What is Eurocurrency?

Eurocurrency is the term used to describe deposits residing in banks that are located outside the
borders of the country that issues the currency the deposit is denominated in. Euro-currency is any
currency banked outside its country of origin. Thus it is a non-domestic financial intermediary. It is
extremely large & has grown rapidly in a short interval. It has received a bad press from Central Banks,
which continuous to call it a major cause of inflation & an obstacle to their control of domestic monetary
systems. For example: a deposit denominated in US dollars residing in a Japanese bank is a Eurocurrency
deposit, or more specifically a Eurodollar deposit.
Investopedia explains 'Eurocurrency Market'
Rates on deposits in the Eurocurrency market are typically higher than in the domestic
market, because the depositor is not protected by domestic banking laws and does not
have governmental deposit insurance. Rates on loans in the Eurocurrency market are typically lower
than those in the domestic market, because banks are not subject to reserve requirements on
Eurocurrency and do not have to pay deposit insurance premiums.
Eurocurrency Markets:Introduction
Up until the 1950s, most international trade was conducted in s (instead of the currencies of whatever
countries were trading). English banks facilitated international trade taking deposits and making loans so
that importers/exporters in other countries could simply sign over deposits in order to pay for goods.
Also, financing purchases was simple in that firms could simply take out loans in s from these English
banks.
In 1956, the Suez Canal crisis put downward pressure on the . Attempting to alleviate the pressure, the
Bank of England prohibited loans of s to foreign borrowers (the logic being that if the foreign investors
did not have pounds, they could not put pressure on the pound by selling them). The banks did not like
this because it took away a very profitable piece of their business.English banks decided to take deposits
and make loans in $US so that they could continue to finance international trade, except with $US
instead of s. This was the start of the Eurocurrency Market.
Eurocurrency is any deposit of a currency in a country other than that of the currencys origin. For
example, a deposit of $US in a bank in France is a deposit of Euro-dollars. The entire market for loans
and deposits in Eurocurrency is the Eurocurrency Market. The Eurocurrency Market does not have
buyers and sellers, it has lenders and borrowers. Note that the prefix Euro is historical in nature,
referring to the fact that the market was initially centred in Europe. Today, however, a deposit of $US in
a Japanese bank is still referred to as Eurocurrency.
From relatively humble beginnings, the Eurocurrency deposits have developed into a market measured
in the trillions of dollars (as of 1989 the total value of eurocurrency deposits globally was over $5 trillion
US). The Eurocurrency market was created to avoid capital controls imposed by governments. It grew in
response to further capital controls, especially by the U.S. government (for example the Interest
Equalization Tax of 1963 applied to interest earned from $US loans to foreign firms (since repealed), and
Regulation Q (also since repealed) which put a limit on the rate that could be paid by American banks on
deposits).

Generally, Eurobanks are able to pay higher rates on deposits and charge lower rates on loans than
purely domestic banks. They are able to do this because they can often avoid government regulations
such as reserve requirements and the need to pay deposit insurance. This lowers the cost of operations
for Eurobanks and these lower costs can be passed through to the clients. As well, eurocurrency loans
are generally very large and the customers are well known firms. This means that the banks are not
subject to as much default risk and can charge lower margins on the large loans.

Of course, Eurobanks have to offer higher rates on eurocurrency deposits because of the higher risk to
the depositor. Part of the risk comes from the fact that eurobanks do not follow the same regulations as
domestic banks (these regulations are usually meant to protect depositors). However, a large part of the
extra risk comes from sovereign risk. This is the risk that governments impose new regulations that
restrict the movement of capital or control foreign currency transactions. This may mean that any
eurocurrency deposits held in that country become inaccessible for the owner.

While eurobanks will offer better rates than purely domestic banks, the difference between
eurocurrency rate sand domestic rate swill be limited by arbitrage. It must be that:
Euro-loan rate > Domestic deposit rate
Euro-deposit rate < Domestic loan rate
If one of these did not hold then arbitrageurs could simply borrow in the cheaper market and deposit in
the money in the in the market where they would get a higher return.
Generally, the advantage of eurocurrency rates over domestic rates runs somewhere between 25 and
100 basis points.There are several eurocurrency centres around the world where eurobanks conduct
most of their business. The largest are: London, the Cayman Islands, Bahrain, Singapore and some
International Banking Facilities that have been set up in the U.S. Approximately 80% of the
eurocurrency market involves banks lending to, and depositing with, other banks. This is done on a BidAsk basis with the bid being the rate offered on deposits and the ask the rate charged on loans. A main
characteristic of eurocurrency loans is that they are usually floating rate (this also referred to as rollover
pricing or as cost-plus pricing) and are typically set as a percentage over LIBOR.

Origin & Creation of Euro Currency:

After the Second World War, the amount of U.S. dollars outside the United States increased enormously.
As a result, enormous sums of U.S. dollars were in custody of foreign banks outside the United States.
During the Cold War period, especially after the invasion of Hungary in 1956, the Soviet Union feared
that its deposits in North American banks would be frozen as a retaliation. It decided to move some of
its holdings to the Moscow Narodny Bank, a Soviet-owned bank with a British charter. The British bank
would then deposit that money in the US banks. There would be no chance of confiscating that money,

because it belonged to the British bank and not directly to the Soviets. On February 28 1957, the sum of
$800,000 was transferred, creating the first eurodollars. Gradually, as a result of the successive
commercial deficits of the United States, the eurodollar market expanded worldwide. Thus, the
currencies involved in the Eurodollar market are in no way different from currencies deposited with
banks in the home country. It is only that Eurodollar is not under the orbit or surveillance of the
monetary policy, where the currency in their home country is under the regulation of the national
monetary policy
Creation of Euro Currency One can take the physical currency of a country & deposit it in a bank in
another country. Banks do hold currency of other countries but mainly for the convenience of travelers.
One can transfer deposits from within the country whose currency is in question to an offshore bank.
This may well be an overseas subsidiary of the very same bank with which the original deposit was held.
Growth of Euro-Currency:
Growth of Euro-Currency Growth 1950s. Eastern Europeans, afraid US would seize deposits to reimburse
claims for business losses as a result of Communist takeover of Eastern Europe. Currency deposited by
national governments or corporations in banks outside their home market. This applies to any currency
and to banks in any country.
Other Events ::
Other Events : Britain 1957 prohibited banks from financing non-British trade. U.S. 1960s discouraged
banks from lending to non-US residents. Oil crisis 1970s led to huge amount of dollars amassed by
OPEC countries. They did not want them to be in the US because they were afraid that they would be
confiscated by the US government. Gave opportunity to those who wanted to deposit or borrow dollars
(later, other currencies, as well).
ATTRACTION:
ATTRACTION Lack of government regulation. Pay higher interest rates. Charge lower rates. Reserve
restrictions are less costly. Gave opportunity to those who wanted to deposit or borrow dollars (later,
other currencies, as well).

Structure of the euro money market[edit]

In regard to structure, the euro money market has been less concentrated over the past years. But
differences across the various money market segments continue to exist. The market that is least
concentrated is the unsecured money market segment. The money market segments that are highly
condensed are the forward rate agreement, other interest rate agreement and the cross currency swap
segments. They constitute about 70% of the entire money market share.
The euro money market products are short term deposits, repos, EONIA swaps and foreign
exchange swaps. There is an increase in the liquidity in these money market instruments that is
projected by the thinning in the bidoffer spread.

Features of Eurocurrency Market

1.

It is an international market and it is under no national control: It has come up as the most
important channel for mobilizing and deploying funds on an international scale.

2.

It is a short term money market

3.

Eurodollar markets are the time-deposit market. The deposits here have a maturity period
ranging one day to several months. Eurodollar is the short-term deposit. It is a wholesale
market: It is so because Eurodollar is the currency that is dealt in only large units. Size of
individual transaction is usually above $1million.

4.

It is highly competitive and sensible market:

High competitive : This market is characterized as highly competitive because the market is
growing and accepted internationally.
Sensible : The Eurodollar market is said to be sensible because it responds faster to the
changes in demand and supply of the funds and also reacts to changes in the interest rates.

The Euro Markets

The most important international financial markets today.
A) The Eurocurrency Market:
1. Composed of Euro-banks who accept/maintain deposits of foreign currency
2. Dominant currency: US$
B) Growth of Eurodollar Market caused by restrictive US government policies, especially
1. Reserve requirements on deposits
2. Special charges and taxes
3. Required concessionary loan rates
4. Interest rate ceilings
5. Rules which restrict bank competition.
C) Eurodollar Creation involves
1. A chain of deposits
2. Changing control/usage of deposit
3. Eurocurrency loans a. Use London Inter-bank Offer Rate- LIBOR as basic rate b. Six month rollovers c.
Risk indicator: size of margin between cost and rate charged.
4.Multicurrency clause Clause gives borrower option to switch currency of loan at rollover. Reduces
exchange rate risk
Euro Dollar:

Euro Dollar Thus euro dollars are bank deposit liabilities denominated in U.S. dollars but not subject to
U.S banking regulations. For the most part, banks offering Euro dollar deposits are located outside the
U.S.
D) Eurobonds Bonds sold outside the country of currency denomination.
1. Recent Substantial Market Growth -due to currency swaps, a financial instrument which gives 2
parties the right to exchange streams of income over time.
2. Links to Domestic Bond Markets arbitrage has eliminated interest rate differential.
3. Placement underwritten by syndicates of banks.
Factors for the Expansion The Suez Crisis :
(1957) It was a crisis whereby the sterling credit facilities were unable to reach Britain provided speed to
the growth of Eurodollar Market. The British banks ultimately found a good substitute in dollars. As
there was already available pool of USD held by residents outside US.
*Relaxation of Exchange Control and Resumption of Currency Convertibility : Resumption of currency
convertibility was seen in Europe (1958).
* SURPLUS EUROMARKET DEFICIT
* Political Factors : It was cold war led to growth of Eurodollar Market. As the communist countries had
a fear that their dollars deposited in banks in the US, would be seized due to hostilities. It was then the
Russian and European banks preferred to transfer their dollars with European banks.
* Balance of Payment Deficit of US : It means that the outflow of dollars from US increased to other
nations. It was in 1950 that US started facing the problem of deficit, but it was in 1958 that the problem
reached to the saturation point. The outflow of USD contributed as a factor for expanding Eurocurrency
market.
*Regulation Q : Regulation Q was a United States government regulation which fixed the maximum
interest payable by the banks in US and restricted the payment of interest on deposits less than 30 days.
Unlike US, Eurodollar market paid interest on the deposits of less than 30 days.

Participants in Eurocurrency Market

Participants in Eurocurrency Market Government International Organizations Central Banks Commercial
Banks Corporations MNC Traders Individuals Participants have contributed in the demand and supply of
the fund, in the following way:
Supply : Central Banks of various countries are the suppliers; they channel the fund through BIS.
Increase in the Oil Revenue of the OPEC has added to the fund. MNCs and the traders place their surplus
funds for the short-term gains.
Demand : Government demand for these funds to meet the deficit arising due to meet the deficit arising
due to the deficit in Balance of Payment and the rise in the oil prices. Commercial Banks needs extra
fund for lending. Some also borrow for the better window dressing in the year-end.

Advantages It helped the economies to solve the liquidity problems: It provided better
investment opportunities. Funds are also by the commercial banks of various countries for
domestic credit creation and window dressing. This facilitated the growth and development
of various countries like Brazil, South Korea, Taiwan, and Mexico etc Its International
acceptance has helped in the international trade to expand and accelerated the process of
globalization.

16. Disadvantages For many economies it is a new concept. For many economies also
considered that the speed of its growth or expansion is TOO fast. For many economies, they
feel this market gives a chance to avoid many a regulations that they try to impose on their
national money market.

(doubt)

or

Advantages
1. Transaction costs will be eliminated.
For instance, Uk firms currently spend about 1.5 billion a year
buying and selling foreign currencies to do business in the EU.
With the EMU this is eliminated, so increasing profitability of EU
firms.
Advice to young people: You can go on holiday and not have to
worry about getting your money changed, therefore avoiding
high conversion charges.
2. Price transparency.
Eu firms and households often find it difficult to accurately
compare the prices of goods, services and resources across the
EU because of the distorting effects of exchange rate differences.
This discourages trade. According to economic theory, prices
should act as a mechanism to allocate resources in an optimal
way, so as to improve economic efficiency. There is a far greater
chance of this happening across an area where E.M.U exists.
Advice to young people: We can buy things without wrecking our
brains trying to calculate what price it is in our currency.
3. Uncertainty caused by Exchange rate fluctuations eliminated.
Many firms become wary when investing in other countries
because of the uncertainty caused by the fluctuating currencies in
the EU. Investment would rise in the EMU area as the currency is

universal within the area, therefore the anxiety that was

previously apparent is there no more.
4. Single currency in single market makes sense.
Trade and everything else should operate more effectively and
efficiently with the Euro. Single currency in a single market seems
to be the way forward.
5. Rival to the "Big Two".
If we look out in the world today we can see strong currencies
such as the Japanese Yen and The American $. America and Japan
both have strong economies and have millions of inhabitants. A
newly found monetary union and a new currency in Europe could
be a rival to the "BIG TWO".
EMU can be self-supporting and so they could survive without
trading with anyone outside the EMU area.
This fact makes the Euro very strong already, and even George
Soros couldn't affect it (well, hopefully!!!!).
The situation that EMU is in is good as it seems that it can survive
on its own, with or without the help of Japan and U.S.A.
6. Prevent war.
The EMU is, and will be a political project. It's founding is a step
towards European integration, to prevent war in the union. It's a
well known fact that countries who trade effectively together
don't wage war on each other and if EMU means more happy
trade, then this means, peace throughout Europe and beyond (we
hope).
7. Increased Trade and reduced costs to firms.
Proponents of the move argue that it brings considerable
economic trade through the wiping out of exchange rate
fluctuations, but as well as this it helps to lower costs to industry
because companies will not have to buy foreign exchange for use
within the EU. For them, EU represents the completion of the
Single European Market. It is vital if Europe is to compete with
the other large trading blocs of the Far East and North America.
8. The Political agenda.
There is also a political agenda to European bank (the European
System of Central Banks -ESCB), the complete removal of national

control over monetary policy and the partial removal of control

over fiscal policy. Individual nation states will lose sovereignty
(i.e. the ability to control their own affairs). It will be a
considerble step down the road towards political union. There are
many in the EU who faviour economica dn political union and
they are very much in facour ot EMU. There are also many who
wish to keep national sovereignty and are strugging to prevent
EMU, whatever its merits might be, from going ahead.
9. Inflation
From the mid-1980s onwards, there were a number of
economists and politicians who argued that, for the UK at least,
EMU provided the best way forward to achieve low inflation rates
throughout the EU. During the first half of the 1980s high inflation
countries, such as France and Italy were forced to adopt policies
which reduced their inflation rates to something approximating
the German inflation rates to something approximating the
German inflation rate. If they had not done this, the franc and the
lira would have had to be periodically devalued, negating the
fixed exchange rate advantages of the system. Effectively, the
German central bank, the Bundesbank, set inflation targets and
therefore monetary targets for the rest of the EU. At the time,
there was much discussion of why Germany had a better inflation
record than many other European countries. The consensus
emerged that it was because the Bundesbank, the German
central bank, was independant of the German Government. In
countries such as the UK and France, central banks were
controlled by governments. If the UK government decided to
loosen monetary policy, for example, by reducing interest rates, it
had the power to order the Bank of England to carry out this
policy on its behalf. There have always been especially strong
pressures before an election for UK governments to loosen the
monetary reins and create a boom in the economy, with the
subsequent increase in inflation following the election. The
Bundesbank, in contrast, was independent of government. By law
it has a duty to maintain stable prices. It can resist pressures from
the German government to pursue reflation policies if it believes
that these will increase inflation within the economy. Events of
the early 1990s have shaken the naieve faith that linkage to the
independent ESBC, the central bank of Europe would solve all
inflationary problems. This is because German inflation rates in
the early 1990s rose to over 4% as Germany strugged with the
consequences of unification. In 1993, inflation was nearly three
times as high in Germany as in the UK and twice as high as that in

France. Some countries, such as France, have made their central

banks independent on the Germany model and therefore
arguably don't need to the EMU link to Germany to maintained
low inflation.The UK has gone a little way towards giving more
power to the central bank by publishing reports of monthly
meetings between the Chancellor of the Exchequer and the
Governenor of the Bank of England. This forces the Government
to justify its monetary policy publically and makes it harder for it
to use interest rates for short term political ends.
Disadvantages
1. The instability of the system.
Throughout most of the 1980s the UK refused to join the ERM
(Exchange rate mechanism). It argued that it would be impossible
to maintain exchange rate stability within the ERM, especially in
the early 1980s when the pound was a petro-currency and when
the UK inflation rate was consistently above that of Germany.
When the UK joined the ERM in 1990 there had been three years
of relative currency stability in Europe and it looked as though the
system had become relatively robust. The events of Sept. 1992,
when the UK and Italy were forced to leave the system, showed
that the system was much less robust than had been thought.
2. Over estimation of Trade benefits.
Some economists argue that the trade and cost advantages of
EMU have been grossly over estimated. There is little to be
gained from moving from the present system which has some
stability built into it, to the rigidities which EMU would bring.
3. Loss of Sovereignty.
On the political side, it is argued that an independent central
bank is undemocratic. Governments must be able to control the
actions of the central banks because Governments have been
democratically elected by the people, whereas an independent
central bank would be controlled by a non elected body.
Moreover, there would be a considerable loss of sovereignty.
Power would be transferred from London to Brussels. This would
be highly undesirabel because national governments would lose
the ability to control policy. It would be one more step down the
road towards a Europe where Brussels was akin to Westminster
and Westminster akin to a local authority.

4. Deflationary tendencies.
Perhaps the most important economic argument relates to the
deflationary tendencies within the system. In the 1980s and 90's
France succeeded in reducing her inflation rates to German
levels, but at the cost of higher unemployent, For the UK, it can
be aruged, that membership of the ERM between 1990 and 1992
prolonged unnecessarily the recessional period. This is because
the adjustment mechanism acts rather like that of the gold
standard. Higher inflation in one ERM country means that it is
likely to generate current account deficits and put downward
pressure on its currency. To reduce the deficit and reduce
inflation, the country has to deflate its economy. In the UK, it
could be argued that the battle to bring down inflation had been
won by the time the UK joined the ERM in 1990. However, the UK
joined at too high an exchange rate. It was too high because the
UK was still running a large current account deficit at an exchange
rate of around 3 Dm to the pound. The UK government then
spent the next two years defending the value of the pound in the
ERM with interest rates which were too high to allow the
economy to recover. Many forecasts predicted that, had the UK
not left the ERM in Sept 1992, inflation in the UK in 1993 would
have been negative (ie prices would have fallen).The economic
cost of this would have been continued unemployment at
3million and a stagnant economy. When the UK did leave the
ERM and it rapidly cut interest rates from 10% to five and a half
%, there was strong economic growth and the current account
position improved, but there was an inflation cost.
Another problem that the early 1990s highlighted was that the
needs of one part of Europe can have a negative impact on the
rest of Europe. In the early 1990s, the Germans struggled with the
economic consequences of German reunification. There was a
large increase in spending in Germany with a consequent rise in
inflation. The Bundesbank responded by raising German interest
rates. As a result, there was an upward pressure on the DM as
speculative money was attracted into Germany. Germansy's ERM
partners were then forced to raise their interst rates to defend
their currencies. However, higher interest rates forced most of
Europe into recession in 1992 - 1993. Countries such as France
couldn't then get out of recession by cutting interest rates
because this would have put damaging strains on the ERM. The
overall result was that Europe suffered a recession because of
local reunification problems in Germany. Critics of the ERM and
EMU argue that this could be repeated frequently if EMU were

ever to be achieved. Local economies would suffer economic

shocks because of policies, forced on them, designed to meet the
problems of other parts of Europe.
One way around this would be to have large transfers of money
from region to region when a local area experienced a recession,
e.g. N. Ireland which suffered structural unemployment for most
of the post war period, has had its economy propped up by large
transfers of resources from richer areas of the UK with lower
unemployment. However, regional transfers are very small at the
moment unfortunately. Moreover to approximate the regional
transfers which occur at the moment in, say, Britain, there would
have to be a huge transfer of expenditures from national
governments to Brussels - just what anti Europeans are opposed
to

Growth of euro currency market:

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.
Difference between Euro currency market & Domestic money market.:
Difference between Euro currency market & Domestic money market. 1) The absence of
reserve requirements in Euro currency market means the absence of direct control by Central
Banks. Central banks are gradually feeling their way towards some partial solutions of this
problem, but the situation is certainly not as clear-cut as in each country's domestic markets.
Difference between Euro currency market & Domestic money market.:
Difference between Euro currency market & Domestic money market. 2) The absence of
international character means that like the foreign exchange market, the Euro market does
not exit in any particular location. It consists of participants all around the world linked
together by telephones, telexes & increasingly by computerized information systems. Thus, it
is a continuous market.
Difference between Euro currency market & Domestic money market.:
Difference between Euro currency market & Domestic money market. 3) There are number of
problems in euro currency market as compared to domestic market such as jurisdiction, the
acceptability of a freeze on deposits in one country by another country whose currency is
being traded in the first country, booking a loan in one centre rather than another is merely
legitimate tax planning or tax evasion etc.s
Difference between Euro currency market & Domestic money market.:
Difference between Euro currency market & Domestic money market. 4) The Euro currency
market is purely wholesale market as compared to domestic market which is retain banking
market. Thus it is got relative freedom from regulations as compared to domestic markets.
Difference between Euro currency market & Domestic money market.:
Difference between Euro currency market & Domestic money market. 5) The Euro currency
market is almost exclusively concerned with matched deposit dealing. That is, each deposit

(liability) of an international bank will tend to be matched by an asset (usually a deposit in

another bank) of the same currency & of similar maturity.
Difference between Euro currency market & Domestic money market.:
Difference between Euro currency market & Domestic money market. 6) In Euro currency
market loans are typically made for specific period & funded by a deposit of a similar period.
This is very different from a domestic market where typically large amounts of lending are
done on the basis of a prime (or base) rate, with these loans being funded day to day in the
domestic overnight or short-date money market or from normal customer deposits.
Difference between Euro currency market & Domestic money market.:
Difference between Euro currency market & Domestic money market. 7) In Euro currency
market as compared to domestic deposits are time deposits at fixed interest rates, usually of
short maturity. Many of these deposits are on call , thus these can be withdrawn without
notice.
Difference between Eurobond vs. Eurocurrency loans:
Difference between Eurobond vs. Eurocurrency loans Five Differences a. Eurocurrency loans
use variable rates b. Loans have shorter maturities c. Bonds have greater volume d. Loans
have greater flexibility e. Loans obtained faster

3Turnover of the euro money market[edit]

The total turnover of the euro money market was moribund in the second quarter of 2004
although there was a huge surge in the turnover in the second quarter of 2003. Such
developments were discontinuous across the market. After this upturn in all the market
segments in the second quarter of 2003, there was a sharp downturn in the interest
rate, cross currency and FX swaps in the second quarter of 2004. This was contrasted by a rise
in the turnover in the unsecured, secured and other interest rate swaps. The forward rate
agreement and the short term securities also witnessed a rise. The secured segmenthappens
to be the largest money market segment.
The overnight interest rate swap segment also saw a sharp downfall in the second quarter of
2004 although it had experienced a strong rise in the second quarter of 2003. this change is
attributed to the interest rate speculation which was high in 2003 but low in 2004. The
overnight interest rate swap segment of the money market is provided impetus by the
EUIRIBOR-ACI.
The unsecured, secured and the overnight interest rate swap and the FX swap segments are
characterized by activities that have very short term maturity periods. The instruments like
the cross currency and other interest rate swaps are the money market instruments that are
traded at long maturities.

Youth voice Impact of Euro Crisis on India

by blogb on July 9, 2012 in BlogBee, Youth Corner
Against the backdrop of Euro Crisis, the euro cup 2012 was a blessing and much needed
refreshment that relieved some of the tension by creating an atmosphere of mirth in Europe
as it is having a financial meltdown. It enthused the lost passion and flared up new hopes to
review the sinking economy of Europe. No doubt it was a spectacular sporting event.

The Euro Crisis technically known as European Sovereign Debt Crisis (ESDC) which has made it
difficult or impossible for some countries in Europe to refinance their government
department without any assistance from third parties.

Today the Euro Crisis has engulfed the whole world in its financial distress. In India the
markets are swaying to the ripple effects of developments across the globe. The domestic
economy, growth and inflation numbers are struggling to cope with the consequences of
wars, turmoil and economic crisis of nations miles away.
Before we study the impact of the Euro crisis on India we must first understand the very
origin of this crisis and its present dynamics.
The Euro Crisis ESDC - resulted from a combination of complex factors like globalization of
finance, easy credit condition during the 2002-2008 period that encouraged high risk lending
and borrowing practices, international trade imbalances and other technical issues, but the
most important of them are:
Euro Crisis Bursting of Real Estate Bubbles:
During the 2008-2012 Global Financial Crisis the US has no longer been the favorite choice of
investors. When the economy was still in incipient stage, the investors chose Europe for
higher yields. This led to the generation of bubble after bubble. Bubble is nothing but a
giant pool of money. When these bubbles burst causing assets (housing and commercial) to
decline, the liabilities owed to global investors remained at full price and the crisis followed.
Euro Crisis Financial Contagion:
The interconnection in the Global Financial System means that if one nation defaults in its
sovereign debt and enters into recession it also pulls other dependent countries into
depression. This is what happened in October 2011 when the net amount of Italian
borrowings from French banks was 366 billion dollars. Thus when Italy slumped into crisis, it
also jeopardized the economy in France.
Currently the most affected countries in the Euro Crisis are Greece, Ireland, Italy, Portugal,
and Spain. Many bailout schemes, finance pour in methods are being considered to pull them
out of the crisis. Greece has also adopted austerity measures to curb its debt.

Euro Crisis Impact on Indian

Now, lets examine the situation in India. The Euro Crisis has casted its spell on our Growth
sectors. Capital flows into the economy and exports are likely to take a slump. The sudden
surge in Foreign Institutional Investor (FII) has left India grappling with high inflation. Adding
to the woes the Central Bank has raised the key interest rates.
The quantum of impact of Euro Zone Crisis on Indian markets is yet to be measured. The
inchoate European economy has resulted a slump in domestic industrial growth.
Unaddressed agricultural woes, rising interest rates and escalating fuel cost have
compounded the global factors. A series of scandals emerging from under the carpet have
diluted the faith of foreign investors.
The volatility in Indian Markets will persist till the European Crisis is resolved. There were
other very serious impacts of Euro crisis that have compounded and magnified as a challenge
to Indian economy. They are as follows:
a) Depreciation of Rupee:
Slow growth in Europe has coaxed the investors to invest in US dollar. This refuge to US dollar
has enabled the US dollar to appreciate as compared to other currencies in the world.

Dropping exports coupled with rising crude oil prices has created immense pressure on Indian
rupee, which in turn has deprecated with respect to US dollar.
b) Slowdown in the Manufacturing and Service sectors:
Due to the contraction in European and American markets, the demand of goods and services
from countries like India and China have slowed down considerably. Inflationary pressure has
made the cost of products sky high thereby discouraging the consumers.
c) Market visibility:
The global financial markets are volatile which in turn have impacted Indian Financial markets
too. High rates of inflation have forced Reserve Bank of India (RBI) to raise interest rates.
Prices of Gold and Silver have spiraled up, pushing the inflation rate still higher.
d) Cash hoarding:
Various Indian firms have cut down on expanding. They are holding their cash and saving it
for loan debts as well as shielding them from financial crunches.
In the wake of the above impacts, our government including RBI has claimed to form a
contingency bailout plan for European countries as well as for India.
The plan is not yet disclosed but economists believe we are prepared with monetary and
fiscal measures if necessary and try to insulate India from the shockwaves of the European
collapse. This plan may include lowering of interest rates and lowering the amount of money
that banks home to keep on deposit in the Central bank. This will ensure that the banks can
lend more money to firms so that they can keep hiring and expanding, a major driver of the
economy.
Coming back to Euro Cup the economy is not very different from football. Spain which won
the Euro Cup this year did not have any star player in their team but they won on the basis of
sheer team work, extraordinary coordination among themselves and a strong belief that they
can win. Just like Spain we all need teamwork among the relatively stable countries like India,
China, Brazil and a belief that we can do it to hammer out a solution for the Euro Crisis and
stabilize the economy.

Euro Banking:
Euro Banking Concept Features Risk in Euro Banks Euro Banking & the Central Bank
Concept of Euro Banking:
Concept of Euro Banking Euro Bank is a financial intermediary that bids for time deposits &
makes loans in the offshore market. Usually, this will also mean that it deals in currencies
other than those of the country in which it is located.
Concept of Euro Banking:
Concept of Euro Banking It can be created in two ways- 1) One can take the physical currency
of a country out of the country & deposit it in a bank of another country. 2) A national
currency deposit becomes part of the offshore currency market when it is transferred to a
bank outside the controlled national monetary system.
Features of Euro Banking:
Features of Euro Banking Unregulated institutions Not subject to interest rates ceilings.
Advantage of low tax location Margins are low & overheads cost low. Are subject to greater
risk than domestic banks. Unprofitable in nature. Less subject to pressures from government.
Risks of Euro Banking:
Risks of Euro Banking Exchange Rate Risk-due to assets & liabilities denominated in different
foreign currencies. Interest Rate Risk-mismatch of maturity between assets & liabilities as

deposits are short term & lending is long term. Default Risk-default in payments-especially in
case of MNCs & governments.
Euro Banking & the Central Bank.:
Euro Banking & the Central Bank. The central banks often voice their concern about the
offshore markets. They are- While the central banks have a stronger control on credit
creation but this control is lost when the banking business slips to offshore markets.

Loan Syndicate (syndication):

Loan Syndicate (syndication) Concept Nature Advantages & Disadvantages Participants Charges on these
loans Quoting spreads in syndication Loan syndication procedure in India
Concept of Loan Syndicate:
Concept of Loan Syndicate A loan syndicate is a high structured group of financial institutions (primary
banks), formed by a manager (or a group of co-managers), which agree to lend a specific amount of loan
or money on common terms & conditions to a borrower. It involves a small group of knowledgeable &
well capitalised banks that agree initially to provide the entire loan.
Nature of Loan Syndicate:
Nature of Loan Syndicate It is a term loan It has drawndown period. Repayment of the loan are made in
accordance with an amortisation schedule. Loan attached with grace period. It is a major negotiating
point between the borrowers & the lead bank. Are of revolving credit type. Flexibility.
Advantages of Loan Syndicate:
Advantages of Loan Syndicate Highly profitable & positive impact on the earnings of the banks-exCiticorp, BOA. Improved risk-return performance because can diversify loans by country & type of
customer. High credit standing Safeguards such as credit insurance programmes, guarantees by parent
company & host Government on loans to affiliates etc. reduces risk of international lending.
Disadvantages of Loan Syndicate:
Disadvantages of Loan Syndicate Risk analysis is highly complex It did not anticipate dramatic increase in
country risk Some bankers have relaxed their credit standards to compensate for weak domestic
demand & commercial demand for loans. Many loans are short term variable loans raise the question
of the ability of debtor country to service their external debt. Advantages of Loan Syndicate
Disadvantages of Loan Syndicate:
Disadvantages of Loan Syndicate If borrowings countries ae unable to meet their obligations on time, the
banks will be forced to roll over their loans indefinitely. The ultimate purpose of some loans is to finance
balance of payments deficit. This type of loan does not improve the debtors countrys ability to generate
foreign exchange earnings.
Participants of Loan Syndicate:
Participants of Loan Syndicate Lead Banks Managing Banks Participating Banks There is a separate group
called co-managers.
Charges on Loan Syndicates:
Charges on Loan Syndicates Front end fees Agents annual fees
Charges on Loan Syndicates:

Charges on Loan Syndicates Front end fees They are one off charges negotiated in advance & imposed
when the loan agreement is signed. These fees are usually in the range of 0.5%-1% of the value of the
loan. The fee may be higher if the borrower insists upon obtaining funds at a lower spread than
warranted by market conditions & creditworthiness.
Benefits of the euro
The single currency that we have today can be seen as a logical step in complementing the Single
Market. The benefits of the single currency are:
Low interest rates due to a high degree of price stability
The conduct of the single monetary policy by the Eurosystem has been successful. The euro is as stable
as the best-performing currencies previously used in the euro area countries. This has established an
environment of price stability in the euro area, exerting a moderating influence on price and wagesetting. As a consequence, inflation expectations and inflation risk premia have been kept low and
stable. Even in the more challenging current environment, price stability in the euro area has not been
jeopardised.
More price transparency
Payments can be made with the same money in all countries of the euro area, making travelling across
these countries easier. Price transparency is good for consumers since the easy comparison of price tags
makes it possible for consumers to buy from the cheapest supplier in the euro area, e.g. cars in different
euro area countries. Therefore, price transparency created by the single currency helps the Eurosystem
to keep inflation under control. Increased competition makes it more likely that available resources will
be used in the most efficient way, spurring intra-euro area trade and thereby supporting employment
and growth.
Removal of transaction costs
The launch of the euro on 1 January 1999 eliminated foreign exchange transaction costs and thus made
possible considerable savings. Within the euro area, there are no longer any costs arising from:
buying and selling foreign currencies on the foreign exchange markets;
protecting oneself against adverse exchange rate movements;
cross-border payments in foreign currencies, which entail high fees;
keeping several currency accounts that make account management more difficult.
No exchange rate fluctuations
With the introduction of the euro, exchange rate fluctuations and therefore foreign exchange risks
within the euro area have also disappeared. In the past, these exchange rate costs and risks hindered
trade and competition across borders.