Euro as a currency

and Euro currency

market
Euro as a currency
 Euro was launched on January 1 , 1999 in line with
schedule set out by the Maastricht treaty.




 Eleven out of fifteen member countries in the

European economic and monetary union (EMU)
linked their domestic currencies to Euro on
December 31 , 1998
  The Euro is issued and administered by an European
system of central banks (ESCB)



 ESCB comprises of European central bank and 11

national central banks which will set up the
monetary policy and can alone authorize the
issuance of Euro notes
  Till January 1 , 2002 Euro was transacted in the form
of electronic currency later replaced by Euro notes
and coins



 From January 1 , 2002 the national currencies of 11

countries were replaced by Euro
Euro currency market
 Euro currency market is also known as euro dollar
market is an international capital market which
specialises in borrowing and lending of currencies
outside the country of issue.
  Thus deposits in dollars with a bank in London are
Euro - dollars


 Similarly French francs held by bank in London are

Euro – Francs


 Pound sterling held by banks in Germany are Euro –

Sterling


 All these are Euro - currencies

  The main center of Euro currency are London and a
few other places in Europe



 The growth of market has now extended to Asian

centers like Singapore and Hongkong



 The foundation of modern Euro currency was laid on

1949

Features of the market
 Transactions in each currency take place outside the
country of its issue



 Example: dollars earned by a Japanese firm from

exports may be deposited with a bank in London

  The London bank is free to use the funds for lending
to any other bank. the bank may lend it to a French
bank.



 Thus utility of currency is entirely outside the control

of the central bank of the country issuing the
currency.



 that is why Euro currencies also referred as offshore

currencies
  Even though the currency is utlised outside the
country of its origin, settlement will take place in its
country of origin



 When japanese firm deposited dollars with london

bank the london bank will keep its funds in a
newyork bank in its own name
  When London bank lends the amount to French bank
it will give instructions to New York bank which will
debit London bank account and credit French bank
account



 Thus settlement of dollars take place in new York

  Though Euro currencies are outside the direct control
of central bank of their issue but they are subject to
some form of indirect control



 Euro – currency market is not a foreign exchange

market
  It is a market for deposits with and in between
banks(interbank deposits) and loans by banks to
non – bank public



 It is a market in which foreign currencies are lent and

borrowed as distinct from foreign exchange market
where they are bought and sold
  It is a pool of short term deposits that help
commercial banks to transform into medium term
and occasionally long term international loans



 The transactions in the market involve huge amounts

running into millions of dollars
 The rate of interest is linked with the base rate of
LIBOR


 The interest on deposits and advances changes in
accordance with change in LIBOR


 US Dollar remains the leading currency traded in the
Euro – currency market
Euro currency market
classification

 Euro – credit market


 Euro – bond market

 Euro – currency (deposits) market

 Euro – Notes market
Euro credit market
 Most of the lending's takes the form of Euro credits



 Euro – credits are medium term and long term loans

provided by international group of banks in
currencies which need not be lenders or borrowers

 It belongs to whole sale sector of international capital
market and involve large amounts8

Euro - Bonds
 A major source of borrowings at Euro – markets is
through issue of international bonds called Euro –
Bonds



 Euro bonds are those sold for international borrowers

in several markets simultaneously by international
group of banks
 They are issued on behalf of MNC’s, international
agencies and governments


 In the past borrowers were largely from industrial
countries


 Now developing countries have entered the market
on a large scale
  Euro bond is different from foregn bond as a foreign
bond is on behalf of a non resident borrower but
sold in the domestic capital market of the issuing
country by a group of banks



 A Japanese firm may issue foreign bond exclusively in

west Germany
 Euro bond is outside the regulations of single country.

 Investors are spread world wide

 Types of euro bonds

1. Fixed rate bond
2. Convertible bond
3. Currency options
4. Floating rate note
Euro currency deposit market


 It represents the funds accepted by the banks
themselves. deposits in currencies outside their
home country



 The minimum deposi in ECD market is USD 50000 or

its equivalent
Euro - Notes
 These are the instruments of borrowings issued by
corporations in the Euro currency market with or
without underwriting support of the banks.



 This is a process where borrower approaches lender

without intermediation of banks and FI”S