept. The
totai sjze Qf tne Eurocurrency market is much greater than the actual cash
deposited. Once a Eurocurrency (assume dollar) deposit is made in a London bank, the bank may use that asset as a basis for making a dollar-denominated loan to someone else. The fraction of the original deposit not loaned out is called the fractional reserve. Since there are no reserve requirements on Eurocurrency deposits, it is up to the individual bank to determine how much protection it requires in the form of reserves. The expansion occurs when the initial loan is spent, deposited in another bank, or used as a basis for another loan.
Even though there are no specific Eurocurrency controls, banks are subject to solvency rules, and Eurocurrency assets and liabilities are a part of the overall assets and liabilities of the bank that are subject to capital ratios and capital provisions. In some cases, such as in Britain with the Bank of England, liquidity is monitored very closely; a Central Bank can issue more of its own currency to ease a liquidity crisis, but it would be hampered by a liquidity crisis caused by another currency.
Market Size
The size of the market is difficult to determine and depends on whether the gross or net size is being discussed (the net size eliminates transfers between banks). Gross liabilities usually are just over twice the net size of the market. In 1971 the total gross Eurocurrency market size was about $150 billion. As Fig Q , shOWs, the market grew to $4,561 trillion by March 1988. It was
estimated that the market reached $6.1 trillion by September 1989.6 Figure 9.2 illustrates that the dollar portion of the Eurocurrency market has remained over 70 percent for most of the past decade, although the importance of the dollar has diminished in recent years, especially as the dollar has fallen in value. By 1988 the dollar portion had slipped to less than 70 percent. As the dollar rises in value, however, the dollar portion of Eurocurrencies will also rise.
The Eurocurrency market is an important source of debt available to the MNE. A Eurocurrency is any currency that is banked outside of its country of origin. Eurodollars, which constitute a fairly consistent 65-80 percent of the market, are dollars banked outside of the United States. Dollars held by foreigners on deposit in the United States are not Eurodollars, but dollars held at branches of U.S. or other banks outside of the United States are Eurodollars. Similar markets exist for Euro-Japanese yen (Euro-Yen), Euro-German marks (Euro-Deutsche marks), and other currencies, such as British pounds, Swiss francs, and French francs.
The Eurocurrency market is worldwide. Large transactions take place in Asia (Hong Kong and Singapore), the Caribbean (the Bahamas and the Cayman Islands), and Canada, as well as in London and other European centers. However, London is the key center for the Eurocurrency market, given that nearly 20 percent of all Eurocurrency transactions in 1989 took place in London. Luxembourg is the center for Euro-Deutsche mark deposits, with Brussels and Paris the centers for Euro-Sterling deposits.5
The major sources of Eurodollars are: (1) foreign governments or individuals who want to hold dollars outside of the United States; (2) multinational corporations with cash in excess of current needs; (3) European banks with foreign currency in excess of current needs; and (4) the reserves of countries such as Japan, Taiwan, and Germany that have large balance-of-trade
surpluses. The demand for Eurocurrencies comes from individuals, firms, and
governments that require funds for operating capital, investment, and the
payment of principal and interest on debt. Eurocurrencies exist partly for the
convenience and security of the user and partly because of the cheaper lend-
ing rates for the borrower and better yield for the lender. The security issue
arose because some governments feared currency controls in the United
' States and decided that they wanted to,hold their U.S. dollars offshore.
Eurocurrency Expansion
The key to Eurocurrency expansion is the fractional reserve concept. The
totai sjze Qf tne Eurocurrency market is much greater than the actual cash
deposited. Once a Eurocurrency (assume dollar) deposit is made in a London bank, the bank may use that asset as a basis for making a dollar-denominated loan to someone else. The fraction of the original deposit not loaned out is called the fractional reserve. Since there are no reserve requirements on Eurocurrency deposits, it is up to the individual bank to determine how much protection it requires in the form of reserves. The expansion occurs when the initial loan is spent, deposited in another bank, or used as a basis for another loan.
Even though there are no specific Eurocurrency controls, banks are subject to solvency rules, and Eurocurrency assets and liabilities are a part of the overall assets and liabilities of the bank that are subject to capital ratios and capital provisions. In some cases, such as in Britain with the Bank of England, liquidity is monitored very closely; a Central Bank can issue more of its own currency to ease a liquidity crisis, but it would be hampered by a liquidity crisis caused by another currency.
Market Size
The size of the market is difficult to determine and depends on whether the gross or net size is being discussed (the net size eliminates transfers between banks). Gross liabilities usually are just over twice the net size of the market. In 1971 the total gross Eurocurrency market size was about $150 billion. As Fig Q , shOWs, the market grew to $4,561 trillion by March 1988. It was
estimated that the market reached $6.1 trillion by September 1989.6 Figure 9.2 illustrates that the dollar portion of the Eurocurrency market has remained over 70 percent for most of the past decade, although the importance of the dollar has diminished in recent years, especially as the dollar has fallen in value. By 1988 the dollar portion had slipped to less than 70 percent. As the dollar rises in value, however, the dollar portion of Eurocurrencies will also rise.
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