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Unit 4: Eurocurrency Markets

In the past decade, the Euro bond market has grown explosively, due to a variety of reasons – Notes
primarily the deregulation of markets. The weakening of the dollar in 1985 also caused a shift
out of dollars toward Euro-Yen and Euro-Deutschmark issues. The control of inflation in the
industrial countries also has resulted in a big demand for financial assets, allowing companies
to issue bonds in unprecedented quantities and in a variety of currencies. The major benefits of
the Euro bond market are that it is relatively unregulated, its income is essentially untaxed, and
there appears to be greater flexibility in making issues than is the case in purely national
markets. In addition, it is an important step towards a fully integrated European capital market.
The Yen is potentially the largest source of funds for the Euro bond market, because of the huge
trade surpluses that Japan has enjoyed in recent years.

Self Assessment

Fill in the blanks:
8. Euro …………………… are unsecured debt securities issued and sold in markets outside
the home country of the issuer.
9. If a company raises funds using equity route through instruments like Global Depository
Receipts (GDRs) or Superstock Equity in more than one foreign market except the domestic
market of the issuing company and denominated in a currency other than that of the
issuer’s home country, it is known as …………………….

10. If the equity issue is made in a particular domestic, it is known as a ‘Foreign
…………………… Issue’.

4.4 External Commercial Borrowings

The underdeveloped and the developing economies require external assistance due to the shortage
of capital within the country. The savings generated by the citizens and tax revenues collected
by the government are too meagre compared to the funds requirement for the development of
the infrastructure sector, the industry and various other developmental activities. The
governments of these economies, therefore, generally encourage the inflow of external funds
into the country. The reasons why they follow such a policy are:
1. The scarcity of domestic capital resources hinders a high rate of capital formation.
2. The rate of savings is low because the income levels are at a low level and whatever small
savings are possible, they are very difficult to mobilise.
3. Scarcity of foreign exchange also plays an important role as most of the developing
economies are characterized by an adverse balance of payment.

4. Generally the country’s exports are not sufficient to cover the large imports of machinery,
components, spare parts, materials and related services.
5. Funding of infrastructure sector by the government alone cannot go on forever on borrowed
money because the monetary needs of the infrastructure sector in a developing economy
are massive and if the government were to even attempt to borrow it all, then the interest
and deficits would rocket with the usual dizzying symptoms on the economy.
The governments, therefore, allow the corporate sector to access funds from abroad in the form
of External Commercial Borrowings (ECBs). ECBs are defined to include (1) commercial bank
loans, (2) buyers’ credit, (3) suppliers’ credit, (4) securitised instruments such as Floating Rate
Notes and Fixed Rate bonds, (5) credit from official sector, e.g., window of multilateral financial
institutions such as International Finance Corporation (Washington), ADB, AFIC, and (6) various
forms of Euro bonds and syndicated loans.

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