Euromarkets are global, trading around the clock in all major financial centers throughout the world. The euromarkets are attractive to both borrowers and investors because of a high degree of flexibility and anonymity. Major activities in eurobonds, floating rate notes, eurocommercial paper, and euro medium term notes are covered in the first four sections of this chapter. The subsequent sections focus on the three largest European markets. The discussion provides a roadmap on how to participate in the major exchanges in London, Paris, and Frankfurt. The European Monetary Union of 1999 effectively brings about a merger of the capital markets of the member states. The implications for the equity markets, bond markets, and settlement challenges are examined as well.
After World War II the U.S. dollar replaced sterling as the main trading currency. Communist countries held large reserves of U.S. dollars, mostly at U.S. banks, to support their international transactions. Later, because of the cold war and concern over possible U.S. seizure of their U.S. deposits, they transferred deposits to banks in Europe.1 These were the first eurodollars. The lifting of foreign exchange restrictions in Western Europe, which permitted multinational corporations to shift to the currency of lower interest, also helped create an environment for the development of euromarkets. In the United States, Interest Equalization Tax (1963) and banking regulations such as reserve requirements, deposit insurance, and legal lending limit forced the dollar-denominated business out to the newly developing eurodollar market. The first eurodollar bond was issued in 1963.
The explosive growth of euromarkets began in the late 1970s. The change in U.S. monetary policy, coupled with spiraling inflation, caused interest rates to skyrocket. Investors began to take money out of the U.S. banks, limited by interest-rate ceilings, and deposit in foreign banks. Other new sources of funds—oil surpluses of OPEC countries and new wealth from emerging countries—poured into the euromarkets. Blue-chip multinationals were increasingly tapping into the euromarkets for floating rate loans.