Unit 19.

Eurocurrency Markets
 I. What is the Eurocurrency Market?
The Eurocurrency Market provides a market for the exchange of financi
al instruments denominated in currencies other than that the country where t
he market is located.
Eurocurrencies are those currencies traded outside the country of their or
igin, such as Euro-dollar, Euro-sterling, etc. The “euro” prefix is attached to
other currencies, even though the Euro-market no longer is exclusively in E
urope.
Other Eurocurrencies are German mark, Swiss Franc, Dutch Guilder, Ja
panese Yen, and French Franc. They all share the Euro-dollar characteristic
and are national currencies deposited outside their own border.
In addition to Europe, financial institutions in the Bahamas, Cayman Isla
nds, Panama (tax heaven), Canada, HK, Japan, Singapore and US IBFs (Inte
rnational Banking Facilities-off shore banking) deal in Eurocurrencies.
(Note: OSBs refer to banks which are not allowed to conduct businesses in t
he domestic market, only with other off-shore banking units or foreign institutions.)
II. Reasons for the Existence of
Eurocurrency Market
• Political Consideration-The Socialist countries were the sou
rce of early dollar balances held in Europe. Since 1960s, the
se countries need dollars from time to time, but didn’t want
deposit in US banks for fear of freezing due to hostilities. T
hus, they deposited these dollars in UK and French banks, w
hich became the first Eurodollar deposits.
• Regulation Considerations & Profit Considerations- Euro-m
arkets are almost totally free of control by national governm
ent and international agencies, such as interest rate ceilings
( 上限 ), reserve requirements, taxes, etc.. It reduces the cost
s for both lenders and borrowers and increase the profits of
both parties.
III. Kinds of Euromarkets
 A. Eurocurrency Market & Eurobond Market
The Eurocurrency market deals with bank
deposits and bank credits of generally short-
term or medium term maturity.
The Eurobond market deals with long-term
debt instruments-normally 10- or 20-year
maturity-that are issued and sold outside the
country of the currency in which they are
denominated.
 B. Interest Rates in Eurocurrency Markets
In the Eurocurrency market, bank credits usually
carry a rate of interest tied by convention to LIBOR.
The actual rate is often a margin plus LIBOR, the
amount of the spread reflecting the credit rating of the
borrower.
The Eurocurrency market is partly an inter-bank
market and partly a market for loans to Corps and to
governments. Many developing countries resort to
borrow from Euro-currency market, instead of IMF,
because of stringent conditions to these countries
imposed by IMF.
C. Eurobonds are underwritten by an international synd
icate and are sold principally in countries other than the
country of the currency in which the bond is denominat
ed. The Eurobond market provides an alternative sourc
e of funds for the borrower who wishes to avoid regulat
ion and expenses of floating ( 发行 ) the bonds in a do
mestic market. Eurobonds require no registration, and u
sually bearer bonds ( 无记名债券 )-that is not registere
d in anyone’s name-which may have advantages in avoi
ding taxes.
 IV. Arguments on
Eurocurrency Market
 The Eurocurrency market expanded rapidly since 1960s duo
to the needs to avoid national controls by keeping a currency i
n a bank outside of its country of origin.
Now, the Eurocurrency market has become a critical structu
ral element for hundreds of banks throughout the world becaus
e the market represents a highly efficient response by internati
onal banks both to investors seeking high-yielding, safe, and l
iquid investments and business firms and governments looking
for low-cost funds with a high degree of assured availability.
There is a concern/controversy over Eurocurrency market d
ue to illegal conducts, such as money laundry ( 洗钱 ) and ille
gal sources of deposits from some corrupted officials of other
countries (embezzlements or bribes).