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Unit 19. Eurocurrency Markets. I. What is the Eurocurrency Market? The Eurocurrency Market provides a market for the exchange of financial instruments denominated in currencies other than that the country where the market is located.

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I. What is the Eurocurrency Market?

The Eurocurrency Market provides a market for the exchange of financial instruments denominated in currencies other than that the country where the market is located.

Eurocurrencies are those currencies traded outside the country of their origin, such as Euro-dollar, Euro-sterling, etc. The “euro” prefix is attached to other currencies, even though the Euro-market no longer is exclusively in Europe.

Other Eurocurrencies are German mark, Swiss Franc, Dutch Guilder, Japanese Yen, and French Franc. They all share the Euro-dollar characteristic and are national currencies deposited outside their own border.

In addition to Europe, financial institutions in the Bahamas, Cayman Islands, Panama (tax heaven), Canada, HK, Japan, Singapore and US IBFs (International Banking Facilities-off shore banking) deal in Eurocurrencies.

(Note: OSBs refer to banks which are not allowed to conduct businesses in the domestic market, only with other off-shore banking units or foreign institutions.)

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Political Consideration-The Socialist countries were the source of early dollar balances held in Europe. Since 1960s, these countries need dollars from time to time, but didn’t want deposit in US banks for fear of freezing due to hostilities. Thus, they deposited these dollars in UK and French banks, which became the first Eurodollar deposits.
  • Regulation Considerations & Profit Considerations- Euro-markets are almost totally free of control by national government and international agencies, such as interest rate ceilings (上限), reserve requirements, taxes, etc.. It reduces the costs for both lenders and borrowers and increase the profits of both parties.
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A. Eurocurrency Market & Eurobond Market

The Eurocurrency market deals with bank deposits and bank credits of generally short-term or medium term maturity.

The Eurobond market deals with long-term debt instruments-normally 10- or 20-year maturity-that are issued and sold outside the country of the currency in which they are denominated.

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B. Interest Rates in Eurocurrency Markets

In the Eurocurrency market, bank credits usually carry a rate of interest tied by convention to LIBOR. The actual rate is often a margin plus LIBOR, the amount of the spread reflecting the credit rating of the borrower.

The Eurocurrency market is partly an inter-bank market and partly a market for loans to Corps and to governments. Many developing countries resort to borrow from Euro-currency market, instead of IMF, because of stringent conditions to these countries imposed by IMF.

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C. Eurobonds are underwritten by an international syndicate and are sold principally in countries other than the country of the currency in which the bond is denominated. The Eurobond market provides an alternative source of funds for the borrower who wishes to avoid regulation and expenses of floating (发行) the bonds in a domestic market. Eurobonds require no registration, and usually bearer bonds (无记名债券)-that is not registered in anyone’s name-which may have advantages in avoiding taxes.

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The Eurocurrency market expanded rapidly since 1960s duo to the needs to avoid national controls by keeping a currency in a bank outside of its country of origin.

Now, the Eurocurrency market has become a critical structural element for hundreds of banks throughout the world because the market represents a highly efficient response by international banks both to investors seeking high-yielding, safe, and liquid investments and business firms and governments looking for low-cost funds with a high degree of assured availability.

There is a concern/controversy over Eurocurrency market due to illegal conducts, such as money laundry (洗钱) and illegal sources of deposits from some corrupted officials of other countries (embezzlements or bribes).