Birth of Euro and Impact on Foriegn Trade | Economic And Monetary Union Of The European Union | Euro

Birth of EURO and Its Impact on World Trade

Study of Birth of EURO and also Analysis on Role of EURO as Global currency has been done. Comparison of Euro visà-vis Global currencies like US$, JPY, UK Sterling on the basis World Debt Market, Derivatives, Global Reserves etc.. Also a study has been made on how “Euro can take over US$ as Global Currency”

Submitted to: Prof. Vivek Bhatia Professor, ICF FORE School Of Management

Group -1 (FMG-18Y)

Aakriti Kakkar 91001 Aditi Bindlish 91003 Ankit Gupta 91006 Madhusudan 91029 Pragati Saraf 91040
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Table of Contents
List of Figures and tables ........................................................................................................................ 3 Evolution of the European Union (EU).................................................................................................... 4 BIRTH OF THE EURO ................................................................................................................................ 7 CURRENCY SIGN ...................................................................................................................................... 9 COINS AND BANK NOTES ........................................................................................................................ 9 INTRODUCTION OF CURRENCY ............................................................................................................. 10 DIRECT AND INDIRECT USAGE .............................................................................................................. 11 Use as reserve currency ........................................................................................................................ 12 THE EURO IN GLOBAL MARKETS ........................................................................................................... 12 The Euro in International Debt Markets ........................................................................................... 12 Narrow Versus Global Measure: The Currency Composition of International Debt Securities Markets In 2009 ................................................................................................................................ 12 The Euro in International Derivatives Market .................................................................................. 15 The Euro in Global Foreign Exchange Reserves ................................................................................ 17 Euro’s Exchange Rate: The Trend ......................................................................................................... 20 Reserve Currency Determinants ........................................................................................................... 21 International Use of the Euro So Far..................................................................................................... 22 Factors that suit a currency for International Status: ........................................................................... 24 What role will the euro play as a reserve currency? ............................................................................ 27 The euro may benefit from the dollar weakness .................................................................................. 27 Central banks’ rising investment requirement ..................................................................................... 29 Focus on yield of foreign exchange reserve investments ..................................................................... 29 What will happen to the euro’s role as a reserve currency after 2010? .............................................. 30 Appendix 1 ............................................................................................................................................ 32 Appendix 2 ............................................................................................................................................ 33

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List of Figures and Tables
Figure 1 Evolution of EU.......................................................................................................................... 4 Exhibit 1 Fixed Exchange Rates -Euro Countries .................................................................................... 8 Figure 2 Map of Euro area .................................................................................................................... 11 Figure 3 Proportion of Currencies in International (Narrow, Constant Rate) ...................................... 13 Figure 4 Proportion of Currencies in International (Global, Constant Rate) ........................................ 13 Figure 5 Proportion of Currencies in International (Narrow, Current Rate)......................................... 14 Figure 6 Proportion of Currencies in International (Global, Current Rate) .......................................... 14 Figure 7 Amounts outstanding of OTC Single-currency Interest Rate Derivatives ............................... 15 Figure 8 Amounts outstanding of OTC Single-currency Interest Rate Derivatives - Amount ............... 16 Figure 9 Amounts outstanding of OTC Single-currency Interest Rate Derivatives - Proportion .......... 16 Figure 10 Composition of Various Currencies in Global Reserves ........................................................ 18 Figure 11 Proportion of Euro in Global Reserves .................................................................................. 19 Figure 12 Comparison of Share on Euro, Yen, USD in Global Reserves ................................................ 19 Figure 13 Exchange Rate of Euro ........................................................................................................ 20 Figure 14 Exchange Rates- Global Currencies....................................................................................... 21 Figure 15 Currency Distribution- Market Turnover .............................................................................. 23 Table 1................................................................................................................................................... 24

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Evolution of the European Union (EU)

Figure 1 Evolution of EU

European Coal and Steel Community (ECSC) The origin of the European Union goes back to the European Coal and Steel Community(ECSC), which was formed with the then West Germany, France, Italy, Belgium, Netherlands and Luxembourg in 1952. After World War II, moves towards European integration were seen by many as an escape from the extreme forms of nationalism which had devastated the continent. One such attempt to unite Europeans was the European Coal and Steel Community which, while having the modest aim of centralised control of the previously national coal and steel industries of its member states, was declared to be "a first step in the federation of Europe". Main aim: • Centralised control of the previously national coal and steel industries of its member states • To eliminate import duties and quotas on coal, iron ore and scrap regarding the international trade among member countries. European Economic Community or European common market

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Successful functioning of ECSC stimulated the member countries to extend this facility to all commodities by the Treaty of Rome in 1957. Originally six countries viz, France, Federal Republic of Germany, Italy, Belgium, Netherlands and Luxembourg formed into the EEC by Treaty of Rome, 1957. The European Economic Community came into existence as a customs union or “common market” in 1958 among the same six nations. Later the number of member countries increased to nine on January 1, 1973 as United Kingdom, Ireland and Denmark joined the community. Countries such as Greece, Spain, Australia, Finland and Portugal joined later on. In 1979, under the influence of Helmut Schmidt, then chancellor of Germany, and Valéry Giscard-d’Estaing, then president of France, eight original member countries set up the European Monetary System (EMS) as a “zone of monetary stability” with linked exchange rates. The EMS became, in effect, a German mark zone, since its members pegged their exchange rates to the mark and therefore found it necessary to base their monetary policy on that of the Bundesbank. Both inflation and interest rates tended to converge among EMS countries. In 1986, the so-called Single European Act aimed to free the movement of goods, services, capital, and people among EU countries by 1992, in order to form a Single Market, as it was called. European Union Germany’s dominance in the EMS in part motivated French officials to propose that a monetary union be formed. Another reason for the proposal was that some Europeans feared that the Single Market might be endangered if exchange rates were not locked together. Thus the Delors Committee was established in 1988. The report of the Delors Committee led in 1991 to the Maastricht Treaty (Treaty on European Union), which may be regarded as the constitution of EMU. The European Union was formally established when the Maastricht Treaty came into force on 1 November 1993, and in 1995 Austria, Sweden, and Finland joined the newly established EU. With the introduction of uniform monetary policy, common currency and fiscal policy among the member countries, the EEC became the European Union (EU).

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Formation of EMU Germany’s dominance in the EMS in part motivated French officials to propose that a monetary union be formed. Another reason for the proposal was that some Europeans feared that the Single Market might be endangered if exchange rates were not locked together. EMU was conceived in 1988–89 by a committee consisting mainly of central bankers chaired by Jacque Delors, then president of the European Commission. Thus the Delors Committee was established in 1988. The initiative, however, came from the political authorities, especially those in France and Germany. Eleven of the fifteen European Union (EU) countries are EMU members—all but Denmark, Greece, Sweden, and the United Kingdom. The report of the Delors Committee led in 1991 to the Maastricht Treaty (Treaty on European Union), which may be regarded as the constitution of EMU. Criteria to qualify for EMU:      Countries should have an inflation rate within 1.5 % of the three EU countries with the lowest rate. Long term interest rates must be within 2% of the three lowest interest rates in EU. Exchange rates must be kept within normal fluctuation margins of Europe’s exchangerate mechanism. The amount of money owed by a government for 1997, known as the budget deficit has to be below 3% of GDP. The total amount of money owed by a government, known as the public debt has to be less than 60 % of GDP. As it turned out, only Greece failed to qualify. Denmark, Sweden, and the United Kingdom chose not to join at the outset. Countries of the EU made strenuous efforts to meet the budget deficit criterion, including some “creative accounting” such as counting the proceeds of privatization and central bank profits from the sale of gold as budget receipts. Actual budget constraints exacerbated the economic slowdown in the EU in 1996–97. It would have made more sense to base the criterion on structural—that is, cyclically adjusted rather than actual—budget deficits. It is understandable that some restraint on the budgetary policies of member countries would be needed in the monetary union. International Corporate Finance| Group 1| Euro and its Impact on World Trade 6

Stability and Growth Pact In 1996 a Stability and Growth Pact was agreed upon. It provided a general rule that deficits should not exceed 3 percent of GDP—but also allowed for political discretion. In fact, if a country’s GDP were to fall by 2 percent or more in any year, it would not be penalized for a deficit greater than 3 percent of its GDP. It is somewhat ironic that this pact acknowledged the existence of the business cycle but the convergence criteria did not. Flexibility of fiscal policy is necessary on the part of individual member countries of EMU.

BIRTH OF THE EURO The euro was born as the currency of the European Economic and Monetary Union (EMU). Its introduction on January 1, 1999 marked the final phase of the EMU, a 3 stage process that was launched in 1990 as EU member states prepared for the 1992 Single Market. Stages 1990: Aimed at boosting cross border business activity, the first stage of the EMU lifted restrictions on movements of capital across internal EU borders. 1994: The European monetary institute was established in Frankfurt to pave the way for the European Central Bank. 1999: The Euro was introduced as the single currency for 11 EU member states: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. Why was the Euro introduced? Since for most EU countries today, majority of International trade is with other EU members, a common currency has:  Removed exchange rate risks from the internal market  Cut the costs of transactions  Encouraged firms to trade across national borders  The common currency has made the eurozone into an area of monetary stability in Europe.

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 It has also forced EU states to adopt responsible economic policies that contain inflation and increase living standards. ADMINISTRATION The euro is managed and administered by the Frankfurt-based European Central Bank (ECB) and the Eurosystem (composed of the central banks of the eurozone countries). As an independent central bank, the ECB has sole authority to set monetary policy. The Eurosystem participates in the printing, minting and distribution of notes and coins in all Member States, and the operation of the eurozone payment systems.

Exhibit 1 Fixed Exchange Rates -Euro Countries

The 1992 Maastricht Treaty obliges most EU Member States to adopt the euro upon meeting certain monetary and budgetary requirements, although not all states have done so. The United Kingdom and Denmark negotiated exemptions, while Sweden turned down the euro in a 2003 referendum, and has circumvented the obligation to adopt the euro by not meeting the monetary and budgetary requirements. All nations that have joined the EU since 1993 have pledged to adopt the euro in due course. In order to participate in the currency, Member States are meant to meet strict criteria such as those given for EMU. International Corporate Finance| Group 1| Euro and its Impact on World Trade

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Due to differences in national conventions for rounding and significant digits, all conversion between the national currencies had to be carried out using the process of triangulation via the euro. The definitive values in euro of these subdivisions (which represent the exchange rates at which the currency entered the euro) are shown below: The rates were determined by the Council of the European Union, based on a recommendation from the European Commission based on the market rates on 31 December 1998. They were set so that one European Currency Unit (ECU) would equal one euro. The European Currency Unit was an accounting unit used by the EU, based on the currencies of the Member States; it was not a currency in its own right. They could not be set earlier, because the ECU depended on the closing exchange rate of the non-euro currencies (principally the pound sterling) that day.

CURRENCY SIGN A special euro currency sign (€) was designed after a public survey had narrowed the original ten proposals down to two. The European Commission then chose the design created by the Belgian Alain Billiet. “Inspiration for the € symbol itself came from the Greek epsilon (Є)– a reference to the cradle of European civilisation – and the first letter of the word Europe, crossed by two parallel lines to ‘certify’ the stability of the euro.”—European Commission

COINS AND BANK NOTES COINS The euro is divided into 100 cents (sometimes referred to as euro-cents, especially when distinguishing them from other currencies). All circulating coins have a common side showing the denomination or value, and a map in the background. For the denominations except the 1-, 2- and 5-cent coins that map only showed the 15 Member States which were members when the euro was introduced. Beginning in 2007 or 2008 (depending on the country) the old map is being replaced by a map of Europe also showing countries outside the Union like Norway. The 1-, 2- and 5-cent coins, however, keep their old design, showing a geographical map of Europe with the 15 Member States of 2002 raised somewhat above the rest of the map.

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The coins also have a national side showing an image specifically chosen by the country that issued the coin. Euro coins from any Member State may be freely used in any nation which has adopted the euro. The coins are issued in €2, €1, 50c, 20c, 10c, 5c, 2c, and 1c denominations. BANK NOTES The design for the euro banknotes have common designs on both sides. Notes are issued in €500, €200, €100, €50, €20, €10, €5. Each banknote has its own colour and is dedicated to an artistic period of European architecture. The front of the note features windows or gateways while the back has bridges. Some of the highest denominations such as the €500 are not issued in all countries, though they remain legal tender throughout the eurozone.

INTRODUCTION OF CURRENCY The currency was introduced in non-physical form (traveller's cheques, electronic transfers, banking, etc.) at midnight on 1 January 1999, when the national currencies of participating countries (the eurozone) ceased to exist independently. Their exchange rates were locked at fixed rates against each other, effectively making them mere non-decimal subdivisions of the euro. The euro thus became the successor to the European Currency Unit (ECU). The notes and coins for the old currencies, however, continued to be used as legal tender until new euro notes and coins were introduced on 1 January 2002. The changeover period during which the former currencies' notes and coins were exchanged for those of the euro lasted about two months, until 28 February 2002. The official date on which the national currencies ceased to be legal tender varied from Member State to Member State. The earliest date was in Germany where the mark officially ceased to be legal tender on 31 December 2001, though the exchange period lasted for two months more. Even after the old currencies ceased to be legal tender, they continued to be accepted by national central banks for periods ranging from several years to forever (the latter in Austria, Germany, Ireland and Spain). Launched in 1999, Europe’s single currency is now shared by 16 EU countries and around 329 million citizens, making it one of the world’s most important currencies and one of the EU’s greatest achievements.

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DIRECT AND INDIRECT USAGE Direct usage The euro is the sole currency of 16 EU Member States: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. These countries comprise the "euro zone", some 326 million people in total. Estonia will join in 2011. With all but two of the remaining EU members obliged to join, together with future members of the EU, the enlargement of the eurozone is set to continue further. Outside the EU, the euro is also the sole currency of Montenegro and Kosovo and several European micro states (Andorra, Monaco, San Marino and Vatican City) as well as in three overseas territories of EU states that are not themselves part of the EU (Mayotte, Saint Pierre and Miquelon and Akrotiri and Dhekelia). Together this direct usage of the euro outside the EU affects over 3 million people.

Figure 2 Map of Euro area (Source: http://www.ecb.int/euro/intro/html/map.en.html)

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It is also gaining increasing international usage as a trading currency, in Cuba, North Korea and Syria. There are also various currencies pegged to the euro (see below). In 2009 Zimbabwe abandoned its local currency and used major currencies instead, including the euro and the United States dollar.

Use as reserve currency Since its introduction, the euro has been the second most widely held international reserve currency after the U.S. dollar. The share of the euro as a reserve currency has increased from 17.9% in 1999 to 26.5% in 2008, at the expense of the U.S. dollar (its share fell from 70.9% to 64.0% in the same timeframe) and the Yen (it fell from 6.4% to 3.3%). The euro inherited and built on the status of the second most important reserve currency from the German mark. The euro remains underweight as a reserve currency in advanced economies while overweight in emerging and developing economies: according to the IMF the total of euros held as a reserve in the world at the end of 2008 was equal to USD 1.1 trillion, with a share of 22% of all currency reserves in advanced economies, but a total of 31% of all currency reserves in emerging and developing economies. The possibility of the euro becoming the first international reserve currency is now widely debated among economists. Former Federal Reserve Chairman Alan Greenspan gave his opinion in September 2007 that it is "absolutely conceivable that the euro will replace the dollar as reserve currency, or will be traded as an equally important reserve currency."

THE EURO IN GLOBAL MARKETS The Euro in International Debt Markets The issuance of international debt securities picked up during 2009 after a trough in 2008. The euro’s share in the stock of international debt securities declined by more than 1 percentage point in 2009, when measured at constant exchange rates, reaching 31.4% at the end of the year. This reflected the relatively subdued net issuance of international debt instruments denominated in euro during 2009, which declined compared with the previous year, whereas the issuance of US dollar-denominated international debt instruments was relatively strong. The financial sector remained the major issuer of euro-denominated bonds and notes Narrow Versus Global Measure: The Currency Composition of International Debt Securities Markets In 2009 The narrow measure of international debt issuance captures only international transactions, although it does not cover the entire spectrum of international debt transactions. For instance, a International Corporate Finance| Group 1| Euro and its Impact on World Trade

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non-euro area investor buying a euro denominated security issued by a euro area resident would not be included in this measure. However, this narrow measure remains an unambiguous indicator of the international use of a currency. The global measure includes all debt securities, including domestic currency issues targeting the domestic market, and thus does not distinguish between domestic and international bonds. Therefore, its currency composition is distorted by the size of the home market and the purely domestic transactions.

Under Constant rate:

Proportion in International DebtNarrow Measure
50 % of total Debt 40 30 20 10 0 EUR USD JPY Other

Figure 3 Proportion of Currencies in International (Narrow, Constant Rate)

Proportion in International DebtGlobal Measure
50 40 30 20 10 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Q2 Q3 Q4 2009 Q2 Q3 Q4 EUR USD JPY Other

Figure 4 Proportion of Currencies in International (Global, Constant Rate)

International Corporate Finance| Group 1| Euro and its Impact on World Trade

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Q2 Q3 Q4 2009 Q2 Q3 Q4

Source: BIS, JEDH, ECB

Source: BIS, JEDH, ECB

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Under Current rate:

Proportion in International Debt- Narrow
Measure
60 % of total Debt 50 40 30 20 10 0 Q2 Q3 Q4 Q2 Q3 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Q4 EUR USD JPY Other

Source: BIS, JEDH, ECB

Figure 5 Proportion of Currencies in International (Narrow, Current Rate)

Proportion in International DebtGlobal Measure
60 50 40 30 20 10 0 EUR USD JPY Other

Source: BIS, JEDH, ECB Figure 6 Proportion of Currencies in International (Global, Current Rate) Over the past decade, the share of the euro remained relatively stable in terms of the global measure of debt issuance, slowly increasing from around 27% of global issuance in 1999 to about 30% in 2009, measured at constant exchange rates. The share of the euro based on the narrow measure of international debt, by contrast, displays a hump-shaped curve, peaking in 2005 and then gradually decreasing. Also it can be analysed that the issue of Debt, in the total global debt market (on narrow basis) has raised till the year 2006, but later the proportion got reduced. But in case of Global measure, the trend does not seem to be true. i.e.. if global measure which includes both domestic as well as transnational issues has been under raise. If this trend is compared with that of USD and JPY (Japan yen), the proportion of Euro has always been less International Corporate Finance| Group 1| Euro and its Impact on World Trade 14

than that of USD but more than JPY. But the trend in the years 1999-2005, under both the measures, the proportion of USD was under fall but the share of euro was under raise. This is mainly because governments of the member countries of EURO issued bonds initially. The Euro in International Derivatives Market It is per se very much necessary to even study the presence of the currency in derivatives market. While the substantial turbulence experienced in foreign exchange and derivatives markets at the end of 2008 and in early 2009 resulted in considerable contractions in transaction volumes and outstanding amounts, it did not manifest itself in tangible changes in the way currencies are used in these markets. Indeed, any shifts in the role of the euro as a direct consequence of the crisis could not be detected during the review period.

Amounts outstanding of OTC single-currency interest rate derivatives
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Other Pound sterling Japanese yen US dollar Euro

Source: BIS Quarterly Review: 'June 2010 Figure 7 Amounts outstanding of OTC Single-currency Interest Rate Derivatives

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Amounts outstanding of OTC single-currency interest rate derivatives
200000 180000 160000 140000 120000 100000 80000 60000 40000 20000 0

US$ Billion

Euro US dollar Japanese yen Pound sterling

Figure 8 Amounts outstanding of OTC Single-currency Interest Rate Derivatives - Amount

Amounts outstanding of OTC single-currency interest rate derivatives
45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00%

Euro US dollar Japanese yen Pound sterling

Figure 9 Amounts outstanding of OTC Single-currency Interest Rate Derivatives - Proportion The data has been taken from BIS1. Among derivatives traded on organised exchanges, equity and interest rate instruments experienced the largest drops, with notional principal outstanding falling by 41.6% and 34.1% respectively by the first quarter of 2009 in comparison with the first quarter of 2007.
1

The Bank for International Settlements (BIS) is an intergovernmental organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks.

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For interest rate contracts, the share of the US dollar and the euro increased to 34.1% and 39.1% respectively against a 2.3 percentage point fall of the Japanese yen. Additionally, the persistently rising trend in the role of peripheral currencies from emerging and developing countries seemed to have been at least temporarily interrupted by the financial and economic turbulence, with the shares of these currencies recording some retrenchment during the review period.

The Euro in Global Foreign Exchange Reserves During the period under review, rapid global reserve growth resumed. As a result, global foreign exchange reserves reached a new historical high (USD 8.2 trillion) at end-2009. Such reserve buffers may have been useful in many vulnerable emerging market countries during the crisis, but the excessive accumulation of foreign reserves is costly 2 While enhanced exchange rate flexibility would help to reduce the social costs of holding reserves, reserve diversification has also been mentioned as a possible remedy. There appears to be no mechanical link between reserve accumulation and reserve diversification. In fact, recent research suggests that, depending on the motives for holding foreign exchange reserves, a rise in the level of foreign exchange reserves may not be associated with increased diversification of reserve portfolios3 The notion that reserve accumulation may not necessarily lead to swift diversification of foreign exchange reserve portfolios is also supported by aggregate data which is available at the global level. According to the IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER)4 database, which covers the currency composition of around 60% of global foreign exchange reserves, the share of major reserve currencies remained relatively stable throughout 2009. However, this observation should be interpreted with caution since according to the IMF, Asian countries in particular do not disclose the currency composition of their foreign exchange reserves. From the charts below it can be analysed that share of the euro increased by around 1 percentage point to 27.3% at end-2009 (from 26.4% at end-2008). However, this increase

2

Rodrik, D. (2006), “The social cost of foreign exchange reserves”, International Economic Journal 20 (3), September, pp. 253-266. 3 THE INTERNATIONAL ROLE OF THE EURO, ECB publications; page 33 4 COFER is an IMF database that keeps end-of-period quarterly data on the currency composition of official foreign exchange reserves

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reflects to some extent the depreciation of the US dollar against the euro during the same period. When measured at constant end-2009 exchange rates, the share of the euro increased by 0.3 percentage point, whereas the share of the US dollar decreased by around 1 percentage point.

Global Reserves
100% 90% 23% 80% 70% 14% 60% 50% 40% 30% 55% 20% 10% 0% 1999 2000 2001 2002 2003 2004 2005 2006 US$ £ ¥ € Unallocated reserves 2007 2008 2009 56% 55% 50% 48% 47% 44% 41% 39% 37% 14% 15% 18% 22% 23% 25% 27% 29% 34% 37% 39% 43% 44%

18%

18%

16%

16%

16%

15%

15%

35%

Source: IMF Statistics Department COFER database and International Financial Statistics Figure 10 Composition of Various Currencies in Global Reserves

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€ : Proportion in Global Reserves
19.00% 18.00% 17.00% 16.00% 15.00% 14.00% 13.00% 12.00% 11.00% 10.00% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Figure 11 Proportion of Euro in Global Reserves5

$ , ¥ Vs €
60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 1999 2000 2001 2002 US$ 2003 € 2004 2005 2006 2007 2008 2009

¥ Swiss Francs €

Figure 12 Comparison of Share on Euro, Yen, USD in Global Reserves Also if the proportion of each major currency in Global reserve is analysed, the share of US$ has been drastically reducing over the years where as the share of Euro has been increasing or in fact fluctuating. But one point to be noted is, the share of currencies of emerging economies like China, India, Australia, have been on raise, this implies the major proportion of the reserve is unallocated and unreserved.

5

Source: IMF Statistics Department COFER database and International Financial Statistics

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Euro’s Exchange Rate: The Trend After analysing the presence of EURO in Derivatives, Foreign reserves and also Debt market, it is also necessary to analyse the exchange rate movement of EURO and also of the other currencies. From the chart below on Exchange rate of USD/Euro we can observe that the exchange rate is falling over the years. This implies that the euro is appreciating over the years when compared with USD. Also if the trend is compared for that of Japan Yen (JPY) and UK Sterling, we can observe that all the three currencies are on the rise.


1.4 1.2 1 0.8 0.6 0.4 0.2 0

$/€

Jul, 09

Jul, 99

Jul, 00

Jul, 01

Jul, 02

Jul, 03

Jul, 04

Jul, 05

Jul, 06

Jul, 07

Jul, 08

Jan, 09

Jan, 99

Jan, 00

Jan, 01

Jan, 02

Jan, 03

Jan, 04

Jan, 05

Jan, 06

Jan, 07

Jan, 08

Figure 13 Exchange Rate of Euro 6 7

6 7

In terms of USD($). Source: www.Oanda.com

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Jan, 10

Jul, 10

20

Exchange Rates
1.4 1.2 1 0.8 0.6 0.4 0.2 0 Jan99 Jul99 Jan00 Jul00 Jan01 Jul01 Jan02 Jul02 Jan03 Jul03 Jan04 Jul04 Jan05 Jul05 Jan06 Jul06 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10 160 140 120 100 80 60 40 20 0

€/$ ; £/$

£

¥

Source: Oanda.com

Figure 14 Exchange Rates- Global Currencies Also there have been many explanations for the Euro depreciation 1999-2002. A depreciation of Euro can be expected due to a higher growth rate of money in the EU; a higher growth of per capita income; a higher growth rate of population; a higher rate of capital accumulation; a faster rising index of stocks or higher interest rates in the US. He points out specially a mistaken fiscal policy leading to a growth weakness in Germany and the EU as the reason for the weakness of Euro.8 On February 28, 2002 national banknotes and coins were finally withdrawn from use. Euro is now not only a denomination currency but also a store of value and a transactions currency (medium of exchange). Just from this time the Euro begins to appreciate for three consecutive years and stabilises at the end of this period at a high level vis-à-vis Dollar.

Reserve Currency Determinants The literature on what determines reserve currency status is fairly well- established, if often lacking in quantification. Three key points are as follows:  Determinants: There is a list of determining factors, which appears in The most important is the size of the country or region in which the currency is indigenously used, but there are others as well.  Network externalities or economies of scale and scope are important: Each country is more likely to use whatever currency is used by others. Thus international currency use
8

‘Dollar-Euro Exchange Rate 1999-2004 - Dollar and Euro as International Currencies’ , Rasul Shams, Hamburg Institute of International Economics Discussion Paper, May 2005, pp: 3-5.

International Corporate Finance| Group 1| Euro and its Impact on World Trade

$/¥
21

is not linear in the determinants. Rather, there may be a tipping phenomenon: if one currency were to draw even and surpass another, the derivative of reserve currency use with respect to its determining variables would be higher in that range than in the vicinity of zero or in the range when the leading currency is unchallenged. In that sense the switch happens rapidly.  In the chronological sense, however, the switch happens slowly. Whatever currency has been used in the past will continue to be used in the future. Thus inertia is great.

International Use of the Euro So Far Of the various indicators of international currency use, the sort that is available on the timeliest basis is the currency of denomination in cross-border financial transactions. The euro soon after its debut came into wide use to denominate bonds. Within Europe there was a tremendous increase in issues of corporate bonds, denominated in euros, together with a rapid integration of money markets, government bond markets, equity markets and banking. While the frenetic activity seemed to be related to the debut of the euro, it does not meet the definition of ‘international currency use’, because it is taking place inside the currency’s home region (Gaspar and Hartmann 2005; Rey 2005).

Outside Europe, the euro has been a success as well. Detken and Hartmann (2000) studied the data from the euro’s first year in operation, doing a careful job of netting out intra-euro-area holdings in order to be able to trace back a measure of euro-precursor currencies for five years before 1999 that is comparable with post-1999 numbers. They found more of an increase in the supply of euro-denominated assets outside of Europe than an increase in demand. The stock of international debt denominated in Euros increased from about 20% on the eve of EMU to 30% in 2003 (Rey 2005, p. 114).

When the euro arrived, although its share approximately equalled the sum of the shares of the mark, French franc and guilder the year before EMU, it was less than what one would get by adding in the share of ECUs (European Currency Units). This is to be expected: before 1999, the 12 central banks had to hold foreign exchange reserves, including each other’s currencies; these disappeared at the stroke of a pen on 1 January 1999. One cannot simply compare pre- and post-1999 figures to learn whether the advent of the euro has hurt the attractiveness of the dollar as international reserve currency. The euro’s share in central banks’ foreign exchange reserves reached 19.7% in 2003 and has grown steadily thereafter.9

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International use of the euro has grown by other criteria as well. About half of euro land trade with non-euro area residents is invoiced in the new currency (Hartmann 1998). The euro’s share in international debt securities rose to above 30% (versus below 20% for the pre-1999 legacy currencies).10 Anecdotal evidence suggests that euro cash is increasingly accepted in retail transactions around the world, and dollar bills decreasingly so. The comprehensive triennial survey of foreign exchange trading volume put together by the Bank for International Settlements (BIS) showed the dollar still easily in first place in 2001, at 85% of all spot trades (out of 200%), followed by the euro at 43% and the yen at 26% The same ranking holds when one adds in forwards and swaps, and derivatives that are traded over the counter. The next triennial BIS survey, covering April 2004, showed a small gain for the euro. Including also forwards and swaps, the dollar was involved in 89% of all transactions, and the euro in 37% in 2004 (BIS 2005).
100 USD

80

60 EUR 40

20

0 2001 2004 2007 2001 2004 2007

Figure 1: Currency distribution of reported foreign exchange market turnover – percentage Currency Distribution- Market Turnover Figure 15shares of average daily turnover in April of each year (shares sum to 200%) Source: BIS (2007, p. 11).

The most recent survey, covering April 2007, shows the dollar having declined further, to 86% of all traditional transactions. (Meanwhile, in an unheralded comeback, the pound has been closing in on the yen for the number 3 spot.) Over-the-counter FX derivative markets tell a stronger story: the euro has been gaining share since its creation and the dollar losing share (BIS 2007, p. 11). Figure 1 illustrates the dollar’s gradual loss of share in total foreign exchange trading, traditional plus over-the-counter derivatives. In short, the euro is the number 2 international currency, ahead of the yen, and has rapidly gained acceptance, but is still well behind the dollar, which appears to most observers to be comfortably in the number 1 slot. We now turn to a consideration of the determinants of international currency status.

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Factors that suit a currency for International Status: The literature on international currencies has identified a number of determining variables.  Output and trade. The currency of a country that has a large share in international output, trade and finance has a big natural advantage. The US economy is still the world’s largest in terms of output and trade. By such measures, Japan should be number 2, ahead of Germany. Alarmist fears of the early 1990s notwithstanding, it was never very likely that Japan, a country with half the population and far less land area or natural resources, would surpass the United States in sheer economic size. But the euro is now the home currency to 15 countries. Their combined economic weight is much greater than Germany alone, or Japan. As of 2007, It was not quite as large as the United States, as Table 1 shows. But evaluated at current exchange rates, the value of US GDP apparently fell below that of euro land GDP for the first time in early 2008. Very likely, most of the 12 countries that have acceded to the EU over the last four years will eventually join EMU, which will boost euro land’s collective GDP a bit further. If the other three long-time EU members, the United Kingdom, Sweden and Denmark, were to join, euro land would definitively surpass the United States in economic size; but that is much less likely to happen. If any of the larger countries do join, it will be at least some years into the future. Thus the question of relative size also depends on the growth rates of the US and European economies. Table 1 2004 US $11.5 trillion Number of members Euro zone 12 $9.0 trillion 2007 $13.8 trillion Number of members 13a

$11.9 trillion $16.6 27b EU (post-May 2004) 25 $12.1 trillion trillion Notes: Includes Slovenia, but not Cyprus and Malta, who joined the euro in 2008. Includes Bulgaria and Romania.

As an alternative to gross domestic product (GDP), we have also looked at countries’ trading volume as another indication of their relative weights in the world economy.  The country’s financial markets. To attain international currency status, capital and money markets in the home country must be not only open and free of controls, but also International Corporate Finance| Group 1| Euro and its Impact on World Trade 24

deep and well-developed. The large financial marketplaces of New York and London have long benefited the dollar and pound relative to the euro and its predecessor the Deutschmark, as Frankfurt still lags far behind as a financial centre. In our earlier paper, we took it for granted that Frankfurt was the current home of the euro. Under the scenario where the United Kingdom decided to join EMU, the euro benefited from the double boost on counting the UK economy into the size of the euro land economy, and bringing the advantages of London’s deep financial markets.

It is surprisingly difficult to come up with a proxy for size, depth or development that is available for all the financial centers. We have opted to use as our primary measure data on foreign exchange turnover in the respective financial centers: New York, London, Frankfurt, Tokyo, Zurich, etc. This measure differs from turnover of the currencies (dollar, pound, euro, etc.), a variable that would be much more likely to be determined simultaneously with the international currency status that we are trying to explain. It captures, for example, the pre-eminence of London, which continues despite the small role of the pound. This measure has the virtue of reflecting to some extent all kinds of international financial transactions (both long-term and short-term, banking and securities, bonds and equities). Moreover, it is possible to patch together a data set covering the desired countries and years – though but just barely, and with increasing difficulty as one goes back through the 1970s. We also tried an alternative proxy for the size of financial centers – the size of the countries’ stock markets.  Confidence in the value of the currency. Even if a key currency were used only as a unit of account, a necessary qualification would be that its value not fluctuate erratically. As it is, a key currency is also used as a form in which to hold assets (firms hold working balances of the currencies in which they invoice, investors hold bonds issued internationally and central banks hold currency reserves). Here confidence that the value of the currency will be stable, and particularly that it will not be inflated away in the future, is critical. The monetary authorities in Japan, Germany and Switzerland in the 1970s established a better track record of low inflation than did the United States, which helped their bids for international currency status. As recently as the 1980s, the mean and variance of the inflation rate in the United States were both higher than in those three hard-currency countries, though lower than in the United Kingdom, France, Italy and many other countries (e.g. Tavlas and Ozeki 1991).

Given the good US inflation performance in the 1990s, this is no longer such a concern as it was formerly. A more important negative for the dollar is the fact that the United International Corporate Finance| Group 1| Euro and its Impact on World Trade 25

States is now a large-scale debtor country. Even if the Federal Reserve never succumbs to the temptations or pressures to inflate away the US debt, the continuing US current account deficit is always a likely source of downward pressure on the dollar. Such fears work to make dollars unattractive.  Network externalities. International money, like domestic money, derives its value because others are using it. It is a classic instance of network externalities. In this sense, the intrinsic characteristics of a currency are of less importance than the pathdependent historical equilibrium. There is a strong inertial bias in favor of using whatever currency has been the international currency in the past. One can make an analogy with language. If one sat down to design an ideal language, it would not be English. (Presumably it would be Esperanto.) Nobody would claim that the English language is particularly well-suited to be the world’s lingua franca by virtue of its intrinsic beauty, simplicity or utility. It is neither as elegant nor euphonious as French, for example, nor as simple and logical in spelling and grammar as Spanish or Italian. Yet it is certainly the language in which citizens of different countries most often converse and do business, and increasingly so. One chooses to use a lingua franca, as one chooses a currency, in the belief that it is the one that others are most likely to use. Krugman (1984) showed how there can be multiple equilibrium in use of an international currency, developing some informal ideas of earlier authors such as Kindleberger (1981), McKinnon (1979) and Swoboda (1969). Matsuyama et al. (1993) went to the next level of abstraction analyzing this problem with the theory of random matching games (see also Rey 2001).

The implication is that small changes in the determinants will not produce corresponding changes in the reserve currency numbers, at least not in the short run. At a minimum, changes will show up only with a long lag. As noted, the pound remained an important international currency even after the United Kingdom lost its position as an economic superpower early in the century. In the present context, the inertial bias favours the continued central role of the dollar. Also, as already noted, economies of scale suggest that, even in the long run, measures of international currency use may not be linear in the determinants. There may be a tipping phenomenon when one currency passes another.

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What role will the euro play as a reserve currency? Given these structural advantages of the US there are strong reasons to assume that the dollar will remain the international reserve currency No. 1 in the decades to come. Nevertheless, the euro has the potential to play a bigger role as a reserve currency, well beyond its last reported share of 26.5% at the end of 2007 Looking ahead it is practical to differentiate between the period until 2010 and beyond 2010. There are several conceivable scenarios for the phase by 2010. In a first extreme-case scenario the process of shifting into the euro could occur relatively quickly within a few months, assuming central banks utilized the current phase of dollar weakness to reduce their cluster risk by diversifying out of the dollar. Although a swift reserve shift in favor of the euro cannot be ruled out, the probability seems small because many Asian central banks are still dollar-oriented and will proceed cautiously to minimize the risk of their currencies depreciating against the dollar and avoid a decline in reserve value. In a second extreme-case scenario it is assumed that no diversification is carried out for the time being, as the existing currency situation between the US and Asia suits all the countries concerned. A third scenario combines both the wish for diversification and the desire for value retention, namely a gradual increase in the euro share to 30-40% by 2010. Still, we consider this our baseline scenario. As things stand, there are probably four main drivers that will be essential in shaping the diversification of foreign exchange reserves into Euros over the medium term: (1) the EUR/USD exchange rate (2) changes in exchange rate policies, (3) central banks’ rising investment requirement and (4) the growing appetite for returns.

The euro may benefit from the dollar weakness Dollar: the exchange rate counts The dollar exchange rate has been an important determinant for the dollar’s role as reserve currency. A period of a low dollar rate vis-à-vis the euro (or before 1999 vis-à-vis the D-mark and the yen) resulted – with a time lag of a few years – in a decline in the dollar’s share in global foreign exchange reserves and vice versa 10. Even in weak periods the dollar share remained dominant (i.e. over 50%).

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The euro "behaves" differently: In contrast, there is no clear-cut relationship between the euro exchange rate and the international role as reserve currency. In the period 1999 to 2002 the euro exchange rate vis-à-vis the dollar tended to be weak while the euro’s share in global foreign exchange reserves climbed from 18% to 25%. The euro share had stabilized at that level by 2006 even though the euro exchange rate rose considerably. Only in 2007 was the strong euro exchange rate associated with an increase in the euro’s share to 26.5%. Looking ahead a further rise in the exchange rate – starting at a value of about USD 1.55 – cannot be ruled out given the uncertainty about the US economy in the wake of the sub-prime crisis. However, it should not be overlooked that the euro has already reached a very high level against the dollar. Thus, the risk of a dollar rebound against the euro is growing, making the euro less attractive to central banks wanting to diversify. The fact that the correction of the global current account imbalances is under way and the Chinese Yuan has witnessed a tangible up-valuation against the dollar may be regarded as a signal that there is no need for a further major devaluation of the dollar against the euro. Thus, the exchange rate argument is likely to lose in importance in favor of the Euro. Changes in exchange rate policy may support euro use: The fact that countries use the euro as an orientation yardstick for their exchange rate policy implies that they have to hold reserves in Euros in order to be able to intervene in the euro foreign exchange market of their currency. At present, about 40 countries align their exchange rate policy with the euro. Furthermore, currency baskets are increasingly being used as a yardstick for exchange rate policy, with the dollar and the euro as key components. Such changes in exchange rate policy demand that the respective central bank hold euro reserves. Recent examples have been China and Russia. At present, exchange rate policies are under review in many countries around the globe. Obviously, the trend towards the two corner regimes of either flexible exchange rates or a fixed exchange rate seems to be over as the number of middle-ground exchange rate models of pegged but adjustable exchange rates has recently risen. The exchange rate policy of many countries around the globe is currently challenged by two closely related problems. The first problem concerns rising inflation rates around the globe mainly due to increasing oil, other (energy) commodity and agricultural prices. The inflation rate has climbed to 8.3% in China (May 2008), to 7.4% in India, to 8.1% in the Asean countries and to even 11.6% in the six countries of the Gulf Cooperation Council. This provokes the question of how these countries can maintain economic growth in an inflationary environment, and which role the exchange rate should play with regard to fighting inflation.

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The second problem regards the Fed’s policy of easy money. Therefore, those roughly 60 countries that use the dollar as anchor currency face the problem of whether a dollar peg is still compatible with the aim of combating inflation or whether a change in the exchange rate regime is necessary. Alternatives to a dollar peg are, for instance, a basket solution with the euro as a key component or even a pure euro orientation. Both cases would generate a need to hold euro reserves. It is, however, open whether a country that changes its exchange rate policy will provide detailed information about the role of the euro, e.g. its weight in a currency basket.

Central banks’ rising investment requirement Global foreign exchange reserves held by central banks more than tripled to around USD 6,400 bn between the end of 2001 and the end of 2007 – compared with cumulative increases in world trade of two-thirds and in global nominal GDP by two-fifths. The lion’s share of the increase in foreign exchange reserves was accounted for by China, other emerging markets in Asia, and Japan. The main source for reserve accumulation has been the buying of dollars in foreign exchange markets against local currency. Of all the international foreign exchange reserves at the end of 2007 about two thirds were held in Asia (excluding Middle Eastern oil nations), with China and Japan combined accounting for nearly 50%. The accumulation of such huge reserves went far beyond the level necessary for ex-change rate management. Thus, Asia’s central banks are under increasing pressure to reduce their dollar-denominated cluster risk and diversify into other currencies. China is a special case as it has the largest stock of reserves. According to unofficial sources some 80% of its foreign exchange reserves are invested in dollars, i.e. more than the global average share of 64%. China is also a major player with regard to sovereign wealth funds (SWF). This special type of institutional investors has gained major importance in holding, managing and/or administering public funds mainly stem-ming from official reserves at central banks. This is also a vehicle giving the euro a major opportunity to grab a bigger share of global foreign exchange reserves.

Focus on yield of foreign exchange reserve investments Given the huge volume of foreign exchange reserves eligible for investment purposes there is a growing pressure on central banks to sharpen their focus on yields. This is not only true for central banks in Asia but also in the industrial and oil-exporting countries. The watchword is diversification and from a yield standpoint in both senses: firstly, by instrument within the dollar segment and, second-ly, by currency. Diversification moves within dollar segment – from US treasury paper into other securities – before July 2007 are likely to have been negatively affected by the sub-prime crisis. At present, diversification within the dollar segment might still

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be difficult due to a lack of liquidity in many securities markets except US treasuries. This also offers opportunities for diversification out of the dollar into the euro. However, the desire for currency diversification and a higher yield on the one hand and the desire to maintain the value of foreign exchange reserves on the other can be conflicting objectives. A central bank must thus take into consideration what impact diversification out of the dollar into the euro could have on its country’s exchange rate against the dollar. A strategy of massive currency diversification could prompt an appreciation of this central bank’s currency against the dollar and this would in turn lead to write-downs of the dollar reserves in national currency. There are two alternatives: either it decides against currency diversification or it pursues a clandestine strategy of currency diversification, for instance by transferring part of its reserves into a separate unit (e.g. a SWF) or to a professional asset manager. However, it is doubtful whether a central bank’s investment strategy can prevent a fundamentally driven appreciation of its own currency against the dollar in the medium run.

What will happen to the euro’s role as a reserve currency after 2010? Whether the euro will still be on the rise as reserve currency or even outstrip the dollar after 2010 is closely linked with structural changes that can be expected in Europe, in the US and the rest of the world. One factor that will remain key for the euro/dollar exchange rate is longerterm US development particularly with regard to growth and interest rates. US growth is expected to pick up as of 2010 once the structural problems of the sub-prime crisis are overcome and the huge US current account deficit has been convincingly reduced to a manageable level. Then, US growth is likely to be more dynamic than in the euro area. A longer-term problem of relevance to the euro area is the reduction of growth potential linked with the demographic developments. Trend growth in the euro area at nearly 2% is around one percentage point lower than in the US. The contribution of the factor labor will play a key role in this regard, as determined by the development of working hours per employee, participation rates and the population. Although working hours and the participation rates in the euro area have risen in recent years, they are well behind US levels. The euro area is, however, clearly at a disadvantage in terms of population growth. As the birth rate has been much lower than in the US in recent decades, population growth will continue to slow in the EMU states. Despite immigration the population in EMU countries will actually decline in the next ten years. Reduced future growth potential should, however, dampen the appeal of the euro especially among central banks focusing heavily on returns and constitute a risk factor for the euro as a reserve currency. Therefore, the dollar will also remain the most important reserve currency in the longer run. International Corporate Finance| Group 1| Euro and its Impact on World Trade 30

References
 http://www.oanda.com/currency/historicalrates?date_fmt=us&date=08/30/10&date1=08/24/09&exch=USD&expr=EUR&format= CSV&margin_fixed=0  BIS ( Bank of International Settelment)  IMF ( International Monetory Fund)  ECB- Statstical data Warehouse  Joint External Debt Hub (JEDH)9  Dollar-Euro Exchange Rate 1999-2004 - Dollar and Euro as International Currencies’ , Rasul Shams, Hamburg Institute of International Economics Discussion Paper, May 2005, pp: 3-5.  “THE INTERNATIONAL ROLE OF THE EURO”, July 2010,European Central Bank  Big is beautiful in euros but dollars' allure remains  “The Birth of the Euro” by Robert Solomon, Brookings Review,  “The Euro hits the Big time: International Role of the Euro”, Deutsche Bank Research, June 26,2008.  “DOLLAR DAZE IN EUROPE” Special Report: The Financial Crisis  “Why the Euro Will Rival the Dollar” by Menzie Chinnw(University of Wisconsin) and Jeffrey Frankelz(Harvard University)  “Why the Euro will Not Rival the Dollar” by Adam S. Posen (Peterson Institute for International Economics.)  EBSCOHost Database

9

The Joint External Debt Hub (JEDH) is jointly developed by the Bank for International Settlements (BIS), the International Monetary Fund (IMF), the Organization for Economic Cooperation and Development (OECD) and the World Bank (WB). JEDH brings together external debt data and selected foreign assets from international creditor/market and national sources

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Appendix 1

Currency Composition of Official Foreign Exchange Reserves (COFER)

Total foreign exchange holdings Allocated reserves 1/ Claims in U.S. dollars Claims in pounds sterling Claims in Japanese yen Claims in Swiss francs Claims in euros Claims in other currencies Unallocated reserves 2/

(In millions of U.S. dollars) 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 17,8 19,3 20,4 24,0 30,2 37,4 43,2 52,5 66,9 73,3 81,6 1,94 6,28 9,58 7,97 5,07 8,35 0,11 1,37 9,37 7,73 5,66 7 2 0 8 1 8 7 1 3 4 7 13,7 15,1 15,6 17,9 22,2 26,5 28,4 33,1 41,1 42,0 45,6 9,70 8,24 9,48 5,91 3,11 5,07 3,54 5,48 9,28 9,96 3,28 5 4 8 5 0 0 1 3 4 1 6 10,7 11,2 12,0 14,6 17,5 19,0 21,7 26,4 26,9 28,3 9,79, 9,91 2,43 4,67 5,75 1,01 2,53 1,07 1,67 8,42 6,99 783 6 1 3 2 2 5 5 1 3 7 39,8 41,7 42,4 50,5 61,6 89,4 1,02, 1,45, 1,92, 1,68, 1,95, 27 98 01 37 55 57 243 205 675 793 574 87,9 92,0 79,1 78,1 87,6 1,01, 1,01, 1,02, 1,20, 1,31, 1,37, 39 78 90 45 08 787 769 051 480 901 515 3,17 4,08 4,37 7,31 5,01 4,41 4,14 5,68 6,39 5,79 4,94 2 7 2 4 6 9 3 5 5 9 1 10,8 11,1 12,4 2,46, 2,77, 3,01, 4,27, 5,59, 6,58, 6,83, 8,31, 2,28 2,20 5,78 950 693 026 327 246 531 809 947 6 6 0 22,0 22,6 20,0 27,9 43,8 49,8 49,0 59,5 75,7 92,8 1,42, 34 72 69 19 33 65 41 20 78 39 479 10,9 14,7 19,3 25,8 31,2 36,0 4,02, 4,18, 4,80, 6,12, 8,01, 3,28 6,57 5,88 0,08 7,77 2,38 242 039 092 063 961 8 6 8 9 3 0

Exchange Rates 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Pound sterling per 0.61 0.68 0.51 0.58 0.50 0.49 0.68 0.61 0.67 0.62 0.56 U.S. dollar 9 9 8 1 9 9 6 7 Japanese yen per 102. 114. 131. 119. 107. 104. 117. 118. 90.7 92.0 114 U.S. dollar 2 9 8 9 1 12 97 95 5 6 Swiss franc per 1.63 1.67 1.38 1.23 1.13 1.31 1.12 1.06 1.03 1.6 1.22 U.S. dollar 7 7 7 7 2 4 6 4 1 Euro per U.S. 0.99 1.07 1.13 0.95 0.79 0.73 0.84 0.75 0.67 0.71 0.69 dollar 5 5 5 4 2 4 8 9 9 9 4 Source: IMF Statistics Department COFER database and International Financial Statistics

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Appendix 2

Outstanding international debt securities, Global Measure 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Q2 Q3 Q4 2009 Q2 Q3 Q4 Sources: BIS and ECB 7,348 7,439 7,711 9,949 13,26 3 15,81 4 15,04 1 18,74 4 23,30 4 25,40 7 26,23 8 24,05 8 24,21 5 23,96 8 26,18 0 27,54 5 27,15 2

US$ Billion Narrow Measure 628 727 823 1,10 8 1,56 0 1,97 0 1,92 4 2,45 1 3,10 7 3,41 4 3,53 8 3,22 2 3,09 5 2,96 0 3,20 1 3,34 8 3,24 8 1,48 4 1,70 1 1,79 3 1,89 6 2,13 0 2,38 6 2,70 7 3,45 6 4,18 3 4,22 2 4,31 6 4,33 7 4,29 2 4,33 3 4,47 1 4,59 5 4,73 3 484 471 426 411 439 456 401 413 510 593 578 593 654 597 600 627 598 436 489 516 648 828 1,03 1 1,12 7 1,50 7 1,85 3 1,94 9 2,01 6 1,82 3 1,56 8 1,54 2 1,74 6 1,77 2 1,75 8

Current Prices 16,02 6,535 4,915 1 16,98 6,208 4,917 3 18,44 5,936 5,073 1 19,80 6,827 5,909 0 21,40 8,321 7,275 9 23,27 9,400 8,846 9 25,32 8,851 9,727 6 28,17 11,90 8,905 7 2 31,24 14,45 9,464 0 6 31,76 10,84 14,98 0 9 2 32,15 10,15 15,62 7 5 7 32,75 10,29 14,67 9 9 0 33,12 11,83 13,80 1 2 8 33,85 10,94 13,68 3 3 4 34,12 11,45 15,57 2 9 9 34,51 12,34 16,58 8 2 0 34,81 12,22 17,03 1 9 7

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