16.2. INTERNATIONAL BOND & COMMERCIAL-PAPER MARKETS 615
approved by the local Central Bank. (Approval by one Central Bank suffices to sell
anywhere in the Union—the so-called “passport”.) But large-denomination bonds
escape all this hassle.
Simple contractsAs borrowers are generally of good credit standing, eurobonds
tend to be unsecured; thus, legal costs, as well as the expenses of bonding and
monitoring, are avoided. Since lenders have no control whatsoever over the borrower,
only well-reputed companies can play this game at a reasonable price; small players
often find the risk spread they would have to offer unattractive.
Tax gamesEurobonds, being anonymous bearer bonds, traditionally make it easier
to evade income taxes. Withholding taxes can be avoided by issuing the bonds in
tax havens, and mostOECDcountries have recently waived withholding taxes for
nonresidents.
Large issuesIssues belowusd100m are very rare, nowadays. Most issues are now
500-1000musdoreur, but even 5b issues are placed in a day or two (not including
the unofficial bookbuilding) and no longer raise eyebrows. In 2006, the largest issue
was 22b. Such a big placement allows relatively low issuing costs.
DisintermediationSince the mid-seventies, impetus for the growth of the eurose-
curities market has come from the generaldisintermediationmovement. Disinterme-
diation means “cutting out the intermediary”; that is, corporations borrow directly
from investors. This evolution was the result of two forces. First, in the 80s, many
banks lost their first-rate creditworthiness when parts of their loan portfolios turned
sour (due to the international debt crisis^10 and the collapse of the real estate mar-
kets^11 ) As a result, these banks were no longer able to fund at theAAArate, which
meant that top borrowers could borrow at a lower cost than banks could—by tap-
ping the market directly. Second, as a response to the lower profits from lending
and borrowing and to the stricter capital adequacy rules, banks preferred to earn
fee income from bond placements or commercial paper issues. Unlike operations
involving deposits and loans, this commission business creates immediate income
(rather than income from bid-offer spreads, received later on) and does not inflate
(^10) Emerging-market debt had ballooned after, in 1974, the oil price doubled (which made many
countries borrow heavily) and when a wave of inflation in the late 1970s had increased interest rates
to unusual levels (much of the oil debt was at floating rates). Borrowers defaulted or renegotiated
both their bank debt (in the “London Club”) and their Government-to-Government debt (in the
“Paris Club”).
(^11) One background item was that, in the early 1970s, the distinction between thrifts and banks was
lifted. Thrifts (or Saving&Loans) were originally cooperatives where members made time deposits
and got time loans, mostly mortgage loans. Unlike commercial banks, they could not take sight
deposits and give overdraft facilities. When the distinction was lifted, the old S&L were left with
far less controls than commercial banks. As a result they made many bad investments, contributing
to a boom and bust in real estate. The mess took years, and trillions, to sort out. The real-estate
bubble also spread to Europe and hurt also the old commercial banks, most notably in theus, the
Nordic countries and France.