Making of Euro

8/10/2019 Making of Euro

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What is Eurocurrency?

Eurocurrency is the term used to describe deposits residing in banks that are located outside the

borders of the country that issues the currency the deposit is denominated in. Euro-currency is any

currency banked outside its country of origin. Thus it is a non-domestic financial intermediary. It is

extremely large & has grown rapidly in a short interval. It has received a bad press from Central Banks,which continuous to call it a major cause of inflation & an obstacle to their control of domestic monetary

systems. For example: a deposit denominated in US dollars residing in a Japanese bank is a Eurocurrency

deposit, or more specifically a Eurodollar deposit.

Investopedia explains 'Eurocurrency Market'

Rates on deposits in the Eurocurrency market are typically higher than in the domestic

market, because the depositor is not protected by domestic banking laws and does not

have governmental deposit insurance. Rates on loans in the Eurocurrency market are typically lower

than those in the domestic market, because banks are not subject to reserve requirements onEurocurrency and do not have to pay deposit insurance premiums.

Eurocurrency Markets:Introduction

Up until the 1950s, most international trade was conducted in s (instead of the currencies of whatever

countries were trading). English banks facilitated international trade taking deposits and making loans so

that importers/exporters in other countries could simply sign over deposits in order to pay for goods.

Also, financing purchases was simple in that firms could simply take out loans in s from these English

banks.

In 1956, the Suez Canal crisis put downward pressure on the . Attempting to alleviate the pressure, theBank of England prohibited loans of s to foreign borrowers (the logic being that if the foreign investors

did not have pounds, they could not put pressure on the pound by selling them). The banks did not like

this because it took away a very profitable piece of their business.English banks decided to take deposits

and make loans in $US so that they could continue to finance international trade, except with $US

instead of s. This was the start of the Eurocurrency Market.

Eurocurrency is any deposit of a currency in a country other than that of the currencys origin. For

example, a deposit of $US in a bank in France is a deposit of Euro-dollars. The entire market for loans

and deposits in Eurocurrency is the Eurocurrency Market. The Eurocurrency Market does not have

buyers and sellers, it has lenders and borrowers. Note that the prefix Euro is historical in nature,referring to the fact that the market was initially centred in Europe. Today, however, a deposit of $US in

a Japanese bank is still referred to as Eurocurrency.

From relatively humble beginnings, the Eurocurrency deposits have developed into a market measured

in the trillions of dollars (as of 1989 the total value of eurocurrency deposits globally was over $5 trillion

US). The Eurocurrency market was created to avoid capital controls imposed by governments. It grew in

response to further capital controls, especially by the U.S. government (for example the Interest

Equalization Tax of 1963 applied to interest earned from $US loans to foreign firms (since repealed), and

Regulation Q (also since repealed) which put a limit on the rate that could be paid by American banks on

deposits).


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Generally, Eurobanks are able to pay higher rates on deposits and charge lower rates on loans than

purely domestic banks. They are able to do this because they can often avoid government regulations

such as reserve requirements and the need to pay deposit insurance. This lowers the cost of operations

for Eurobanks and these lower costs can be passed through to the clients. As well, eurocurrency loansare generally very large and the customers are well known firms. This means that the banks are not

subject to as much default risk and can charge lower margins on the large loans.

Of course, Eurobanks have to offer higher rates on eurocurrency deposits because of the higher risk to

the depositor. Part of the risk comes from the fact that eurobanks do not follow the same regulations as

domestic banks (these regulations are usually meant to protect depositors). However, a large part of the

extra risk comes from sovereign risk. This is the risk that governments impose new regulations that

restrict the movement of capital or control foreign currency transactions. This may mean that anyeurocurrency deposits held in that country become inaccessible for the owner.

While eurobanks will offer better rates than purely domestic banks, the difference between

eurocurrency rate sand domestic rate swill be limited by arbitrage. It must be that:

Euro-loan rate > Domestic deposit rate

Euro-deposit rate < Domestic loan rate

If one of these did not hold then arbitrageurs could simply borrow in the cheaper market and deposit in

the money in the in the market where they would get a higher return.

Generally, the advantage of eurocurrency rates over domestic rates runs somewhere between 25 and

100 basis points.There are several eurocurrency centres around the world where eurobanks conduct

most of their business. The largest are: London, the Cayman Islands, Bahrain, Singapore and some

International Banking Facilities that have been set up in theU.S. Approximately 80% of the

eurocurrency market involves banks lending to, and depositing with, other banks. This is done on a Bid-

Ask basis with the bid being the rate offered on deposits and the ask the rate charged on loans. A main

characteristic of eurocurrency loans is that they are usually floating rate (this also referred to as rollover

pricingor as cost-plus pricing) and are typically set as a percentage over LIBOR.

Origin & Creation of Euro Currency:

After the Second World War, the amount of U.S. dollars outside the United States increased enormously.

As a result, enormous sums of U.S. dollars were in custody of foreign banks outside the United States.

During the Cold War period, especially after the invasion of Hungary in 1956, the Soviet Union feared

that its deposits in North American banks would be frozen as a retaliation.It decided to move some of

its holdings to the Moscow Narodny Bank, a Soviet-owned bank with a British charter. The British bankwould then deposit that money in the US banks. There would be no chance of confiscating that money,


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because it belonged to the British bank and not directly to the Soviets. On February 28 1957, the sum of

$800,000 was transferred, creating the first eurodollars. Gradually, as a result of the successive

commercial deficits of the United States, the eurodollar market expanded worldwide. Thus, the

currencies involved in the Eurodollar market are in no way different from currencies deposited with

banks in the home country. It is only that Eurodollar is not under the orbit or surveillance of the

monetary policy, where the currency in their home country is under the regulation of the national

monetary policy

Creation of Euro Currency One can take the physical currency of a country & deposit it in a bank in

another country. Banks do hold currency of other countries but mainly for the convenience of travelers.

One can transfer deposits from within the country whose currency is in question to an offshore bank.

This may well be an overseas subsidiary of the very same bank with which the original deposit was held.

Growth of Euro-Currency:

Growth of Euro-Currency Growth 1950s. Eastern Europeans, afraid US would seize deposits to reimburseclaims for business losses as a result of Communist takeover of Eastern Europe. Currency deposited by

national governments or corporations in banks outside their home market. This applies to any currency

and to banks in any country.

Other Events ::

Other Events : Britain1957 prohibited banks from financing non-British trade. U.S.1960s discouraged

banks from lending to non-US residents. Oil crisis1970s led to huge amount of dollars amassed by

OPEC countries. They did not want them to be in the US because they were afraid that they would be

confiscated by the US government. Gave opportunity to those who wanted to deposit or borrow dollars

(later, other currencies, as well).

ATTRACTION:

ATTRACTION Lack of government regulation. Pay higher interest rates. Charge lower rates. Reserve

restrictions are less costly. Gave opportunity to those who wanted to deposit or borrow dollars (later,

other currencies, as well).

Structure of the euro money market[edit]

In regard to structure, the euro money market has been less concentrated over the past years. But

differences across the various money market segments continue to exist. The market that is least

concentrated is the unsecured money market segment. The money market segments that are highly

condensed are theforward rate agreement,other interest rate agreement and the cross currencyswap

segments.They constitute about 70% of the entire money market share.

The euro money market products are short term deposits,repos,EONIAswaps andforeign

exchangeswaps. There is an increase in the liquidity in these money market instruments that is

projected by the thinning in thebidoffer spread.

Features of Eurocurrency Market
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1. It is an international market and it is under no national control: It has come up as the most

important channel for mobilizing and deploying funds on an international scale.

2. It is a short term money market

3. Eurodollar markets are the time-deposit market. The deposits here have a maturity period

ranging one day to several months. Eurodollar is the short-term deposit. It is a wholesalemarket: It is so because Eurodollar is the currency that is dealt in only large units. Size of

individual transaction is usually above $1million.

4. It is highly competitive and sensible market:

High competitive : This market is characterized as highly competitive because the market is

growing and accepted internationally.

Sensible : The Eurodollar market is said to be sensible because it responds faster to the

changes in demand and supply of the funds and also reacts to changes in the interest rates.

The Euro Markets

The most important international financial markets today.

A) The Eurocurrency Market:

1. Composed of Euro-banks who accept/maintain deposits of foreign currency

2. Dominant currency: US$

B) Growth of Eurodollar Market caused by restrictive US government policies, especially

1. Reserve requirements on deposits

2. Special charges and taxes

3. Required concessionary loan rates

4. Interest rate ceilings

5. Rules which restrict bank competition.

C) Eurodollar Creation involves

1. A chain of deposits

2. Changing control/usage of deposit

3. Eurocurrency loans a. Use London Inter-bank Offer Rate- LIBOR as basic rate b. Six month rollovers c.

Risk indicator: size of margin between cost and rate charged.

4.Multicurrency clause Clause gives borrower option to switch currency of loan at rollover. Reduces

exchange rate risk

Euro Dollar:


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Euro Dollar Thus euro dollars are bank deposit liabilities denominated in U.S. dollars but not subject to

U.S banking regulations. For the most part, banks offering Euro dollar deposits are located outside the

U.S.

D) Eurobonds Bonds sold outside the country of currency denomination.

1. Recent Substantial Market Growth -due to currency swaps, a financial instrument which gives 2

parties the right to exchange streams of income over time.

2. Links to Domestic Bond Markets arbitrage has eliminated interest rate differential.

3. Placement underwritten by syndicates of banks.

Factors for the Expansion The Suez Crisis :

(1957) It was a crisis whereby the sterling credit facilities were unable to reach Britain provided speed to

the growth of Eurodollar Market. The British banks ultimately found a good substitute in dollars. Asthere was already available pool of USD held by residents outside US.

*Relaxation of Exchange Control and Resumption of Currency Convertibility : Resumption of currency

convertibility was seen in Europe (1958).

* SURPLUS EUROMARKET DEFICIT

* Political Factors : It was cold war led to growth of Eurodollar Market. As the communist countries had

a fear that their dollars deposited in banks in the US, would be seized due to hostilities. It was then the

Russian and European banks preferred to transfer their dollars with European banks.

* Balance of Payment Deficit of US : It means that the outflow of dollars from US increased to other

nations. It was in 1950 that US started facing the problem of deficit, but it was in 1958 that the problem

reached to the saturation point. The outflow of USD contributed as a factor for expanding Eurocurrency

market.

*Regulation Q : Regulation Q was a United States government regulation which fixed the maximum

interest payable by the banks in US and restricted the payment of interest on deposits less than 30 days.

Unlike US, Eurodollar market paid interest on the deposits of less than 30 days.

Participants in Eurocurrency Market

Participants in Eurocurrency Market Government International Organizations Central Banks Commercial

Banks Corporations MNC Traders Individuals Participants have contributed in the demand and supply of

the fund, in the following way:

Supply : Central Banks of various countries are the suppliers; they channel the fund through BIS.

Increase in the Oil Revenue of the OPEC has added to the fund. MNCs and the traders place their surplus

funds for the short-term gains.

Demand : Government demand for these funds to meet the deficit arising due to meet the deficit arising

due to the deficit in Balance of Payment and the rise in the oil prices. Commercial Banks needs extrafund for lending. Some also borrow for the better window dressing in the year-end.


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universal within the area, therefore the anxiety that was

previously apparent is there no more.

4. Single currency in single market makes sense.

Trade and everything else should operate more effectively and

efficiently with the Euro. Single currency in a single market seems

to be the way forward.

5. Rival to the "Big Two".

If we look out in the world today we can see strong currencies

such as the Japanese Yen and The American $. America and Japan

both have strong economies and have millions of inhabitants. A

newly found monetary union and a new currency in Europe could

be a rival to the "BIG TWO".

EMU can be self-supporting and so they could survive without

trading with anyone outside the EMU area.

This fact makes the Euro very strong already, and even George

Soros couldn't affect it (well, hopefully!!!!).

The situation that EMU is in is good as it seems that it can survive

on its own, with or without the help of Japan and U.S.A.

6. Prevent war.

The EMU is, and will be a political project. It's founding is a step

towards European integration, to prevent war in the union. It's a

well known fact that countries who trade effectively together

don't wage war on each other and if EMU means more happy

trade, then this means, peace throughout Europe and beyond (we

hope).

7. Increased Trade and reduced costs to firms.

Proponents of the move argue that it brings considerable

economic trade through the wiping out of exchange rate

fluctuations, but as well as this it helps to lower costs to industry

because companies will not have to buy foreign exchange for use

within the EU. For them, EU represents the completion of the

Single European Market. It is vital if Europe is to compete with

the other large trading blocs of the Far East and North America.

8. The Political agenda.

There is also a political agenda to European bank (the European

System of Central Banks -ESCB), the complete removal of national


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France. Some countries, such as France, have made their central

banks independent on the Germany model and therefore

arguably don't need to the EMU link to Germany to maintained

low inflation.The UK has gone a little way towards giving more

power to the central bank by publishing reports of monthly

meetings between the Chancellor of the Exchequer and the

Governenor of the Bank of England. This forces the Government

to justify its monetary policy publically and makes it harder for it

to use interest rates for short term political ends.

Disadvantages

1. The instability of the system.

Throughout most of the 1980s the UK refused to join the ERM

(Exchange rate mechanism). It argued that it would be impossible

to maintain exchange rate stability within the ERM, especially in

the early 1980s when the pound was a petro-currency and when

the UK inflation rate was consistently above that of Germany.

When the UK joined the ERM in 1990 there had been three years

of relative currency stability in Europe and it looked as though the

system had become relatively robust. The events of Sept. 1992,

when the UK and Italy were forced to leave the system, showed

that the system was much less robust than had been thought.

2. Over estimation of Trade benefits.

Some economists argue that the trade and cost advantages of

EMU have been grossly over estimated. There is little to be

gained from moving from the present system which has some

stability built into it, to the rigidities which EMU would bring.

3. Loss of Sovereignty.

On the political side, it is argued that an independent central

bank is undemocratic. Governments must be able to control the

actions of the central banks because Governments have been

democratically elected by the people, whereas an independent

central bank would be controlled by a non elected body.

Moreover, there would be a considerable loss of sovereignty.

Power would be transferred from London to Brussels. This would

be highly undesirabel because national governments would lose

the ability to control policy. It would be one more step down the

road towards a Europe where Brussels was akin to Westminster

and Westminster akin to a local authority.


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4. Deflationary tendencies.

Perhaps the most important economic argument relates to the

deflationary tendencies within the system. In the 1980s and 90's

France succeeded in reducing her inflation rates to German

levels, but at the cost of higher unemployent, For the UK, it can

be aruged, that membership of the ERM between 1990 and 1992

prolonged unnecessarily the recessional period. This is because

the adjustment mechanism acts rather like that of the gold

standard. Higher inflation in one ERM country means that it is

likely to generate current account deficits and put downward

pressure on its currency. To reduce the deficit and reduce

inflation, the country has to deflate its economy. In the UK, it

could be argued that the battle to bring down inflation had been

won by the time the UK joined the ERM in 1990. However, the UKjoined at too high an exchange rate. It was too high because the

UK was still running a large current account deficit at an exchange

rate of around 3 Dm to the pound. The UK government then

spent the next two years defending the value of the pound in the

ERM with interest rates which were too high to allow the

economy to recover. Many forecasts predicted that, had the UK

not left the ERM in Sept 1992, inflation in the UK in 1993 would

have been negative (ie prices would have fallen).The economic

cost of this would have been continued unemployment at

3million and a stagnant economy. When the UK did leave the

ERM and it rapidly cut interest rates from 10% to five and a half

%, there was strong economic growth and the current account

position improved, but there was an inflation cost.

Another problem that the early 1990s highlighted was that the

needs of one part of Europe can have a negative impact on the

rest of Europe. In the early 1990s, the Germans struggled with the

economic consequences of German reunification. There was a

large increase in spending in Germany with a consequent rise in

inflation. The Bundesbank responded by raising German interest

rates. As a result, there was an upward pressure on the DM as

speculative money was attracted into Germany. Germansy's ERM

partners were then forced to raise their interst rates to defend

their currencies. However, higher interest rates forced most of

Europe into recession in 1992 - 1993. Countries such as France

couldn't then get out of recession by cutting interest rates

because this would have put damaging strains on the ERM. The

overall result was that Europe suffered a recession because of

local reunification problems in Germany. Critics of the ERM andEMU argue that this could be repeated frequently if EMU were


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ever to be achieved. Local economies would suffer economic

shocks because of policies, forced on them, designed to meet the

problems of other parts of Europe.

One way around this would be to have large transfers of money

from region to region when a local area experienced a recession,

e.g. N. Ireland which suffered structural unemployment for most

of the post war period, has had its economy propped up by large

transfers of resources from richer areas of the UK with lower

unemployment. However, regional transfers are very small at the

moment unfortunately. Moreover to approximate the regional

transfers which occur at the moment in, say, Britain, there would

have to be a huge transfer of expenditures from national

governments to Brussels - just what anti Europeans are opposed

to

Growth of euro currency market:

While opening up of the domestic markets began only around the end of seventies, a truly

international financial market had already been born in the mid-fifties and gradually grown

in size and scope during sixties and seventies.

This refers to the well-known Eurocurrencies Market. It is the largest offshore market.

Prior to 1980, Eurocurrencies market was the only truly international financial market of

any significance. It is mainly an inter-bank market trading in time deposits and various debt

instruments. What matters is the location of the bank neither the ownership of the banknor ownership of the deposit.

The prefix "Euro" is now outdated since such deposits and loans are regularly traded

outside Europe.

Over the years, these markets have evolved a variety of instruments other than time

deposits and short-term loans, e.g. certificates of deposit (CDs), euro commercial paper

(ECP), medium- to long- term floating rate loans, eurobonds, floating rate notes and euro

medium-term notes (EMTNs).

The difference between Euro markets and their domestic counterparts

is one of regulation.

Eurobonds are free from rating and a disclosure requirement applicable to many domestic

issues as well as registration with securities exchange authorities.

Emergence of Euro markets:

1. During the 1950s, the erstwhile USSR was earning dollars from the sale of gold and other

commodities and wanted to use them to buy grain and other products from the West,

mainly from the US.

However, they did not want to keep these dollars on deposit with banks in New York, as

they were apprehensive that the US government might freeze the deposits if the cold war


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intensified.

They approached banks in Britain and France who accepted these dollar deposits and

invested them partly in US.

2. Domestic banks in US (as in many other countries) were subjected to reserve

requirements, which meant that a part of their deposits were locked up in relatively lowyielding assets.

3. The importance of the dollar as a vehicle currency in international trade and finance

increased, so many European corporations had cash flows in dollars and hence temporary

dollar surpluses.

Due to distance and time zone problems as well as their greater familiarity with European

banks, these companies preferred to keep their surplus dollars in European banks, a choice

made more attractive by the higher rates offered by Euro banks.

The main factors behind the emergence and strong growth of the Eurodollar markets were

the regulations on borrowers and lenders imposed by the US authorities which motivated

both banks and borrowers to evolve Eurodollar deposits and loans.Added to this are the considerations mentioned above, viz. the ability of Euro banks to

offer better rates both to the depositors and the borrowers and convenience of dealing

with a bank that is closer to home, who is familiar with business culture and practices in

Europe.

Difference between Euro currency market & Domestic money market.:

Difference between Euro currency market & Domestic money market. 1) The absence of

reserve requirements in Euro currency market means the absence of direct control by Central

Banks. Central banks are gradually feeling their way towards some partial solutions of this

problem, but the situation is certainly not as clear-cut as in each country's domestic markets.


Difference between Euro currency market & Domestic money market. 2) The absence of

international character means that like the foreign exchange market, the Euro market does

not exit in any particular location. It consists of participants all around the world linked

together by telephones, telexes & increasingly by computerized information systems. Thus, it

is a continuous market.


Difference between Euro currency market & Domestic money market. 3) There are number of

problems in euro currency market as compared to domestic market such as jurisdiction, the

acceptability of a freeze on deposits in one country by another country whose currency isbeing traded in the first country, booking a loan in one centre rather than another is merely

legitimate tax planning or tax evasion etc.s


Difference between Euro currency market & Domestic money market. 4) The Euro currency

market is purely wholesale market as compared to domestic market which is retain banking

market. Thus it is got relative freedom from regulations as compared to domestic markets.


Difference between Euro currency market & Domestic money market. 5) The Euro currency

market is almost exclusively concerned with matched deposit dealing. That is, each deposit


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(liability) of an international bank will tend to be matched by an asset (usually a deposit in

another bank) of the same currency & of similar maturity.


Difference between Euro currency market & Domestic money market. 6) In Euro currency

market loans are typically made for specific period & funded by a deposit of a similar period.This is very different from a domestic market where typically large amounts of lending are

done on the basis of a prime (or base) rate, with these loans being funded day to day in the

domestic overnight or short-date money market or from normal customer deposits.


Difference between Euro currency market & Domestic money market. 7) In Euro currency

market as compared to domestic deposits are time deposits at fixed interest rates, usually of

short maturity. Many of these deposits are on call , thus these can be withdrawn without

notice.

Difference between Eurobond vs. Eurocurrency loans:Difference between Eurobond vs. Eurocurrency loans Five Differences a. Eurocurrency loans

use variable rates b. Loans have shorter maturities c. Bonds have greater volume d. Loans

have greater flexibility e. Loans obtained faster

3Turnover of the euro money market[edit]

The total turnover of the euro money market was moribund in the second quarter of 2004although there was a huge surge in the turnover in the second quarter of 2003. Such

developments were discontinuous across the market. After this upturn in all the market

segments in the second quarter of 2003, there was a sharp downturn in the interest

rate,cross currencyand FX swaps in the second quarter of 2004. This was contrasted by a rise

in the turnover in the unsecured, secured and otherinterest rate swaps.Theforward rate

agreementand the short term securities also witnessed a rise. Thesecured segmenthappens

to be the largest money market segment.

Theovernight interest rateswap segment also saw a sharp downfall in the second quarter of

2004 although it had experienced a strong rise in the second quarter of 2003. this change is

attributed to the interest rate speculation which was high in 2003 but low in 2004. The

overnight interest rate swap segment of the money market is provided impetus by theEUIRIBOR-ACI.

The unsecured, secured and the overnight interest rate swap and the FX swap segments are

characterized by activities that have very short term maturity periods. The instruments like

the cross currency and other interest rate swaps are the money market instruments that are

traded at long maturities.

Youth voiceImpact of Euro Crisis on Indiabyblogbon July 9, 2012 inBlogBee,Youth Corner

Against the backdrop of Euro Crisis, the euro cup 2012 was a blessing and much needed

refreshment that relieved some of the tension by creating an atmosphere of mirth in Europe

as it is having a financial meltdown. It enthused the lost passion and flared up new hopes to

review the sinking economy of Europe. No doubt it was a spectacular sporting event.
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The Euro Crisis technically known as European Sovereign Debt Crisis (ESDC) which has made it

difficult or impossible for some countries in Europe to refinance their government

department without any assistance from third parties.

Today the Euro Crisis has engulfed the whole world in its financial distress. In India the

markets are swaying to the ripple effects of developments across the globe. The domestic

economy, growth and inflation numbers are struggling to cope with the consequences of

wars, turmoil and economic crisis of nations miles away.

Before we study the impact of the Euro crisis on India we must first understand the very

origin of this crisis and its present dynamics.

The Euro CrisisESDC - resulted from a combination of complex factors like globalization of

finance, easy credit condition during the 2002-2008 period that encouraged high risk lendingand borrowing practices, international trade imbalances and other technical issues, but the

most important of them are:

Euro CrisisBursting of Real Estate Bubbles:

During the 2008-2012 Global Financial Crisis the US has no longer been the favorite choice of

investors. When the economy was still in incipient stage, the investors chose Europe for

higher yields. This led to the generation of bubble after bubble. Bubble is nothing but a

giant pool of money. When these bubbles burst causing assets (housing and commercial) to

decline, the liabilities owed to global investors remained at full price and the crisis followed.

Euro CrisisFinancial Contagion:

The interconnection in the Global Financial System means that if one nation defaults in its

sovereign debt and enters into recession it also pulls other dependent countries intodepression. This is what happened in October 2011 when the net amount of Italian

borrowings from French banks was 366 billion dollars. Thus when Italy slumped into crisis, it

also jeopardized the economy in France.

Currently the most affected countries in the Euro Crisis are Greece, Ireland, Italy, Portugal,

and Spain. Many bailout schemes, finance pour in methods are being considered to pull them

out of the crisis. Greece has also adopted austerity measures to curb its debt.

Euro CrisisImpact on Indian

Now, lets examine the situation in India. The Euro Crisis has casted its spell on our Growth

sectors. Capital flows into the economy and exports are likely to take a slump. The sudden

surge in Foreign Institutional Investor (FII) has left India grappling with high inflation. Addingto the woes the Central Bank has raised the key interest rates.

The quantum of impact of Euro Zone Crisis on Indian markets is yet to be measured. The

inchoate European economy has resulted a slump in domestic industrial growth.

Unaddressed agricultural woes, rising interest rates and escalating fuel cost have

compounded the global factors. A series of scandals emerging from under the carpet have

diluted the faith of foreign investors.

The volatility in Indian Markets will persist till the European Crisis is resolved. There were

other very serious impacts of Euro crisis that have compounded and magnified as a challenge

to Indian economy. They are as follows:

a) Depreciation of Rupee:

Slow growth in Europe has coaxed the investors to invest in US dollar. This refuge to US dollarhas enabled the US dollar to appreciate as compared to other currencies in the world.
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Dropping exports coupled with rising crude oil prices has created immense pressure on Indian

rupee, which in turn has deprecated with respect to US dollar.

b) Slowdown in the Manufacturing and Service sectors:

Due to the contraction in European and American markets, the demand of goods and services

from countries like India and China have slowed down considerably. Inflationary pressure has

made the cost of products sky high thereby discouraging the consumers.c) Market visibility:

The global financial markets are volatile which in turn have impacted Indian Financial markets

too. High rates of inflation have forced Reserve Bank of India (RBI) to raise interest rates.

Prices of Gold and Silver have spiraled up, pushing the inflation rate still higher.

d) Cash hoarding:

Various Indian firms have cut down on expanding. They are holding their cash and saving it

for loan debts as well as shielding them from financial crunches.

In the wake of the above impacts, our government including RBI has claimed to form a

contingency bailout plan for European countries as well as for India.

The plan is not yet disclosed but economists believe we are prepared with monetary and

fiscal measures if necessary and try to insulate India from the shockwaves of the Europeancollapse. This plan may include lowering of interest rates and lowering the amount of money

that banks home to keep on deposit in the Central bank. This will ensure that the banks can

lend more money to firms so that they can keep hiring and expanding, a major driver of the

economy.

Coming back to Euro Cup the economy is not very different from football. Spain which won

the Euro Cup this year did not have any star player in their team but they won on the basis of

sheer team work, extraordinary coordination among themselves and a strong belief that they

can win. Just like Spain we all need teamwork among the relatively stable countries like India,

China, Brazil and a belief that we can do it to hammer out a solution for the Euro Crisis and

stabilize the economy.

Euro Banking:Euro Banking Concept Features Risk in Euro Banks Euro Banking & the Central Bank

Concept of Euro Banking:

Concept of Euro Banking Euro Bank is a financial intermediary that bids for time deposits &

makes loans in the offshore market. Usually, this will also mean that it deals in currencies

other than those of the country in which it is located.

Concept of Euro Banking:

Concept of Euro Banking It can be created in two ways- 1) One can take the physical currency

of a country out of the country & deposit it in a bank of another country. 2) A nationalcurrency deposit becomes part of the offshore currency market when it is transferred to a

bank outside the controlled national monetary system.

Features of Euro Banking:

Features of Euro Banking Unregulated institutions Not subject to interest rates ceilings.

Advantage of low tax location Margins are low & overheads cost low. Are subject to greater

risk than domestic banks. Unprofitable in nature. Less subject to pressures from government.

Risks of Euro Banking:

Risks of Euro Banking Exchange Rate Risk-due to assets & liabilities denominated in different

foreign currencies. Interest Rate Risk-mismatch of maturity between assets & liabilities as


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deposits are short term & lending is long term. Default Risk-default in payments-especially in

case of MNCs & governments.

Euro Banking & the Central Bank.:

Euro Banking & the Central Bank. The central banks often voice their concern about the

offshore markets. They are- While the central banks have a stronger control on creditcreation but this control is lost when the banking business slips to offshore markets.

Loan Syndicate (syndication):

Loan Syndicate (syndication) Concept Nature Advantages & Disadvantages Participants Charges on these

loans Quoting spreads in syndication Loan syndication procedure in India

Concept of Loan Syndicate:

Concept of Loan Syndicate A loan syndicate is a high structured group of financial institutions (primary

banks), formed by a manager (or a group of co-managers), which agree to lend a specific amount of loan

or money on common terms & conditions to a borrower. It involves a small group of knowledgeable &well capitalised banks that agree initially to provide the entire loan.

Nature of Loan Syndicate:

Nature of Loan Syndicate It is a term loan It has drawndown period. Repayment of the loan are made in

accordance with an amortisation schedule. Loan attached with grace period. It is a major negotiating

point between the borrowers & the lead bank. Are of revolving credit type. Flexibility.

Advantages of Loan Syndicate:

Advantages of Loan Syndicate Highly profitable & positive impact on the earnings of the banks-ex-

Citicorp, BOA. Improved risk-return performance because can diversify loans by country & type of

customer. High credit standing Safeguards such as credit insurance programmes, guarantees by parentcompany & host Government on loans to affiliates etc. reduces risk of international lending.

Disadvantages of Loan Syndicate:

Disadvantages of Loan Syndicate Risk analysis is highly complex It did not anticipate dramatic increase in

country risk Some bankers have relaxed their credit standards to compensate for weak domestic

demand & commercial demand for loans. Many loans are short term variable loansraise the question

of the ability of debtor country to service their external debt. Advantages of Loan Syndicate

Disadvantages of Loan Syndicate:

Disadvantages of Loan Syndicate If borrowings countries ae unable to meet their obligations on time, the

banks will be forced to roll over their loans indefinitely. The ultimate purpose of some loans is to financebalance of payments deficit. This type of loan does not improve the debtors countrys ability to generate

foreign exchange earnings.

Participants of Loan Syndicate:

Participants of Loan Syndicate Lead Banks Managing Banks Participating Banks There is a separate group

called co-managers.

Charges on Loan Syndicates:

Charges on Loan Syndicates Front end fees Agents annual fees

Charges on Loan Syndicates:


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Documents

Making of Euro