Prior to 1980 Eurocurrency markets are the only international financial market of any significance. They are offshore markets where financial institutions conduct transactions which are denominated in currencies of countries other than the country in which the institutions currencies of countries other than the country in which the institutions are located. The Eurocurrency market is outside the legal preview of the country in whose currency the finance are raised in the market. Eurocurrencies are bank deposits denominated in currencies other than the currency of the country in which the bank is located. The bank deposits and loans are denominated in Eurocurrencies, particularly dollars. Eurodollars are dollar denominated time deposits held by financial intuitions located outside the US., including such deposits by branches of U.S.,including such deposits held by branches of U.S.,banks. Thus a dollar with a bank in London or Paris is a Eurodollar deposit. Similarly, a Deutsche mark deposit with a bank in London is Euro mark deposit, even a deposit made by a U.S., firm with a Paris subsidiary of a U.S. bank is still a Eurodollar deposit. Similarly a Eurodollar loan made by bank or branch of a bank outside U.S.A. is a Eurodollar market and the deposit are termed as Eurodollar deposits and the loans are called Eurodollar loans. The terms euro’ is affixed to denote offshore currency transactions.
Origin and Growth of Eurodollar Market
The Eurodollar market originated in the 1950s. Soviet Union and Eastern European countries, which earned dollars by gold exports and other means, wanted to keep their dollars as deposits with European banks. They avoided the banks in U.S.A. out of the fear that U.S. Government may block deposit in the U.S. banks. Subsequent growth of the market may be attributed to the emergence of dollar as the principal international currency after the World War II. Since 1965 there has been a phenomenal growth of this market. The fast growth of the Eurodollar market during 1965-1980 periods may be attributed to four major factors.
- Large balance of payments deficits of U.S.A particularly during 1960s resulted in the accumulation of dollars by foreign financial institution and individuals.
- The Various regulations, which prevailed in the U.S. during 1963-74, encouraged capital outflows. The interest equalization tax of 1963 was lifted and the Eurobond market started flourishing. Side by side there was a revival of the market for foreign bonds in the U.S. regulation Q regulated the interest rates that U.S. banks can pay on time deposits and regulation M required U.S. banks to keep a stipulated percentage of cash reserves against deposits, These restrictions encouraged U.S. banks and multinational corporations to keep dollar deposits and borrow dollars abroad. Thus the main factors behind the emergence and growth of Eurodollar market were the regulations imposed on borrower and lenders by the U.S. authorities that motivated both banks and corporation to evolve Eurodollar deposit and loans. The European and U.S. banks take deposits out of USA. To place them in free centers in Europe. They for short-term lending or for investment used these deposits with outside banks.
- The Massive balance of payment surpluses realized by OPEC countries due to sharp increase in oil prices (1973 and 1978) gave rise to what are called “petrodollars”. These countries preferred to deposit such dollar with financial institutions outside the US.
- The efficiency with which it works and the lower cost has also contributed to the growth of Eurodollar market. Large amounts of funds can be raised in this market due to lower interest rated and absence of credit restrictions that market much domestic market. The Eurocurrency loans are generally cheaper due to small lending margins as a result of exemption from statutory cash reserve requirements, absence of restrictions on lending rates, economies of scales etc., Thus these markets are not subject to national controls.
In sum Eurodollar market is the market for bank time deposits denominated in U.S. dollar but deposited in bank outside the United States. Similarly European, euro sterling, and so forth are simply deposits are denominated. The Eurocurrency market is the market for such bank deposits. The Eurocurrency market thus permits the separations of the currency of denomination from the country of jurisdiction. Eurocurrency market that started in London found its way in other European cities and in Singapore, Hongkong, Tokyo, the Cayman Island and Bahamas. These markets consist of beside Eurodollar market. Asian dollar market, Rio dollar Market, European market as well as Euro-Sterling Euro-Swiss Francs Euro-French Franc Euro-D marks markets etc., International banks and foreign branches of domestic banks, private banks and merchant’s banks are the main dealers on the market. In fact, most of the U.S. banks deal in this market. The commercial banks in each of these markets accept interest-bearing deposits denominated in a foreign currency and they lend their funds either in the same country or in a foreign country in whose currency the deposit is denominated. Over the years these markets have evolved instruments other than time deposits and short-time loans. Those instruments are certificates of deposits, euro commercial paper, medium to long-term floating rate loans, Eurobonds etc., the market is of wholesale nature, highly competitive and well connected by network of brokers and dealers.