WHAT IS EUROCURRINCIES AND EUROBONDS?


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During the Cold War, the Soviet Union was understandably reluctant to put its US dollar reserves under the control of authorities in the United States. So, instead of putting its dollars on deposit in New York, it turned to European banks to keep those dollars on deposit in New York, it turned to European banks to keep those dollars abroad. Those deposits were soon being called Eurodolllars to differentiate them from dollars kept on deposit in their home country.

Today, any currency held abroad, even in banks that are not in Europe, is called a Eurocurrency. Japanese yen held in a New York Bank, for example, are called EuroYen. Even the new European currency, the euro, can be held abroad. Euros held in Japan would be called-appropriately enough-“Euro-euros.”

By the 1980s and 1990s, a huge market had developed for Eurocurrencies, mainly centered in London. Arab oil producers following the example of the Soviet Union began keeping a large part of their “petrodollars” in European banks. This flood of foreign capital needed to be invested, so London-based banks began issuing U.S. dollar bonds, outside the control and regulation of the U.S government. These bonds were called Eurobonds. Soon, the world banks and securities houses were all issuing Eurobonds in all major currencies.

Investors liked the fact that Eurobonds were bearer bonds. Unlike normal domestic bonds, which were registered with the government, bearer bonds allow the investor to remain anonymous. And since there was no withholding tax on interest payments, investors could pocket the interest income without reporting it to the tax authorities at home.

With American corporations found out they could issue bonds more cheaply abroad, with lower interest rates and fewer restrictions than in the United States, the London-based Eurobond market grew even more, quickly outstripping most of the world financial centers. Only by reducing restrictions on new issue of securities in the United States was the U.S. government able to return international market activity-in U.S. government able to return international capital market activity in U.S. dollars, at least to American shores.


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