Eurocurrency Offshore Financial Market - Speech or Presentation Example

Eurocurrency or Offshore Financial Market Speaker Notes for Slides SLIDE 3. A Eurocurrency refers to any foreign currency-dominated deposit or account with a financial institution outside the country of the currency’s issuance. As often misunderstood, the euro prefix does not imply that these currencies or accounts are European. For instance, U.S. dollar deposits held on account in a bank in London, U.K. would qualify into Eurocurrency concept (Eurodollar). As often misunderstood, the euro prefix does not imply that these currencies or accounts are European. The market in which the lending and borrowing takes place using the Eurocurrency is commonly referred as the Eurocurrency market. Other than Eurocurrencies, the market also includes transactions involving Eurobonds and Euro-notes. Eurobonds are international finance tools adopted in facilitation of the long-term debt securities that are transacted outside the borrower’s country for purposes of creating long-term capital in foreign. Additionally, there are Euro-notes which refer to the medium-term financial instruments falling between short-term Eurocurrency bank loans and long-term international bonds. SLIDE 4. Owing to the current trend in business globalization, which has led to cross-border extensions under which this practice apply, the Eurocurrency market has become an essentially 24-hour-a day operation. Other than Eurocurrencies, the market also includes transactions involving Eurobonds and Euronotes, and The development of cross-border commercial transactions has generated multiple currency cash flows that corporate treasurers remain obliged to manage. The Eurocurrency market makes it possible to deal with an easily accessible, well-known bank that can handle all conventional currency needs. The emergence and growth of all the Eurocurrencies can be attributed to factors of cost and convenience. However, the origin of Eurocurrency was more political than economical as USSR had maintained large dollar deposits in order to participate in the world trade SLIDE 5 The development of the Eurocurrency dates back to the late 1950s and early 1960s; and the concept is mainly associated with the reluctance of centrally planned economies to hold bank deposits in the United States with majority of these economies shifting their dollar earnings on deposits into London. The growth of the Eurocurrency market was also stimulated by certain monetary regulations in United States. Some of the regulations put a ceiling on the interest rates that banks operating in U.S. could offer to domestic depositors, leading to increased attraction of depositors to Eurobanks not bound by such regulations. SLIDE 6 Many European dollar holders shifted their dollar earnings on deposits from United States particularly after United States implemented a large balance of payments deficits plan. However, the origin of Eurocurrency was more political than economical, a premise anecdotally attributed largely with poor political relationship between USSR and United States. Since USSR had maintained large dollar deposits in order to participate in the world trade, poor relationship led to fears by the Soviets that the U.S. government could expropriate their deposits. The emerging trend of growth of domestic capital markets has imperatively motivated what experts see as souring international lending, which is the core recipe for the Eurocurrency activities Currently, the Eurocurrency market consists of a number of large banks, referred to Eurobanks, corporations, and governments. The Eurobanks form the foundation of the market offering various types of loans and deposits typical of international character. Governments and companies use the market to deposit currencies as well as obtaining loans to finance assets, infrastructure, and even balance of payment deficits. The Euro banks form the foundation of the market offering various types of loans and deposits typical of international character that agencies use to deposit currencies as well as obtaining loans for development. SLIDE 7 The Eurocurrency market comprises of three components that include: The Eurocurrency deposit market where banks accept deposits from non-bank clients, banks that accept deposits and make loans among themselves in the interbank market, and the Eurocurrency credit market that enables banks to loan money to non-bank borrowers. The loaning of money to non-bank borrowers takes place in forms ranging from Euro-commercial paper to syndicated loan. Governments allow their currencies to trade in the Eurocurrency market to help reduce inflationary pressures generated by expansionary fiscal or monetary policies established by various governments as a strategy to achieve certain politically motivated goals. In addition, governments agree to the terms required for a currency to participate in the Euro market in order to meet the increased demand for liquidity that can easily be satisfied with speed and low cost by the Eurocurrency market. SLIDE 8 Interest rates in the Eurocurrency market are quoted in the bid and ask prices in which the bid rate refers to the deposit rate while the ask rate connotes the loan rates. Spreads in Eurocurrency market refer to the difference of the borrowing rates and lending rates. Tighter spreads result in the Eurocurrency markets offering slightly higher interest rates to lenders and slightly lower rates to borrowers than the rates available in the domestic markets. Such lower rates in the Eurocurrency market than in the domestic markets serve to attract borrowers to the Eurocurrency market more to borrow funds rather than the doing so in their domestic markets. Eurocurrency markets are well-funded and thus forming convenient sources for funding a bank’s domestic and international loans. The spread varies according to the credit worthiness of the borrower and ranges from one percent to for the best or prime borrowers to two percent for borrowers with weak credit ratings. SLIDE 9 Eurobonds refers to bonds sold in other countries rather than the country of the currency denominating the bonds. Eurobond market emerged partially as a result of the interest equalization tax imposed by the U.S. government to discourage its investors from investing in foreign securities. The incentive of issuing Euronotes and Eurobonds involve the lower cost of borrowing long-term funds associated with them compared to other available alternatives. Euronotes typically have maturities of one, three or six months and their interest rates depend on the interest rate Eurobanks charge on interbank transfer. SLIDE 10 In conclusion, report explored and detailed the increasing contemporary form of Eurocurrency. The development of the Eurocurrency dates back to the late 1950s and early 1960s mainly attributed to the reluctance of centrally planned economies to hold bank deposits in the United States with majority of these economies shifted their dollar earnings on deposits in London. The move by main industrial countries to restore full convertibility of their currencies led to a surge of international banking business contributing to the emergency of Eurocurrency. Eurocurrency markets are well-funded and thus forming convenient sources for funding a bank’s domestic and international loans. Read More