International Debt Market (week 8)

Euro Market - the most important international financial today

Eurocurrency Market. – International market without national contecrol.composed of euro
banks who accept/maintain deposits of foreign currency. Dominant current. US$.
Eurocurrencies are these currencies are those currencies that are traded outside the country.
Outside its country of origin. Therefore, in this euro currency market, any currency can be a
euro currency.

 Describe the eurocurrency markets, including various banking facilities.

The international debt markets are where foreign bonds are traded. If an Australian Bank or
corporation wants to raise capital to lend to its customers, it might do so usin either the
domestic debt market or the international debt market. If it uses the domestic debt market, the
bank issues bonds within Australia denominated in Australian dollars. If it uses the
international debt market, the bank issues bonds outside Australia of Australia denominated
in a foreign currency (e.g. US dollars).

Investors are attracted to the international debt markets because they provide deep and liquid
markets while at the same time offering an opportunity to seek higher invfestment returns and
greater portfolio diversification. Under normal circumstances, borrowers with a strong
financial reputation and a very good credit rating are able to access funds from the internation
debt market with relative ease, and to raise large amounts of funding that might not be
available in their domestic financial markets.

Euromarkets Transaction a financial transaction conducted in a foreign country, but not in

the currency of that country.

Euromarkets encompasses the eurocurrency on the euro bond markets as well as the euro
note and euro commercial paper markets. So, this euro market comprises of banks that
accept short-term deposits and make short-term loans in currencies other than that of the
country in which they are located.

Wholesale debt markets, both domestic and international, are an important source of funding
for Aus Banks. 70-30.

The Euromarkets initially developed to enable financial market participants in several

countries, including the UK and Russia, to hold US dollars (USD) outside of the USA>
Although the Euromarkets originated in Europe, the prefix euro- means ‘outside’, it does not
signify Europe. Therefore, it is a misconception to think that the Euromarkets are situated
only in Europe.

A euro market transaction is denominated primarily in a currency other than the currency of
the country in which a debt issue is made. Euromarkets are vast money and capital markets,
with major centres in London, the Middle east and Asia. The dominant currency in the
Euromarkets is the USD; however, all major currencies are issued in the Euromarkets.

The Euromarkets provide intermediated finance and direct finance over a range of terms to
maturity. Therefore, the Euromarkets are categorised into:
  The eurocurrency market, providing intermediated bank finance.
 The euro note markets, providing short-term direct finance.
 The Eurobond markets, providing medium 0 to long-term direct finance.

The Euromarkets do not deal in small retail market transaction and therefor administrative
and operating costs per dollar are deposited is lower than the domestic operations

Euromarkets loans are usually large multi-million-dollar loans and are made to large
corporations, financial institutions, governments, and government agencies. The resources
devoted to assessing the credit risk of the borrower can be less per dollar lent. For example,
credit rating issued by credit rating agencies are an important – and for the lender a cost-free
component of the credit assessment process.

A euro market transaction may occur in any country. It is defined as a financial transaction
carried out in a foreign country but denominated in a currency other than the currency of the
country in which the transaction occurs.

 Understand the structure and features of securities in the Eurobond market.

Eurocurrency market provides a market for the exchange of financial instruments

denominated in currency other than that of the country where the market is located.
Eurocurrency are currencies that are traded outside of the country of their origin, such as euro
dollar or euro sterling. Euromarkets is no longer exclusive in Europe.
Other currencies are German monarch, Swiss franc, Dutch Chiodo, Japanese yen and the
French franc.

In addition to Europe, financial institutions in the Bahamas, Cayman Islands, Hong Kong,
Canada, Japan, Singapore, they are all deal in euro currencies.

Euro is used as a prefix (London).

Any currency can be a eurocurrency if the denomination of a deposit held with, or a short-
term loan granted by a bank located outside the home country of that currency.

U.S Dollar dominates the euro market.

Soviet Union face the problem of keeping dollar balances – deposit their dollar funds in
European banks.

SEC does not regulate Eurodollars.

The supply and demand changes according to the interest rates (convention to labour)

Major participants – large commercial banks, international monetary funds.

Short term bank advances are essentially the same as term loans or fully drawn advanced
obtained through a domestic bank. The term of the advance is negotiated with a bank and the
full amount drawn down on approval. Duration – less than a year.

Euro credits medium to long term bank loans. Eurocurrency loans extended by euro banks
overshot to median terms to diverse entities like corporations, governments, and international
organisations. Syndicated loans. Higher credit risk.

Standby arrangements these akin to overdraft facilities in a euro currency, so provided by

banks to their customers. Interest rate and commitment fee. Useful during tight liquidity
period. Not intended for continuous use.

Argument on Eurocurrency market lack of regulations (lead to increased risks), potential

for financial instability, credit and interest rate risks, economic policy evasion, money
laundering and illicit activities, impact on domestic banking systems (draw capital away and
lead to a shortage of credit).
Euro notes issuance facility (NIF) is a short-term facility whereby an unconditional bearer
promissory note is drawn by the borrower, in the borrower’s own name. It is a platform for
issuing and trading short term promissory notes of commercial papers with varying
maturities. Ranging from 3 to 6 months. NIF – Cost effective alternative to syndicated
credits. Allowing borrowers to issue their own short term euro notes.

Maturity of the NIF: 30-180 days

The Instrument the euro note issuance facility is simply referred to in the markets as an NIF.

Euro commercial paper is an unsecured short-term note issued in the eurocurrency market.
Not underwritten by a bank. An arrangement whereby P-notes that are not underwritten are
issued into the Euromarkets. Pros: collateralize alternative fee. ECP facility meets the
demands. ECP issues are typically for more than USD 250 million. The key features: note
supported by underwriters 1. Selection of the dealers responsible for marketing the issue, 2.
Obtaining a credit rating from a credit ratings agency.

Bonds issued in a foreign market. Trading on global markets. Underwritten ny a

multinational syndication of banks. Domestic, Foreign.
  Explore the operation of US money and capital markets.

Financial products in the USA Market – Commercial paper (USCP), US Yankee Bond,
American depository receipts (ADRs).

 Discuss credit rating agencies.

Credit rating agencies are specialised organisation that assess the credit quality associated
with financial obligations. Function: evaluating the abilities of entities, including
government and companies to meet their debt obligations, particularly principal and interest
payments. Credit rating system S&P provide long-term, short-term rating.

Opinion of a credit rating agency about the ability and willingness of an obligor such as a
corporations or government, to meet its financial commitments with respect to a debt issue of
other financial obligations. Credit rating is also an opinion about the credit quality of an
issue such as a bond or other debt security, and the relative likelihood that it may default.
Assessing and rating, influence the development of the financial markets.
A credit rating is not an indication of the market liquidity of a debt security or itsprice in the
secondary market.