600 CHAPTER 16. INTERNATIONAL FIXED-INCOME MARKETS
In the sections that tell the tale of how the international markets emerged, we
still use the euro- prefix in its “international” meaning. For simplicity, when we say
euro- we also mean to include other international markets in the Middle East and
especially in the Far East (Tokyo, Hong Kong, Singapore). This largely conforms
to standard practice in the Americas and Europe.
The earliest activity in the international markets was in the deposit and loan
segments, the segments where banks act as intermediaries between investors and
borrowers. The emergence and growth of the eurobanking business was mainly the
result of low costs, which enable a more narrow bid-ask spread. The success of this
unregulated, wholesale banking market was soon imitated in the bond section and in
the short-term securities part of the capital market (eurobonds and eurocommercial
paper, respectively).
This chapter is organized in the following way: In the first section, we describe
the traditional eurobanking world: markets for short-term international deposits,
bank loans, and credit lines. We then discuss the counterparts of these banking
products in the securities markets, namely, the international bond and commercial
paper (CP) markets (Section 2). The final issue we bring up, in Section 3, is how
to compare one’s fixed-financing alternatives across currencies and markets. We
conclude in Section 3.
16.1 “Euro” Deposits and Loans
The banking segment is the oldest segment of the international markets. Even before
World War II, there was a small market forusddeposits and loans in London,
then the world’s financial heart. However, the market took off in earnest in the
sixties only. We start by explaining the reasons for its rapid growth since then. We
distinguish between circumstances that facilitated the emergence of the market and
reasons for its longer-term success. The proximate reasons had mostly to do with
bad economic-policy decisions and regulations that had unexpected consequences.
16.1.1 Historic, Proximate Causes of Euromoney’s growth
Liberalization of trade and exchange The eurodollar markets began to expand
in the fifties and sixties, after the lifting of the widespread exchange controls. These
controls had been imposed after World War II because of the scarcity of dollars (the
only internationally accepted currency at the time, since even thegbp’s international
use had become heavily controlled and regulated).
Note, however, that while liberalization of the exchange market is a necessary
condition for the emergence of euromoney markets, it is not an explanation of that
emergence.
TheUStrade deficit The liberalization of the European exchange markets was