PROJECT ON

EVOLUTION AND IMPLEMENTATION OF EUROCURRENCY

A Project Submitted to
University of Mumbai for partial completion of the degree
of
Bachelor in Commerce (Accounting and Finance)
Under the Faculty of Commerce

Semester VI

BY

Rahul Singh

ROLL NO: 46

Under the Guidance of

Mrs. Devanjali Dutta

K. M. AGRAWAL COLLEGE OF ARTS, COMMERCE AND

SCIENCE, GANDHARE, KALYAN (W)

2020-21
 Evolution and Implementation of Eurocurrency

PROJECT ON

EVOLUTION AND IMPLEMENTATION OF EUROCURRENCY

A Project Submitted to
University of Mumbai for partial completion of the degree
of
Bachelor in Commerce (Accounting and Finance)
Under the Faculty of Commerce

Semester VI

BY

Rahul Singh

ROLL NO: 46

Under the Guidance of

Mrs. Devanjali Dutta

K. M. AGRAWAL COLLEGE OF ARTS, COMMERCE AND

SCIENCE, GANDHARE, KALYAN (W)

2020-21

2
 Evolution and Implementation of Eurocurrency

INDEX

Sr. No. Title Pg. No.

1 Introduction 7

1.1 Introduction of Eurocurrency 7

1.2 Introduction of Eurocurrency market 10

1.3 Functions of Eurocurrency market 13

1.4 Origin and Growth 14

2 Research Methodology 25

2.1 Objectives 25

2.2 Scope of the study 31

2.3 Limitations of Eurocurrency 32

2.4 Data Collection 34

3 Review of Literature 36

4 Data Analysis and Interpretations 60

5 Conclusion 63

3
 Evolution and Implementation of Eurocurrency

DECLARATION

I the undersigned Mr. Rahul Singh here by, declare that the work embodied in this project
work titled “Evolution and Implementation of Eurocurrency”, forms my own contribution
to the research work carried out under the guidance of Mrs. Devanjali Dutta is a result of my
own research work and has not been previously submitted to any other University for any
other Degree/ Diploma to this or any other University.
Wherever reference has been made to previous works of others, it has been clearly indicated
as such and included in the bibliography.
I, here by further declare that all information of this document has been obtained and
presented in accordance with academic rules and ethical conduct.

Name and Signature of the Student

Certified by
Name and signature of the Guiding Teacher

4
 Evolution and Implementation of Eurocurrency

ACKNOWLEDGEMENT

To list who all have helped me is difficult because they are so numerous, and the depth is so
enormous.

I would like to acknowledge the following as being idealistic channels and fresh dimensions
in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me chance to do this
project.

I would like to thank my college and its Principal, Dr. Anita Manna for providing the
necessary facilities required for completion of this project.

I take this opportunity to thank our HOD, Prof. Sujeet Singh and Prof. Mahendra
Pandey for their moral support and guidance.

I would also like to express my sincere gratitude towards my project guide Mrs. Devanjali
Dutta whose guidance and care made the project successful.

I would like to thank my College Library, for having provided various reference books and
magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped me in
the completion of the project especially my Parents and Peers who supported me
throughout my project.

Signature of the Student

5
 Evolution and Implementation of Eurocurrency

K. M. AGRAWAL COLLEGE OF ARTS, COMMERCE AND

SCIENCE, GANDHARE, KALYAN (W).

CERTIFICATE

This is to certify that Mr. Rahul Singh has worked and duly completed her/his Project
Work for the degree of Bachelor in Commerce (Accounting & Finance) under the Faculty
of Commerce and his/her project is entitled, “Evolution and Implementation of
Eurocurrency” under my supervision.

I further certify that the entire work has been done by the learner under my guidance and
that no part of it has been submitted previously for any Degree or Diploma of any
University.

It is his/her own work and facts reported by her/his personal findings and investigations.

Course Co-ordinator Principal

Project Guide External Examiner

Internal Examiner

Date of Submission:

6
 Evolution and Implementation of Eurocurrency

CHAPTER 1

INTRODUCTION

1.1 Introduction of Eurocurrency

Eurocurrency is amount of currency held on deposit by any national governments or

corporations operating outside of their home market. Contrary to its name, the term does not
refer to euros that are deposited outside of Europe. It is a general term that applies to all
currencies that are deposited anywhere outside of its local country.

For example,

1. If India held their currency (RUPEE) in banks which are located outside of the country
(i.e., INDIA) is called “Eurocurrency”.

7
 Evolution and Implementation of Eurocurrency

2. A deposit of U.S. dollars (USD) held in a British bank would be considered

Eurocurrency, as would a deposit of British Pounds (GBP) made in the United States.

3. If you deposit Japanese yen at a bank in the United States, it is considered to be

Eurocurrency.

4. The Euro-prefix can be applied to any currency, so for example a deposit denominated
in Euros held in a Brazilian bank is a Euroeuro deposit.

5. South Korean won (KPW) deposited at a bank in South Africa would be considered
Eurocurrency, even if no European currency is involved.

Eurocurrency is an important part of the global financial system. Since globalization has led to
a sharp rise in cross-border transactions in recent decades, many banks find themselves needing
to access deposits of local currency in different regions throughout the world. This has led to a
large and active eurocurrency market, in which international banks regularly exchange and lend
foreign currencies with one-another out of their eurocurrency deposits.

8
 Evolution and Implementation of Eurocurrency

In addition to the rise of international transactions, another explanation for the use of
eurocurrency throughout the world concerns regulation. For many banks, borrowing from other
banks through the eurocurrency market can be a faster and more efficient way to access short-
term financing as compared to finding alternative sources of funding within their home market.

European investors were mainly driven by the two concerns of avoiding taxes in their own
country and protecting themselves against falling values of domestic currency. Eurocurrency
was designed to address such type of issues.

Following are the points about the Eurocurrency:

 The term eurocurrency refers to currency deposits held at banks outside of their country of
origin.
 The most famous example of eurocurrency is the Eurodollar, which involves U.S. dollar (USD)
deposits held outside the United States.
 Eurocurrency has become an extremely important facet of the global financial system, due to
factors such as globalization and financial regulations.

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 Evolution and Implementation of Eurocurrency

1.2 Introduction of eurocurrency market

. . . the volume and nature of transactions in Eurodollars, their large and active
turnover, and the wide range of their employment, has constituted an institutional change of
the utmost importance. It has created truly international money market and has developed a
structure of international interest rates that is entirely without precedent.
Paul Einzig (1973)

The eurocurrency market is the money market for currency outside of the country where it is
legal tender. The eurocurrency market is utilized by banks, multinational corporations, mutual
funds, and hedge funds, investment companies to avoid regulatory requirement of their
domestic countries. Normal middleclass people do not do trading in eurocurrency market.

The eurocurrency market not only operates in Europe but also in many financial centres around
the world. The Eurocurrency market then consists of those banks called Eurobanks that accept
the deposit and make loans in foreign currencies. In the Eurocurrency market, investors hold
short-term claims on commercial banks which intermediate to transform these deposits into
long-term claims of final.

borrowers. 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.

These bonds are in bearer forms. Hence, there is no ownership and no tax withheld. Starting
from London today it has expanded fast to the countries like Hong Kong and Singapore in the
far east, at present more than half of the transactions in the Euro markets take place outside the
Europe.

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 Evolution and Implementation of Eurocurrency

Early 1980’s witnessed liberalisation of many domestic economies and globalisation of the
same. Issuers from developing countries, were issue of dollars foreign currency denominated
in equity shares were not permitted are now able to access the International equity markets
through the issue of as intermediates instruments called Depository Receipts. The growth of
Eurocurrency market, also known as Eurodollar market, is one of the significant developments
in the international economic sphere after the World War II.

Following are the points about the Eurocurrency market:

 The term Eurocurrency is different from Eurodollar and should not be confused with the EU
currency, the euro.
 There is also a Eurobond market for countries, companies, and financial institutions to borrow
in currencies outside of their domestic market.
 Eurocurrency markets offer better rates for both borrowers and lenders, but in return they have
higher risks.

Balance Sheet of an Indian bank with a branch in Great Britain:

Liabilities Assets

Capital (in rupees) Cash (in rupees)

Rupee demand deposits Rupee loans

Rupee time deposits Rupee investments

Pound sterling deposits Pound sterling loans

Yen deposits Yen loans

Dollar deposits Dollar loans

Euro deposits Euro loans

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 Evolution and Implementation of Eurocurrency

Participants in Eurocurrency Market:

 Government
 International Organization
 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 extra funds for lending. Some also borrow for the better ‘window dressing’ in the year-
end.

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 Evolution and Implementation of Eurocurrency

1.3 FUNCTIONS OF EUROCURRENCY MARKETS:

The following are some functions of the Eurocurrency markets:

1. Cheap Source of working capital:

Eurocurrency loans attract lesser interest rate than the loans of the domestic economy.
This is because overhead costs are low. Since dealings are between banks with good credit
rating, the costs of credit checking, and processing are less. Lending rates can thus be fixed
lower than domestic market.

2. Liquidity:
Financial institutions find it highly profitable to hold their idle resources in
Euromarkets. As there are fewer restrictions in the markets, investors can make investments in
bearer securities. It has an advantage in the form of absence of tax withholding on interest. Most
of the Euro deposits have maturities ranging from less than a day to few months. On an average
80% of these deposits have maturity of six months.

3. Facilitates International Trade:

Eurocurrency markets provide easy loans, which facilitate international trade. Most
banks prefer this form of financing to traditional forms (such as letter of credit). It’s mainly for
two reasons: (i) Lower interest rate and (ii) easy procedural formalities.

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 Evolution and Implementation of Eurocurrency

1.4 Origin and Growth

The Eurocurrency market was originally started by commercial banks in Europe which accepted
interest-bearing deposits in currencies other than their national currencies and re-lent them
either in the same currency, their national currency or in a third currency. The market is no
longer specifically 'Euro’ in that external or offshore banking centres have been established in
many areas including the Caribbean and the Middle and far East. More generally a
Eurocurrency deposit may be defined as any short-term bank liability (whether to a resident or
non-resident). Prior to 1980 Eurocurrency markets are the only international financial market
of any significance. They are offshore markets where financial institutions conduct transactions
which are denominated in currencies of countries other than the country in which the institutions
are located.

The Eurocurrency market is outside the legal preview of the country in whose currency the
finances are raised in the market. The bank deposits and loans are denominated in
Eurocurrencies, particularly dollars. These markets consist of Asian dollar market, Rio dollar
market, Euro sterling, Euroswiss francs, etc other than the Eurodollar market.

FIVE COUNTRIES RESPONSIBLE FOR THE GROWTH OF THE

EURO-CURRENCY MARKET:

 China (fear that its Fx in USD would be blocked)

 USA (indeed blocked identifiable Fx in USD in1950, federal Reserve Act, regulation
‘Q’ and ‘M’; control and restrictions on borrowing funds in US in 1965, and
introduction of interest equalization tax in 1963)
 Korea (War broke out in 1950)
 Russia (erstwhile USSR) {because of their banking presence in Paris and London}
 UK (policy of not granting sterling loan outside sterling area in 1957)

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 Evolution and Implementation of Eurocurrency

Factors responsible for Growth:

a. Reduced Cost on deposits: The mandatory requirements of all banks is to insure deposits
accepted by them from the public The Eurocurrency market is unregulated which means
no obligation to insure deposits. This reduces their cost on deposits.

b. Permanent source of financing: In spite of risks involved eurocurrency market is a

permanent source of financing because:
i. The easiness and convenience in borrowing
ii. Bank’s ability to get return quickly.
iii. Borrower’s ability to raise credits in excess of availability.
iv. Lack of regulation

c. Instruments of Eurocurrency market: Eurocurrency transactions usually take form of

deposits and there are a variety of instruments:
i. Fixed rate time deposits
ii. Eurodollar certificate of deposits
iii. Tranche certificate of deposit
iv. Floating rate instruments

Components (compositions) of Eurocurrency Markets:

Compositions of Euromarkets are described in three areas viz.,

a. Market Participants – consisting of commercial banks, corporate banks, government and
central banks and private individuals.

b. Euro financial instruments

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 Evolution and Implementation of Eurocurrency

c. Transactional structure of Euro-markets – The euro currency market is entirely a

wholesale market. Transactions in the market are telephone linked or telecommunications
linked. They are focused upon London. London boats around one third of eurocurrency
markets. All euro currency transactions are unsecured credits and hence lenders pay
particular attention to borrowers’ status, name and reputation.

Eurocurrency Credit (Loans) Market:

Eurocredits are generally provided for short to medium term i.e., five to eight years. This
component of the market operates on a wholesale basis and individual euro-credits are
therefore, provided for very large amounts.

Eurocredits are always provided on a syndicated basis to distribute the credit risk over a large
number of participants. These loans are assessed on the basis of credit rating of the borrower.
Euro credits are provided both as revolving credits and as term loans. Eurocredits provide the
flexibility of borrowing with multi-currency option. Euro credits are always given on a floating
rate basis and are rolled over normally on six months basis i.e., interest rate is reviewed and
reset based on the ongoing applicable LIBOR plus specified mark up. Euro loans agreement
may provide for prepayment of the loan without the commitment charges at the time of periodic
roll overs.

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 Evolution and Implementation of Eurocurrency

Types of Eurocurrency Bonds:

1. Fixed rate bonds / Straight debt bonds:
It is a debt instrument which has a fixed maturity and a fixed coupon rate. Its face
value and principal are repaid in one go at maturity. This form of repayment is called
‘Bullet’ repayment. They can have maturity as long as 50 years.Bonds with shorter
maturity are called ‘Notes’. These Eurobonds are listed on London, Luxembourg, and
Singapore stock exchanges. An investor can buy them in primary and secondary
markets.

2. Floating Rate Notes (FRN):

Bonds having varying interest rates or coupon rates over their life are called as floating
rate notes. They are issued with maturity period varying from 5-7 years and their rates
are linked to six months LIBOR rates.

3. Sinking Fund Bonds:

These bonds provide for repayment of the principal in instalments during the lifetime
of the bond. Such bonds are issued by companies with average credit rating. The
repayments in instalments assures the investors about the solvency and credit worthiness
of the issuer. It helps to progressively reduce the liability of the issuer.

4. Junk Bonds:
Companies with very poor credit rating or entering into high risks business ventures
issue such bonds. These bonds carry coupon rates of at least 3-4% above the normal
rates. A characteristic feature of this bonds is the high turnover of investors. Such bonds
are used by corporate entities and individuals to make short term gains on temporary
surplus liquidity.

5. Zero Coupon Bonds:

These bonds don’t carry interest rates and are issued at discount to face value while
redemption takes place at face value at the end of its maturity. The investor earns capital
gains to the extent of difference between the discounted price and face value.

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 Evolution and Implementation of Eurocurrency

6. Deep Discount Bonds:

These bonds are also issued at discount and redeemed at the face value, difference in
values being the cumulative interest earned by investors at specified interest rat

Eurocurrency Notes Market:

Euro notes are instruments of borrowing issued by borrowers directly to investors without using
banks as intermediaries, with or without the underwriting support to the issue.
They have shorter maturities than bonds. Maturities normally range from 15 days to 5 years.
There are five types of euro notes used in this market:
1. Euro Commercial Paper (ECP):
Short term maturity issued for maturity of less than one year without
underwriting support of the banks are known as commercial papers. These
instruments are, therefore, issued by the borrowers with very good credit rating
wishing to leverage the same to raise resources at lower rates than lending rates
of banks. It is based on discount-to-yield basis. Investors in ECP may be money
market funds, insurance companies, pension funds and other corporate bodies
having short-term cash surpluses. Before ECP came into existence, its domestic
version, called simply commercial paper (CP) had been in existence for quite
some time. For investors, it represents an attractive short-term investment
opportunity, unlike a time deposit with financial institutions. A CP or ECP is a
discount instrument, purchased at a price below its face value and redeemed at
face value on maturity. For example, an ECP issued at $952.4 with a maturity
of 180 days will have a face value of $1000, if the discount rate is 10 per cent
p.a.
2. Notes Issuance Facilities (NIF):
Borrowing entity requires resources for the medium term but investors desire to
invest on short term basis this type of reconciliation is done by notes issuance
facility. The borrower issues short term notes supported by underwriting from
banks. The notes are redeemed on maturity by issue of fresh notes. Underwriters
covers the shortfalls in subscriptions.

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 Evolution and Implementation of Eurocurrency

3. Medium Term Notes (MTN):

Medium term, fixed interest rate instruments issued without underwriting
supported from the banks comes under medium term notes. These are issued for
a period ranging from one to ten years with standard maturity being five years.
These instruments are very popular with euro market investors. They are
normally listed to provide liquidity.
4. Bankers Acceptance (BA):
Instrument widely used in the US money market to finance domestic as well as
international trade is banker’s acceptance. The exporter (seller) draws a time or
issuance draft on the buyer (importer’s bank). Once the shipment is completed,
the seller hands over the shipping documents and L/C issued by his bank to the
exporter’s bank to discount the same and lend to the seller. BAs are highly
standardized negotiable instruments and are available in varying amounts. They
permit importers and other users to obtain credit on better terms than simple
borrowing.
5. Repurchase Obligation (REPO):
In these transactions the borrower ‘sells’ securities to the lender with
commitment to ‘repurchase’ the same at a predetermined rate on a fixed future
rate. The difference between the sale and repurchase prices represents the return
to the lender as interest. Effectively it represents the most secured form of
lending in the eurocurrency market.

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 Evolution and Implementation of Eurocurrency

6. Euro Certificate of Deposit (ECD):

A Certificate of Deposit is an evidence of a deposit with a bank. CD is a
negotiable or marketable instrument. Unlike a bank term-deposit, a CD can be
sold in the secondary market whenever cash is needed. Whoever is holding it at
the time of maturity receives its face value in addition to the interest due. Euro
CDs are issued by London banks. The interest on floating rate CDs is indexed
to LIBOR and Treasury Bill rate, etc. These instruments may be issued in sum
like $100000 or more. For fixed rate CDs, usually there is a single period
maturity when principal and interest rate paid. As regards floating rate CDs, their
timespan is divided into sub-periods of usually six months, when the rates are
reset.

Debt and Non-Debt Flows in Indian Capital Market:

Developed countries have been providing financial assistance to countries in earlier stages of
development for nearly half a century. The measurement of flow of external resources is
essential for the formulation of development strategies and the evaluation of assistance
programmes. Debt Flows in international capital markets include majorly external commercial
borrowings.

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 Evolution and Implementation of Eurocurrency

External Commercial Borrowings (ECBs):

External Commercial Borrowing (ECBs) is a key component of India’s overall debt. Policy on
External commercial Borrowings (ECB) is framed by the Government of India in consultation
with RBI. For the convenience of investors and borrowers, Government brings out the
consolidated ECB Guidelines in the form of a brochure.
External commercial borrowing is a complicated process. It is not the loan agreement alone that
is sufficient. It involves a number of other documents. The exact kind and number of documents
to be executed in an external commercial borrowing depend on various factors including the
nature of the lenders, that is, whether it is an international financial institution, a financial
institution of a country, an export import bank, a commercial bank, or a syndicate of such banks.

The extent and the period for which the funds are required by the borrower also play an
important role in the process. The purpose of the borrowing is also significant.
The important aspect of ECB policy is to provide flexibility in borrowings by Indian
Corporates, at the same time maintaining prudent limits for total external borrowings. The
guiding principles of ECB policy are to keep borrowing maturities long, costs low, and
encourage infrastructure and export sector financing which are crucial for overall growth of the
economy.
Government has been streamlining / liberalizing ECB procedures to enable Indian Corporates,
to have greater access to international financial markets.

External commercial borrowings (ECBs) include bank loans, suppliers’, and buyers’ credits,
fixed and floating rate bonds (without convertibility) and borrowings from private sector
windows of multilateral Financial Institutions such as International Finance Corporation.
ECB can be raised in terms of prevailing current ECB policy in the country formulated by its
government. This policy considers external debt management priorities prescribing the

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 Evolution and Implementation of Eurocurrency

quantum, maturity and use of funds raised in foreign convertible currencies. ECB policy
envisages sectoral approach and preference is given to infrastructure sector.
In India, External Commercial Borrowings are being permitted by the Government for
providing an additional source of funds to Indian corporates and PSUs for financing expansion
of existing capacity and as well as for fresh investment, to augment the resources available
domestically. ECBs can be used for any purpose (rupee-related expenditure as well as imports)
except for investment in stock market and speculation in real estate.
External Commercial Borrowings (ECBs) are defined to include commercial bank loans,
buyer’s credit, supplier’s credit, securitised instruments such as floating rate notes, fixed rate
bonds., credit from official export agent agencies, commercial borrowings from the private
sector window of multilateral financial institutions such as IFC, ADB, AFIC, CDC, etc. and
Investment by Foreign Institutional Investors (FIIs) in dedicated debt funds. Applicants are free
to raise ECB from any internationally recognised source like banks, export credit agencies,
suppliers of equipment, foreign collaborations, foreign equity holders, international capital
markets, etc.

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 Evolution and Implementation of Eurocurrency

Regulator of Eurocurrency in India and in Foreign Countries:

The department of Economic Affairs, Ministry of Finance, and Government of India with
support of Reserve Bank of India monitors and regulates Indian firm’s access to eurocurrency
markets. From time to time, they announce guidelines on policies and procedures for ECB and
Euro-issues.

List of Some Important Central Banks:

Country Name
USA Federal Reserve Bank
UK Bank of England
Japan Bank of Japan
Switzerland Swiss National Bank
Euro-Area European Central Bank
China People’s Bank of China
Australia Reserve Bank of Australia
Norway Bank of Norway
India Reserve Bank of India

List of Some Regularity Authorities:

Country Agency
USA Securities and Exchange Commission (SEC)
UK Financial Services Authority (FSA)
Japan (1) Financial Services Authority
(2) Securities and Exchange Surveillance Commission (SESC)
Switzerland Federal Department of Finance
Canada (1) Canadian Securities Administrators (CSA)
(2) Investment Industry Regulatory Organization of Canada
(IIROC)

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 Evolution and Implementation of Eurocurrency

Australia (1) Australian Prudential Regulation Authority (APRA)

(2) Australian Securities and Investment Commission (ASIC)
Germany Federal Financial Supervisor Authority
France Authorite Des Marches Financiers (AMF)
Financial Markets Authority
India Securities and Exchange Board of India

List of Eurocurrency Centers:

Country Currency
India Rupee
United States Dollar
Euro Member Euro
Japan Yen
Switzerland Franc
Australia Dollar
Canada Dollar
Austria Austrian Shilling
Belgium Belgium Franc
Netherlands Dutch Glider
France French Franc
Germany German Mark
Italy Italian Lira
Portugal Portuguese Escudo
Spain Spanish Peseta

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 Evolution and Implementation of Eurocurrency

CHAPTER 2

RESEARCH METHODOLOGY

2.1 Objectives

1. In the Eurocurrency market, interest rates paid on deposits are typically higher than
on the domestic market. This is because the depositor is not protected by the same
national banking laws and has no government insurance on deposits. Tariffs on
Eurocurrency loans are typically lower for essentially the same reasons than those in
the domestic market. Nor Eurocurrency bank accounts are subject to the same reserve
requirements as domestic accounts.

2. The main advantage of Eurocurrency markets is that they are more competitive. At
the same time, they will give borrowers lower interest rates and higher interest rates for
lenders. That is mostly due to less regulated Eurocurrency markets.

a. The growth of the market has helped to alleviate the international liquidity
problems.
b. The market helped to meet the short-term credit requirements of the business
corporations.
c. The supply of funds has enabled commercial banks in some countries to expand
domestic credit creation and helped ‘window dressing’.
d. The Eurocurrency has helped to accelerate the economic development of certain
countries including South Korea, Brazil, Taiwan and Mexico.

3. Because of its prominent feature i.e., globally it can be traded all around the world, it
has increased the money supply of many countries which in return helps the countries
to grow their economy.

4. International Financial centres of Eurocurrency Market:

A financial centre is ‘a city that has a high concentration of financial institutions and
where the financial transactions of a country are centralised’. Mumbai is India’s
financial centre. London, New York and Tokyo are the leading financial centres.

5.It is often seen as an advantageous source of capital and a beneficial way to receive
international funding because of its ability to switch to other foreign currencies. It is

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 Evolution and Implementation of Eurocurrency

also an attractive financial instrument because of local interest rates can be avoided due
to relaxed restrictions in comparison to local banking regulations. Therefore, many
individuals and businesses use foreign currencies as a way to protect themselves against
risks in foreign exchange and international trade.

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 Evolution and Implementation of Eurocurrency

Impact of Covid-19 on Eurocurrency

Unexpected and unpredictable, COVID-19 has already made a huge impact on global
economies and markets, including the eurocurrency market. Unemployment was at
peak, many people lost their jobs which made a huge negative impact on the economy.
Trading was stopped all around the world, there was less dealings and exchange of
Eurocurrency. The economic consequences of the shutdown in response to the COVID-
19 pandemic are difficult to predict. The IMF (2020) in its World Economic Outlook
from June 2020 declared the greatest worldwide downturn since 1930 and forecasted a
contraction of the advanced economies by 8%. Comparing to global financial crisis
(GFC) 13 years ago, governments and central banks all over the world have reacted
swiftly. Without these interventions, the world economy would have collapsed.
Nevertheless, the short-run negative economic impact of the pandemic is already bigger
than that of 2008/09.
The four main Eurocurrencies are the US dollar, the Euro, the British pound and the
Japanese yen: the currencies of the major economies of the world.

a. Impact on the US dollar

Since the end of the World War II, the US dollar has consistently functioned as a
safe harbour for investors caught by any sort of turbulence. The currency’s status
and reputation have been weakening, COVID and its cures may be lethal for the
dollar’s international dominance.
The U.S. economy suffered its worst period ever in the second quarter, with GDP
falling a historic 32.9%.

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 Evolution and Implementation of Eurocurrency

b. Impact on the Euro

The coronavirus crisis is an unprecedented shock for the European economy: its
effect on economic activity is clearly negative, and the doubts revolve around the
magnitude and duration of the impact. The 7th largest economy of the world fell
by 6.8%. It was the deepest annual contraction since 1995.

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 Evolution and Implementation of Eurocurrency

c. Impact on the British pound

British Pound is the sixth-biggest economy in the world which shrunk by 11.3%
in 2020- the most since “The Great Frost” of 1709 because of the coronavirus. An
estimated 1.72 million people were unemployed in the three months, 418,000
more than a year earlier and 202,000 more than the previous quarter, as the
country's labour market continued to be hit significantly by the Covid-19
pandemic.

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 Evolution and Implementation of Eurocurrency

d. Impact on the Japanese yen

The COVID-19 pandemic has had a severe impact on countries all over the world,
and Japan is no exception, given the significant economic downturn, Japan's
economy is likely to remain in a severe situation for the time being. The world’s
third largest economy shrank by an annualized 28.1% in April to June, more than
a preliminary reading of a 27.8%.

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 Evolution and Implementation of Eurocurrency

2.2 Scope of the study

Significance
While conducting research about eurocurrency below are the importance I have noted
and learnt:

(a) Unregulated Market: It is a cross border market hence no government has full
control over the transactions. There is a minimal government interference.
Essentially it is an unregulated market.

(b) Wholesale Market: The Eurocurrency market is essentially wholesale market. The
transactions include, on the one hand, large banks and, on the other hand,
governments, large government agencies or private corporations. The average size
of transactions, lending or borrowing, is quite large. On account of the extensive
scale of operations, the overhead expenses of Eurobanks are quite low. This feature
makes it a wholesale market rather than a retail market.

(c) Short term deposits: An outstanding feature of eurocurrency market is that the
interbank transactions constitute the largest proportion of its transactions. Deposits
in eurocurrency markets are primarily for a short period of time, the lending and
borrowing operations of euro-banks are essentially short term in nature.

(d) Time deposits: This market exists for savings and time deposits, fixed deposits and
recurring deposits.

(e) Eurodollar and LIBOR based Market: Eurocurrency interest rates are tied to a
variable rate base such as London Interbank Offer Rate (LIBOR). This reduces
interest rate risks.

(f) Highly Competitive Market: The Eurocurrency market is a highly competitive

market. The new banking institutions have almost unrestricted entry. As a result of
greater extent of competition, the margin between interest rates on deposits has
sometimes made the euro-banks to take greater risk in the matters of choice of
borrowers, security of loan and the maturity of loan. Euro-banks recently have
started to become more cautious about the element of risk.

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 Evolution and Implementation of Eurocurrency

(g) Distinct from Domestic Money: Although in many respects the eurocurrency
market is similar to the domestic market, yet it is distinct from the latter in a
significant respect. They have no central monetary authority, and they are free from
central monetary and exchange restrictions.

2.3 Limitations of Eurocurrency

The growth of this market has given rise to some serious problems, especially in the
sphere of monetary ability.

Central Banks and governments have uneasy about the Eurocurrency market ever since
it became visible in 1958. Its explosive growth baffles them, they know that something is going
on but they are seldom sure what it is. They know that one of its attractions for the participants
is that the Eurodollar market provides opportunities for avoiding many of the regulations that
they try to enforce on national money markets. Despite the many advantages of the
Eurocurrency as a vehicle currency, for carrying on world trade as a source of international
liquidity, there remains the unsettling prospect of a machine, controlled by no one, that can add
to the world’s money supply.

Reasons we don’t use Eurocurrency as one currency for the whole world:

1. The economic condition of each country is different:

Establishing a one world currency mean forming a central bank that has a sole
authority to set interest rates. A central bank must act fair and hence cannot formulate
economic policies favouring one region over another. It must formulate a uniform
economic policy across the world with the same interest rates everywhere no matter
what the economic condition of individual counties is. This is not practical considering
all countries at the global level.
2. Loss of financial autonomy of a country:
A single world currency would mean governments would have to give up their
autonomy over drafting economic policies benefiting them.
Considering the example of China. China is a country whose economic value of
exports is greater than its imports, it devalues its currency making its exports attractive
abroad. Why are exports attractive after devaluation? Because the same amount of
foreign can buy more Chinese currency and foreigners would prefer buying the
‘cheaper’ Chinese goods. How does China devalue its currency? By increasing its
money supply in the economy. When there is more money flowing into the economy,
the value of each individual paper currency decreases leading to its devaluation. China
can use two methods of increasing money supply. By printing more currency or by
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 Evolution and Implementation of Eurocurrency

decreasing interest rates. When interest rates are decreased, more people borrow money
from banks to spend and there is overall currency flow in the economy. If there is a
single world currency, then China would not be able to implement these economic
policies and their economy may even collapse.

3. Brewing up an economic crisis:

A one world currency may solve the problem of forex trading and currency
speculation, but it might inadvertently create more problems of its own. The central
bank of a one world currency having to act in a fair and unbiased manner. A uniform
policy will benefit some countries and may prove disastrous for some others.

DISADVANTAGES OF EUROCURRENCY MARKET:

1. For many economies it a new concept.
2. For many economies also considered that the speed of its growth or expansion
is Too fast.
3. For many economies, they feel this market gives a chance to avoid many a
regulations that they try to impose on their national money market.
4. Affects international monetary stability.

Risks of Eurocurrency Market:

The unregulated environment dictates many risks such as:

a. Foreign exchange volatility risk
b. Individual bank risk
c. System risk
d. Uncertainty in the interaction of legal system between host country and
home currency
e. Unsecured credit transaction risk

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 Evolution and Implementation of Eurocurrency

2.4 Data Collection

1. Primary Data

Primary data is basically the data observed or collected directly from the first-hand
experience. It is the data collected by the investigator himself/herself for a specific
purpose. The investigator collects data specific to the problem under study. There is
no doubt about the quality of data collected. If required, during research a researcher
can obtain to study the research in primary data format.
(i) Survey Method:
Survey method is a type of primary data collection for the research. A field of
applied statistics of human research surveys, survey methodology studies the
sampling of individual units from a population and the associated data collection
techniques such as questionnaire construction and method for improving the number
and accuracy of responses to surveys. Survey Methodology includes instruments or
procedures that ask one or more questions that may, or may not, be answered. The
essence of survey method can be explained as “questioning individuals on a topic
or topics and describing their responses”.

2. Secondary Data

A secondary data has been obtained from published as well as unpublished literature
on the topic from books, journals, newspaper, research articles, websites,
magazines, etc. It is less expensive method. The investigator is not personally
responsible for quality of that data. In most of the studies investigator finds it
impracticable to collect first-hand information on related issues as such he makes
use of the data collected by others. The sources of secondary data can be broadly
classified under two heads:

 Published sources

 Unpublished sources

Published Sources:
The various published sources are reports of official publications of central and
state governments such as abstract of Indian union, economic survey of government
of India and Ministry of finance. Published sources also can be reports of

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 Evolution and Implementation of Eurocurrency

international bodies such as ‘World Bank’, ‘International Labour Organizations’,

‘Statistical offices of United Nations’.
Publications of autonomous and private institutes such as trade and
professional bodies of Federation of Indian chambers of Commerce and Industry,
The Institute of Chartered Accountants, The Institute of Foreign Trade. Sometimes
a researcher can also collect data from financial and economic journals such as
‘Indian Economic review’, ‘Reserve Bank of India Bulletin’, ‘Indian finance’ and
annual reports of joint stock companies and corporations.

Unpublished Sources:
All statistical material is not always published. There are various sources of
unpublished data such as records maintained by various government and private
offices, studies made by research institutions, scholars, etc. Such sources can be
used where necessary.
The sources of unpublished data are many they may be found in diaries, letters,
biographies and also maybe available with scholars and research workers, trade
associations, labour bureaus and other public/private individuals and organizations.
Researcher must be very careful in using secondary data. He must make a scrutiny
because it is possible that the secondary data maybe unsuitable or maybe inadequate
in the context of problems which researcher wants to study.
I have used secondary sources of data for my research work which includes
textbooks and various articles published by various publications and private
institutes.

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 Evolution and Implementation of Eurocurrency

CHAPTER 3

REVIEW OF LITERATURE

1. (Gourinchas, 2019) Today, more than ever, we live in a “dollar world”.

2. According to the research conducted by Mehrling, 2013, 2015 financial globalization

requires more than negative integration. We develop a mid-range theory that explains positive
integration as the outcome of technocratic agency within a specific structural context. The
structure of credit money is “essentially hybrid,” meaning its creation and circulation involve
both public and private elements.

3. Braun in 2018 stated our theory focuses analytical attention on monetary technocrats –
primarily central bankers – defined as public servants acting in and through private markets.
Monetary technocrats have agency precisely because they are situated at the boundary between
the public and private spheres. While acting by transacting in private financial markets, their
state-granted privileges make them dominant actors in those markets, allowing them to “govern
through financial markets”.

4. Murau in 2018 stated our empirical analysis is limited to the Eurocurrency markets in the
1970s, the sophistication of the institutional infrastructure underpinning today’s offshore US
dollar system suggests that the scope conditions for our theoretical argument are broader.
Henning, 2015; McDowell, 2017 told that the infrastructure of protection that monetary
technocrats improvised in the 1970s has expanded into a “global financial safety net”.

5. According to Sahasrabuddhe in 2019 and Tooze in 2018 the lending facilities of the
International Monetary Fund (IMF) multiplied, regional financing arrangements mushroomed,
governments built up their foreign currency reserve assets, and the Federal Reserve maintained
currency swap lines with a substantial number of central banks, six of which are unlimited and
unconditional.

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 Evolution and Implementation of Eurocurrency

Bauerle Danzman, 2017; Rey, 2015 At the same time, central banks sought to maintain
monetary governability in a world in which domestic economic conditions increasingly became
subject to a “global financial cycle”.
Krampf in 2019 and Thiemann in 2019 stated the development of inflation targeting and
macroprudential regulation can both be seen in that light.
Burn, 2006 researched- there is broad agreement that the origins of the most recent historical
period of financial globalization can be traced to the birth of the Eurocurrency market in 1957
– well before the collapse of the Bretton Woods system in the early 1970s.

6. Bell, 1973 and Johnston, 1983- According to their view, the growth of the Eurocurrency
market during the 1960s was driven by banks seeking to evade domestic restrictions, as well as
by the growing demand for trade-related credit.

7. Block, 1977; Cohen, 1978; Helleiner, 1994; Kirshner, 1997; Strange, 1986; Underhill,
1991- According to them due to the growth of Eurocurrency market governments made active
decisions, on the basis of both domestic and international considerations, to liberalize domestic
financial markets and eliminate capital controls.

8. Scharpf in 1999 gave A theory of “negative integration” which underpinned the notion that
“the unique mobility and fungibility of money” means that unlike goods or people, money
moves easily across national borders. Consequently, the United States and Britain could create
a “more open financial order” simply by providing “financial market operators an extra degree
of freedom”.

9. Germain, 1997 to explain why positive integration is needed for the globalization of
financial markets, it is essential to understand the hybrid nature of (international) money.

10. Hockett & Omarova, 2017; Ricks, 2016 stated that “In a credit money system, certain
actors’ liabilities are other actors’ money. Private banks enjoy a state-granted privilege in that
system in which they can create money in the form of bank deposits”.

11. Mehrling, 2013; Pistor, 2013- While most of the monetary instruments used in economic
transactions are the liabilities of private financial institutions, payment settlement between them

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 Evolution and Implementation of Eurocurrency

(and between them and the central bank) requires public money, issued by the central bank.
This entanglement between public and private instruments and institutions makes the monetary
system both “essentially hybrid” and inherently hierarchical.

12. According to the research conducted by Gabor & Vestergaard in 2016 and Murau in 2017
Central banks sit atop the hierarchy because their liabilities (‘reserves’) serve as settlement
money for commercial banks, and thus as the ultimate liquidity backstop of the system. The
second layer consists of the liabilities of commercial banks (‘deposits’), which serve as money
for the household sector and the non-financial corporate sector. A third layer consists of the
liabilities of shadow bank institutions (such as money market funds and repo dealers), which
serve as “shadow money” for other financial and non-financial firms.

13. Ricks, 2016 The Euro-currency market, in which banks accept deposits and issue loans
denominated in foreign currencies, can be understood as a form of shadow banking system at
the international level.
Ruggie, 1982 told the regulatory tools of the Bretton Woods period – reserve requirements,
caps on deposit rates, international exchange controls – were premised on the assumption that
money creation occurs onshore: US banks create money by issuing loans to borrowers in the
United States using the US dollar as unit of account, UK banks do the same in the United
Kingdom using Pound Sterling, etc. In other words, this “embedded liberalism”.

14. Ruggie, 1982 From this perspective, there was no need to manage infrastructural
entanglements at the international level. However, that money could also be created offshore,
denominated in a currency different from that of the country hosting the issuing bank.
Murau, 2018 Banks located in London began to issue US dollar-denominated loans in the late
1950s, thereby creating ‘Eurocurrency’.
Burn, 2006 As private banks in other developed countries and borrowers in developing
countries joined the Eurocurrency market, a global currency area emerged that existed in
parallel to many domestic monetary systems.

15. Murau in 2017 and Özgöde recently in 2019 stated the negative integration hypothesis
considers liberalization a sufficient condition for the global expansion of the Eurocurrency
market, the hybridity view of money implies that this expansion could not have occurred

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 Evolution and Implementation of Eurocurrency

without substantial public institution-building at the international level. The domestic liabilities
of commercial banks, trade ‘at par’ – i.e., at a one-to-one exchange rate – with the liabilities of
the central bank. This par relationship is underpinned by a sophisticated public backstop
infrastructure for bank deposits, notably in the form of public supervision, deposit insurance,
and lender-of-last-resort guarantees. Next, consider shadow bank liabilities, such as money
market fund shares. Such “shadow money” lacks explicit public backstops but tends to benefit
from market actors’ expectations that concerns over “systemic risk” will bring central banks
“accommodation”.
16. Awrey, 2018 The same need for public protection exists at the international level. If
anything, the moneyness of Eurodollar deposits is even more institutionally demanding. Even
if a central bank decides to backstop the foreign-currency liabilities of its domestic banks, its
ability to do so is limited by its own foreign-currency reserves. The problem is further
exacerbated by the difficulties in assessing counterparty risk that result from depositors, banks,
and borrowers often residing on three different continents – as in the paradigmatic case of
petrodollar ‘recycling.’ The task of building institutions that could alleviate these problems in
the emerging offshore US dollar system was assumed by monetary technocrats.

17. Keohane, 2005; Milner, 2009 The international agency of national technocrats is well
established in IPE. Two broad mechanisms explain the international role of technocrats with
formally domestic mandates. First, frequent, and regular meetings of national technocrats with
their foreign peers inspire mutual trust and spur cooperative behaviour at the international level.
Second, domestic technocrats are often part of international epistemic communities or global
networks. Both mechanisms apply to central bankers. Although they are appointed by and
receive their mandates from government, they enjoy significant autonomy in their interactions
at the international level. Their capacity to act with relative autonomy is bolstered by their
(carefully cultivated) epistemic authority in a notoriously complex field.

18. An important scope condition for central bankers’ international agency is the organization
of international monetary cooperation (Block, 1977; Cohen, 1978; Fioretos, 2019). The Great
Depression and World War II reduced the world to a “financially underdeveloped state”
(Mehrling, 2015, p. 313) and decimated the international network of monetary technocrats
(Ikenberry, 1992, p. 293). Only with the Bretton Woods system was the network gradually
revived (Russell, 1973). By the 1960s, central bank governors and their deputies had

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 Evolution and Implementation of Eurocurrency

established “a close personal network and high degree of consultation,” institutionalized in the
form of monthly meetings at the BIS in Basel (Spero, 1980, p. 153). Helleiner (1994, pp. 16,
18) has described the “increasingly sophisticated ‘regime’ based around the Bank for
International Settlements” in the 1970s, while Kapstein (1992) has stopped just short of calling
international central bank circles in the 1980s an epistemic community. Recent research on
international monetary history, spurred by newly available archival material, provides ample
new evidence of the international agency of central bankers from the 1960s to the 1980s
(Altamura, 2017; Green, 2016; Kershaw, 2018; Mourlon-Druol, 2015).

19. Braun, 2018a; Hockett & Omarova, 2015 stated- The IPE literature of the international
role of monetary technocrats that also accounts for their special role as intermediaries between
the public and the private components of the credit money system. Monetary technocrats are
different from other technocrats in that they directly participate in private markets. They govern
not only through administrative authority but also (and often primarily) through transactions in
financial markets. This special status of monetary technocrats is defined as publics servants
acting in private markets.

Figure 2 illustrates the special position monetary technocrats occupy at the interface between
states and financial markets.

Figure 2. States, markets, and monetary technocrats in a credit money system.

The hallmark of hybrid credit money systems is public-private infrastructural entanglement.

Each side provides an indispensable infrastructure to the other – central banks depend on private

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 Evolution and Implementation of Eurocurrency

financial actors to implement monetary policy, while private financial actors depend on central
bank liquidity backstops. Regardless of the specifics of their mandates, monetary technocrats
therefore pursue two key goals – the governability of the economy, and the protection of private
financial institutions from destabilizing losses. Failure to attain these goals hampers financial
markets in general, and international markets in particular. We therefore use the concept of
“positive integration” to capture that part of central bankers’ institutional work that involves
coordination with their foreign peers.

20. Braun, 2018 - To manage this infrastructural entanglement for the purpose of establishing
and sustaining monetary governability, central banks have always shaped financial markets –
by changing how they transact with private counterparties, by privileging certain types of
financial instruments over others, by building up entire market segments, or by lobbying
governments for policy changes. Abrupt changes on either side of the infrastructural
entanglement can put monetary governability in jeopardy. These changes can originate on the
public side, as in the case of international monetary regime changes or on the private side. When
private actors innovate and financial markets cease to operate according to the central bank’s
models and expectations, central banks may reign in innovation and/or adapt their governance
techniques. In the case of the Eurodollar market, central banks chose to adapt, notably by
entering into Eurodollar transactions with their domestic banks.

21. Henning, 2015; McDowell, 2017 stated - The second goal of central bankers is to protect
the issuers and users of credit money against losses. This protection, which takes the form of
regulatory oversight and liquidity backstops, is an integral part of the infrastructure of private
money creation and is closely intertwined with the notion of “systemic risk”. An important
recent contribution has traced the formation of what the authors call the doctrine of “unlimited
protection,” which “eliminates the risk of depositor loss and prevents any bank of significant
size from failing, regardless of whether the bank poses a true systemic risk”. The problem of
protection becomes a lot more complicated when domestic financial institutions issue debt
instruments denominated in foreign currencies, notably Eurocurrency deposits. Since central
banks may themselves run out of foreign-currency reserves, offshore credit money raises the
question of an international lender of last resort. The long and varied history of the “global
financial safety net” offers various examples of attempts to establish emergency lending
mechanisms to mitigate the risks associated with cross-border lending and investments.

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 Evolution and Implementation of Eurocurrency

In sum, governability and protection capture two types of mutual infrastructural entanglements
between public and private financial actors – public governance depends on the private issuers
of credit money while the private issuance of credit money depends on public backstops. The
expansion of the Eurocurrency market in the 1970s required not only liberalization but
substantial “positive integration.” This integration was primarily achieved by the monetary
technocrats tasked with managing the infrastructural entanglements of the hybrid credit money
system. Their institutional work was driven by concerns for monetary governability and
protection of private financial actors.
The globalization of the Eurocurrency market during the 1970s was a pivotal development in
post-war financial history.
Figure 3 contextualizes this development in a broader timeline.

Figure 3. Evolution of the Eurodollar market and the rise of financial globalization.

22. Mehrling, 2016 When the Bretton Woods system was established “there were no
functioning private markets” at the international level when banks in the City of London started
dealing in US dollar-denominated bank deposits, this was immediately recognized as a
“revolutionary reform of the monetary system”. From the early 1960s, partly driven by the
newly introduced Interest Equalization Tax (1963), US banks began to use the Eurocurrency
market for their own purposes, turning it into an offshore segment of the New York money
market. During this consolidation period, ‘roundtrip’ transactions, originating and ending in the
US, came to dominate the Eurocurrency market.

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 Evolution and Implementation of Eurocurrency

While Nixon’s closing of the gold window in 1971 thrust the publicly administered monetary
system into crisis, the Eurodollar market continued to expand during the 1970s, as it became
the dominant channel to recycle petrodollars following the 1973 oil shock (Eichengreen, 2019;
Kapstein, 1994; Spiro, 1999). Between 1970 and 1977, the market’s net size increased
sevenfold, from USD 60 billion to USD 400 billion (Burn, 2006, p. 19). The growth of the
private market was accompanied by significant growth of central banks’ ‘official Eurocurrency
holdings’ – foreign-currency deposits with Eurobanks used by central banks as substitutes for
reserves held in US assets such as treasuries. For US banks, foreign lending became the single
largest source of revenue in the 1970s. (Guttentag & Herring, 1983, p. 2). On the borrower
side, developing economies accumulated foreign debt on a massive scale. The foreign interest
payments of the twelve largest borrowers increased from $1.1 billion in 1970 (6 percent of their
export earnings) to $18.4 billion in 1980 (14 percent of export earnings) (Lipson, 1981, p. 603).

While the Euro-currency market included offshore lending denominated in currencies other
than the US dollar, Eurodollar deposits dominated, their market share ranging from 72 per cent
to 84 per cent between 1964 and 1984 (Battilossi, 2010, p. 31). Following the ‘Volcker shock’
in 1979, which helped trigger the debt crisis in Eurodollar-inundated Latin America, the
Eurodollar market emerged as the backbone of the international monetary system (Mehrling,
2015; Murau, 2018).

Our empirical analysis focuses on the Standing Committee on the Euro-currency Market,
established in April 1971 by the G-10 central banks under the auspices of the BIS.3 Our primary
sources consist of the archival documents of the Standing Committee, which include
background papers and correspondences (henceforth: ‘SCEM’, 1971–79) and the informal
records of the conversations taking place in the Committee (henceforth ‘Records’, 1971-
1978).4 The Standing Committee consisted mostly of board-level central bank representatives
who met regularly in Basel to discuss and, in some instances, coordinate policies related to the
international monetary and financial system. Established at the beginning of the most turbulent
period in international monetary affairs since the interwar years, the Standing Committee had
no rivals as the effective headquarters of global monetary governance.

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 Evolution and Implementation of Eurocurrency

At a moment of unprecedented epistemic uncertainty, when even experts had trouble making
sense of international monetary developments, much of the Standing Committee’s power
derived from its unique position as a high-level forum for collective technocratic puzzling and
decision-making. Our analysis reveals a consistent focus on maintaining domestic monetary
governability. Central bankers in Basel puzzled over the inflationary impact of the Eurodollar
market, negotiated over the appropriate regulatory regime, and built an infrastructure for data
collection and dissemination. At the same time, central banks were eager to provide protection
for private banks active in the Eurodollar market. Initially they supported the market via their
own Eurodollar deposits and swaps with their domestic banks, before providing an implicit
backstop guarantee in 1974. With these efforts, central bankers meeting in Basel produced a
level of positive integration going well beyond mere liberalization. Monetary technocrats
helped globalize the Eurodollar market.

From February 1971 to February 1973, as the Bretton Woods system was disintegrating and
inflation rising in advanced economies, the work of the Committee was dominated by concerns
of monetary governability. Most committee members worried that “the Euro-currency market
has an adverse impact on the effectiveness of domestic monetary policy” (Records, 18
February 1971, Annex I, p. 2). It was this concern that drove the conversion of the Ad hoc
Committee on the Euro-currency Market into the Standing Committee, which was tasked to
study “the conditions under which the Euro-currency market has an inflationary impact and
possible ways and means of reducing or eliminating such impact” (Records, 18 April 1971, p.
1). In other words, the Committee was born from “epistemic uncertainty” (Nelson &
Katzenstein, 2014, p. 362) and tasked with establishing a shared understanding of the causes
and consequences of the Eurodollar market that could serve as new convention to guide the
Committee’s work.

During the first few meetings, the Standing Committee struggled to reconcile the Euro-currency
market phenomenon with its then-conventional notions of fractional reserve banking and the
money multiplier. This theoretical perspective exaggerated the connection between reserves
(liabilities of the Fed), onshore US dollar deposits (liabilities of US banks), and offshore
Eurodollar deposits (liabilities of non-US banks). In practice, dramatic changes in bank liability
management in the 1960s and 1970s had loosened this connection (Battilossi, 2010; Walter &
Wansleben, 2019). Simply put, banks learned to manage their liabilities with a view towards

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 Evolution and Implementation of Eurocurrency

smoothing payment outflows, thus reducing their need for reserves (or, in the case of Euro-
banks, their need for US onshore deposits). The debate over how to reconcile outdated monetary
theories with the fast-evolving reality of the Eurodollar market took place both in a series of
technical papers (Fratianni & Savona, 1971; Friedman, 1969; Klopstock, 1970; Machlup,
1970) and inside the Standing Committee. There, members disagreed on whether autonomous
money creation occurred in the Euro-currency markets via “the multiplier effect of the
Eurodollar market, which some regard as enabling the Euro-banks to create deposits by granting
credits, as national banking systems do” (SCEM, 42-5578 to 42-5587, p. 4). Pointing to
epistemic uncertainty, the Banque de France referred to measurement problems and admitted
that it had tried to study “the extent of credit creation in the market,” but “without much
success” (Informal Records, 17 February 1971, pp. 7–8). In general, Committee members found
it “difficult to differentiate between Euro-currency flows and short-term capital flows in
general” (Informal Records, 8 January 1972, p. 6).

To settle those questions, the BIS circulated a questionnaire in January 1972 to assess the impact
of the offshore Euro-currency markets on the governability of the onshore monetary systems.
The central banks’ answers to the questionnaire differed substantially. Germany, France, Italy,
Netherlands, Belgium, Switzerland and Canada affirmed that “inflows from or outflows to the
Euro-currency market […] have at times interfered with the achievement of the objectives of
[our] central bank (a) with respect to domestic monetary management [… and] (b) with respect
to the balance of payments” (SCEM, 42-028367). Sweden, the United Kingdom and the United
States were agnostic, whereas Japan reported having encountered no problems (Records, 12
February 1972, p. 1). At the same time, Canada, France, Italy, Switzerland and the United
States agreed that “flows of Euro-funds had at times helped central banks achieve their
objectives,” whereas Belgium, Germany, Japan, Sweden, and the Netherlands disagreed
(Records, 12 February 1972, pp. 1-2). Eight central banks believed that the Euro-currency
market had “adverse effects on the general inflationary climate,” whereas Canada and the
United Kingdom did not. The Federal Reserve argued that the effect was inflationary only if
central banks fueled the Euro-currency market “with their own placements” (Records, 12
February 1972, p. 2).

While epistemic uncertainty in the Standing Committee was genuine, the answers to the
questionnaire, in particular those of the Bank of England, were conspicuously consistent with

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 Evolution and Implementation of Eurocurrency

national interests (Burn, 2006; Helleiner, 1994). Where continental Europeans and the Federal
Reserve saw potential downsides for governability from the expansion of the Eurodollar
market, the Bank of England saw potential upsides. In spite of the inconclusiveness of these
results and the ensuing discussions in Basel (Records, 12 February 1972), a report on The
Monetary Impact of the Euro-Currency Market listed three areas of agreement: short-term
money inflows increased inflationary pressures, thus interfering with domestic monetary
governance; international flows were increased by the flow of Euro-funds; and the efficacy of
direct controls was “real but limited” (SCEM, 42-6927 to 42-6938, p. 2).

The main effect of the interim report, however, was that the initial assumption guiding the
Committee’s work could not be proved. The questionnaire did not yield clear evidence that the
Euro-currency markets were inflationary. Instead, central bankers reassured themselves that
that Euro-currency markets did not unduly undermine domestic monetary governability.

Following the interim report, the Committee was tasked by the G-10 central bank governors
with formulating joint regulatory responses to two main questions: First, should the G-10
central banks treat offshore money creation in a given monetary jurisdiction as identical to
onshore money creation and therefore introduce international regulations for banks in the Euro-
currency markets such as “reserve requirements, guide-lines or ceilings on bank credit” (SCEM,
42-6927 to 42-6938, p. 2); and second, should central banks intervene in the Eurodollar market
to restrict the movement of funds and apply policy measures such as controls and open market
operations? (SCEM, 42-6927 to 42-6938, p. 3).

From April 1972, a clear conflict emerged that pitted the Bundesbank and the Banca di Italia
against the Bank of England, with the Federal Reserve positioned in the middle (Altamura,
2017, pp. 89-93). By September 1972, two concrete regulatory proposals were on the table.
The Bundesbank suggested that all major countries should impose restrictions such that “the
interest rate attraction of the market and its inflationary impact would be considerably reduced”
(Records, 9 September 1972, Annex, p. 2). The Bank of Italy proposed that a “regulated area”
– the European Common Market member countries in favour of regulation – should be shielded
from undesired foreign inflows through reserve requirements and a “Bardepot” (Records, 9
September 1972, Annex, pp. 2–3). Further refined by BIS staff in January 1973 (Records, 10
February 1973, p. 1), these proposals presented – as the Bank of England admitted in an internal

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 Evolution and Implementation of Eurocurrency

memo – “an entirely coherent framework for dealing with problems of monetary flows between
the regulated and the outside world” (cited in Altamura, 2017, p, 97).

The Committee, however, was unable to reach a consensus. In February 1973, it decided not to
implement any of the plans for an international regulatory regime. The Bank of England even
requested that the work on Euro-currency market regulation be discontinued (SCEM, 43-33958,
p. 1). Was this outcome, which represented a clear victory for the Bank of England, influenced
by the deliberations in the Standing Committee? The archival record indicates that the question
of monetary governability was at the centre of these deliberations. The Bank of England did not
‘win’ by convincing its German and Italian peers that monetary governability was not a
problem, which clearly it was in 1970s Britain (Schenk, 2010). Instead, the discussions in the
Standing Committee continued to be marred by epistemic uncertainty, and the central banks
advocating regulation were unable to decide the governability debate in their favour. During
the meetings in late 1972 and early 1973, central bankers who initially held strong pro-
regulation views accepted the narrative that the Euro-currency markets had some positive and
some negative effects on monetary governability (Records, 9 December 1972 & 6 January
1973). In the decisive meeting of February 1973, there was no majority in the Standing
Committee to implement international regulations because the case had not been convincingly
made that the offshore Eurodollar market impeded the working of the onshore monetary system
(Records, 10 February 1973).

Once stricter regulation was off the table, the Standing Committee reinforced its efforts to
overcome epistemic uncertainty over the nature and dynamics of the Euro-currency markets by
collecting and disseminating data about the market. The archival records show that the G-10
central banks decided to collect and publicize data about flows and exposures with the explicit
goal of improving private bankers’ ability to assess borrower risk in the Eurodollar market.

The market-facing orientation of the Standing Committee’s data gathering effort was clearly
stated in the letter that launched this work. On 7 February 1974, the Secretary General of the
OECD wrote to his BIS counterpart that it would be desirable “for the operations of private
bankers, if more data could be collected and, if possible, published in a suitable form” (SCEM
44-5070). In a December 1975 meeting of the Standing Committee, Kit McMahon of the Bank
of England emphasized the importance of better Euro-currency statistics “so that

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 Evolution and Implementation of Eurocurrency

governments and the banking world would have more to go on in judging how countries’
situations were developing” (Informal Records, 8 December 1975, p. 2, emphasis added). His
colleague, John Sangster, defended the idea of publishing data on bank lending to developing
countries on the grounds that “the banks that provided these data in the first place would very
much like to see the consolidated figures for these countries, from the point of view of their
own credit risk management” (Informal Records, 8 December 1975, p. 7, emphasis added).

Beginning in the mid-1970s, banks located in non-G10 financial centres became increasingly
important players in the Eurodollar market. Obtaining data from offshore centres such as
Singapore, Hong Kong, Bahrain, and Panama therefore turned into a key concern for the
Standing Committee. At that point, other international organizations for the first time became
interested in the Eurodollar market. The central bankers in the Standing Committee, however,
were strictly opposed to any incursions into their Euro-currency jurisdiction. When Kit
McMahon of the Bank of England warned that a “number of international institutions – the
IMF, the IBRD, the OECD and even the EEC – were becoming increasingly interested in the
market, he urged his colleagues to ramp up the BIS’s data operation in order to ward off
potential demands from these much larger organizations ( Records, 8 December 1975, p. 1). A
BIS staff note to Committee Chair René Larre noted a strong preference among Standing
Committee members “to have such discussions here in the Standing Committee, rather than
leave them to be done by the OECD” (Records, 7 November 1975). René Larre himself was
“strongly opposed” to the idea of cooperating with other institutions, “whose presence at
meetings would turn the committee into a forum for useless controversies and polemics”
(Informal Records, 8 December 1975, p.5).

The controversy highlights the Standing Committee’s self-identification as the technocratic

headquarters of the Eurodollar market, distinct from other, more intergovernmental fora of
global financial governance. It also shows that central bankers sought to shield the Euro-
currency markets from external intervention. In sum, the Standing Committee changed its view
of the Euro-currency markets radically between 1971 and 1974. Starting off with grave
concerns about their negative consequences for monetary governability, the Committee over
time redefined their role from regulators to data infrastructure providers for the Euro-currency
markets.

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 Evolution and Implementation of Eurocurrency

Protection: towards a lender-of-last-resort infrastructure

A fundamental problem of the international monetary system in the 1970s was – and still is
today – the absence of an international lender of last resort (Fischer, 1999; Guttentag &
Herring, 1983; McDowell, 2017). When domestic banks accept deposits – and thus incur
liabilities – in foreign currencies, the central banks’ ability to backstop the banking system is
limited by their own holdings of (or access to) foreign currency reserves. This exacerbates the
problem of protection – the backstopping of private credit money by public central banks
(Awrey, 2018). Our historical analysis reveals that central banks grappled with this problem
from the beginning, using official Eurodollar deposits and swaps to stabilize the Eurodollar
market. Following the 1973 oil shock, Euro-banks assumed the quasi-public function of
‘recycling’ the large capital surpluses of oil-exporting countries. When the 1974 bank failures
exposed the vulnerability of that arrangement, monetary technocrats took the decisive step of
providing a coordinated commitment to backstop the market if necessary.

Central bank support, writ small: official deposits and swaps to manage Eurobanks
During their puzzling over the inflationary impact of offshore money, the members of the
Standing Committee made a striking discovery – to a considerable extent, they had themselves
fueled the growth of the Euro-currency markets. Dating back to at least 1960 (Informal Records,
1 June 1971, p. 18), most central banks in the Standing Committee had conducted sizeable
Eurodollar transactions with their domestic banks, in the form of official deposits and swaps.
Driven by a desire to stabilize liquidity conditions for the benefit of private banks and of the
central bank’s domestic monetary control, these interventions called into question central
bankers’ initial view of offshore money as a purely private, market-driven innovation. Official
deposits and swaps became a major focus of the Standing Committee’s work in the second half
of 1971 (Informal Records, 8 May, 1 June, 10 July and 6 November 1971).

Central bank deposits – which did not, as a rule, require government approval – were part of
the institutional infrastructure of the Eurodollar market. Central banks increased the Eurodollar
liabilities of their domestic banks by using them as an alternative to conventional foreign
exchange assets, such as US government debt. Consider a central bank selling US dollar-
denominated assets, such as US government bonds, and transferring the proceeds to a Euro-

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 Evolution and Implementation of Eurocurrency

bank (a non-US commercial bank accepting Eurodollar deposits). In that case, this ‘official
deposit’ created both a new Eurodollar liability and a corresponding asset – a deposit with a US
bank – for the Euro-bank. Crucially, such central banks deposits “would probably not be placed
with foreign commercial banks if there were no Eurodollar market” (SCEM, 42-5578 to 42-
5587, p. 4). Official deposits thus increased the net size of the Eurodollar market, with
potentially inflationary consequences.

The second type of transaction central banks used for governability purposes were US dollar
swaps with commercial banks, whereby central banks sold US dollars spot rate and repurchased
them forward. Such swaps could serve a variety of monetary policy purposes: They enabled
central banks to control domestic liquidity, slow down increases in their official monetary
reserves, repay external debt, facilitate trade finance, and regulate conditions in the exchange
market (SCEM, 42-4899 to 42-4910, pp. 2-3). At the same time, swaps provided additional
Eurodollar liquidity to Euro-banks. While the Bundesbank thought that swaps expanded the
Eurodollar market and wanted to restrict their use, the Banque de France argued that swaps
were an important monetary policy instrument and that central banks “should not destroy their
existing systems of domestic monetary control for the sake of marginal result” (Records, 10
July 1971, p. 5). While US dollar swaps were used by the majority of central banks, the heaviest
users were the Bank of Italy and the Bank of Japan who pursued industrial policy and trade
finance goals in addition to monetary policy objectives (Records, 10 July 1971).

Official deposits and swaps were the Eurodollar equivalent of domestic-currency open market
operations – a way of managing the infrastructural entanglement between private financial
institutions and public monetary policy. By engaging in these transactions, and by using the
Eurodollar market to govern domestic monetary and financial conditions, central banks
effectively condoned – and bolstered – the Eurodollar market in their jurisdictions. According
to estimates of the BIS, 20 percent of the net Euro-currency market consisted of central bank
deposits (Records, 8 May 1971, p. 4). The BIS revealed that it had itself made substantial
placements (Records, 1 June 1971, p. 4).

Standing Committee members, baffled by these numbers, resolved that G-10 central banks
“should not place money directly in the Euro-currency market” except for “exceptional reasons”
(Records, 1 June 1971, p. 10). In this case, the Standing Committee was able to reach a

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 Evolution and Implementation of Eurocurrency

consensus over policy measures which were swiftly implemented by all participating central
banks. Members felt the need to publicly demonstrate agency. The Bank of England’s Jeremy
Morse noted that “there was a lot of agitation going on for something to be done about the Euro-
dollar market and it might be a good idea, therefore, to feed those who were calling for action
with something” (Records, 1 June 1971, p. 10). The financial press reported that the G10 central
banks would “abstain from making further deposits in the market,” possibly even reducing
outstanding central bank deposits (Financial Times, 15 June 1971).
The unanimity in the Standing Committee notwithstanding, however, central bank compliance
with the informal “standstill agreement” to scale back official deposits proved weak. In early
1972, the Bundesbank’s Otmar Emminger suggested that central banks coordinate their
diversification out of dollar assets (such as US government bonds) into Eurodollar deposits,
while calling for “a mechanism for shifting central-bank funds, when necessary, out of the Euro-
currency market back to the United States” (Informal Records, 6 April 1972, pp. 5, 11). Fears
expressed by Committee members in 1978 that their own restraint “would do nothing to stop
the growth of other [non-G10] central banks’ Euro-currency deposits” (SCEM, 49-4513, p. 8)
suggest that official deposits remained an indispensable component of the Eurodollar market
throughout the 1970s.

The failure of central banks to comply with the Standstill Agreement shows that they depended
on this tool to both protect their domestic banks in the Eurodollar market and to exercise control
over domestic monetary conditions.

Central bank support, writ large: setting up an implicit backstop for Eurobanks
After the Standing Committee had been on the brink of deciding to regulate the Eurodollar
market in February 1973, the oil shock in October 1973 brought about an “epochal” shift in its
priorities (Altamura, 2017, p. 99). Monetary technocrats came to see the Eurodollar market as
the solution to the problem of “petrodollar recycling.” The quadrupling of the global oil price
between October 1973 and March 1974 created large dollar surpluses in the oil-exporting
countries, and deficits for oil-importers. These imbalances created a financial intermediation
problem – the surpluses were too large for OPEC countries to spend them entirely on imports,
while oil-importing countries needed to borrow in dollars in order to pay for dollar-denominated
oil. Although the metaphor of ‘petrodollar recycling’ was apt, it is more instructive to think of
the issue as two distinct questions: First, whose liabilities should absorb the oil-exporting

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 Evolution and Implementation of Eurocurrency

countries’ savings in the form of Eurodollar credit money balances? And second, who should
finance the greatly increased current account deficits of the oil-importing countries?

In principle, the OPEC countries could have done what Japan and China did in the 2000s by
investing surpluses directly in US treasuries. In fact, in an agreement that would remain secret
for more than two decades, the US encouraged Saudi Arabia to do precisely that (Spiro, 1999;
Thompson, 2017, p. 96). Such direct investments in the liabilities of Western governments and
international organizations would have been compatible with a public solution to the second
problem: Assuming the role of intermediaries, Western governments and international
organizations could have extended loans to developing countries in need of dollars. Such
recycling via public balance sheets – the “oil facility” established by the IMF in June 1974 was
one example (Kapstein, 1994, p. 68) – would have been in line with how international liquidity
had been intermediated during the Bretton Woods system. Indeed, most G-10 central banks
initially expected this to be the default solution (Kershaw, 2018, p. 305). Even private US
banks, aware of the risks they would incur in the absence of an international lender-of-last-
resort infrastructure, “felt recycling was the proper domain of the government” (Spiro, 1999,
p. 37).

The key actor pushing for recycling via private financial institutions was the US Treasury, then
led by William E. Simon (Kershaw, 2018). At the time European banks offered higher interest
rates than American banks and attracted deposits not only from oil exporting countries but also
from US residents. Fearing that a public solution to the recycling problem would further
diminish capital inflows to the United States, Simon pushed for recycling via financial markets.
Bolstered by this US Treasury support, a consensus quickly emerged among bankers and central
bankers that petrodollars should be absorbed by private banks (both American and European),
and that these banks should make loans to developing countries, as illustrated in Figure
4 (Altamura, 2017). These loans financed more than oil imports. By mitigating the need for
internal adjustment in the Global South, petrodollar recycling also bolstered demand for the
exports of fragile developed economies – developing countries became the “borrowers of last
resort” of the global economy (Griffith‐Jones, 2000). This unprecedented expansion of private
Eurodollar lending to developing countries could not have occurred without a concomitant
expansion of a public infrastructure of protection. One element of that infrastructure was export
credit guarantees through which national governments subsidized private bank loans to foreign

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 Evolution and Implementation of Eurocurrency

importers. Another key element was the efforts by monetary technocrats to replicate, at the
international level, the semblance of an infrastructure of protection for the Eurodollar market.
Figure 4. Petrodollar recycling via the Eurodollar market.

In the wake of the oil shock, the lender of last resort question featured prominently in Basel.
The Standing Committee noted that despite the absence of an international lender of last resort,
“the principal central banks could not, in practice, be indifferent to the emergence of major
liquidity problems in the market” (SCEM, 45-1137). The problem was aggravated by
uncertainty over who would be responsible for foreign branches operating within a central
bank’s jurisdiction but in a currency other than its own. In April 1974, Larre circulated a
questionnaire (SCEM, 45-0528), submitted by the Dutch central bank, that sought information
about each central bank’s interpretation of its “responsibilities as a lender of last resort in
relation to Euro-banking operations.” The response of the Bank of Sweden (SCEM, 45-04972)
stated particularly clearly that in the unlikely case of a Swedish bank suffering losses on its
foreign-currency loans, “it seems unlikely that the central bank would refuse to sell, within
limits set by the size of its reserves, the currencies which the commercial bank requires to meet
its foreign liabilities.”

The Dutch questionnaire also inquired about “the attitude of the central banks towards their
own Euro-market placements.” After the Committee members had agreed, in 1971, to freeze
their official placements in the Euro-currency markets, a 1974 paper on “the impact of the oil
situation” was ambiguous (SCEM, 44-5651). It noted the need to “avoid adding to the process
of ‘reserve creation’ through the Euro-currency market by continuing to abstain from increasing
their official Euro-currency deposits.” On the other hand, the paper highlighted that the
presence of official central bank deposits during calm periods was likely to create the
expectation among commercial banks that central banks would also stand ready to provide
liquidity under conditions of market stress. By this logic, abstaining from official placements

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 Evolution and Implementation of Eurocurrency

“could, in the case of a liquidity shortage developing in the Euro-market, conflict with central
banks’ responsibilities as lenders of last resort.”

Goodhart, 2011; Mourlon-Druol, 2015-Circulated in April 1974, the lender-of-last-resort

questionnaire could not have been timelier. It was followed, in the summer of 1974, by the two
most consequential financial events of the 1970s. First, surging interbank lending rates
precipitated the first major run on the US interbank money market, the most prominent victim
of which was Franklin National Bank, which had moved aggressively into the Eurodollar
market. Second, on 26 June 1974, Bankhaus Herstatt, a mid-sized German bank that was active
in the Eurodollar market, failed. The fallout from Herstatt’s sudden collapse led to the
establishment of a second major committee – the Committee on Banking Regulations and
Supervisory Practices, subsequently the Basel Committee on Banking Supervision – and had a
lasting impact on banking supervision and regulation.

The Franklin National and Herstatt episodes immediately preceded what could be described as
the Eurodollar-market’s “whatever it takes” moment. In meetings of G-6 finance ministers and
central bank governors over the weekend of 6-8 September, the pressure on central banks
mounted to produce a reassuring announcement regarding lender-of-last-resort support for the
Euro-currency markets (Goodhart, 2011). Following a meeting in Basel on 9 September, the
G-10 governors finally published a short joint communiqué on 10 September, the final
paragraph of which read:
The Governors also had an exchange of views on the problem of the lender of last resort in the
Euro-markets. They recognised that it would not be practical to lay down in advance detailed
rules and procedures for the provision of temporary liquidity. But they were satisfied that means
are available for that purpose and will be used if and when necessary.
As is usually the case when it comes to the lender-of-last-resort question, the statement is
deliberately vague. It is even more surprising, therefore, that the October edition of Euromoney
opened with an editorial that claimed that the actual G10 agreement went above and beyond the
official communiqué:
International bankers were profoundly disappointed by the apparent lack of progress at the
September Basel meeting of central bankers on support for commercial banks. … In fact,
however, not only was there a wider degree of agreement in July then was revealed at the time,
but by September this had hardened into a firm commitment by all the countries present (the

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 Evolution and Implementation of Eurocurrency

group of 10 plus Switzerland) on these points: 1. Banks that get into liquidity difficulties with
the national boundaries will be supported by the central bank concerned. […] These points were
not spelled out in the official communication because of legal constraints on some of the central
monetary authorities involved.
The next informal meeting record of the Standing Committee, dating from December 1975,
makes no reference to the communiqué. The respective folder in the BIS archive does, however,
contain a copy of the Euromoney editorial, followed by a hand-written note in French, signed
“RF,” that says (clearly referring to the editorial): “Erroneous interpretation of the ‘Basel
Accord’ of 10.9.1974” (“Interpretation erronnée de ‘l’Accord de Bâle’ du 10.9.1974”). We have
not been able to determine who wrote the note, nor when.
What had the G-10 central bankers agreed on in Basel? The question was hotly debated among
monetary technocrats as well as market participants at the time. Two finance professors and
contemporary observers, citing “off-the-record discussions we have had with policy-makers
who were directly involved,” speculated that the Euromoney editorial was inaccurate
(Guttentag & Herring, 1983). At a 1977 symposium, however, both Kit McMahon (Executive
Director, Bank of England) and Henry C. Wallich (Board of Governors, Federal Reserve)
presented papers on the international lender-of-last-resort question, describing the 1974 Basel
statement as an expression of the underlying understanding among central bankers that lender
of last resort support for Eurodollar banks would be forthcoming if necessary
(McMahon, 1977; Wallich, 1977). Referring specifically to McMahon and Wallich, an IMF
paper concluded that “the infrastructure for providing international assistance by lenders of last
resort was in place” (Johnson & Abrams, 1983). The question of the true meaning of the
statement notwithstanding, contemporary market participants clearly interpreted it as signalling
central bank support for the Eurodollar market. When, in November 1974, Euromoney asked
six financial experts whether they expected the “agreement on support for banks in trouble”
was “likely to prove of any great practical importance,” one respondent highlighted the positive
“psychological effect” of the communiqué, while another expected it would “bolster
confidence” (Goodhart, 2011).
Ultimately, the question of technocratic intent is secondary to our argument, which hinges on
market perception. From this perspective, we argue, the message of protection given by the
Standing Committee was a necessary condition for rapid expansion and globalization of the
offshore US dollar system in the 1970s.

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 Evolution and Implementation of Eurocurrency

23. Fumiaki Takeda, Toshihiro Nishikage - Up until now, we have developed banking
machines for various kinds of paper currency using neural networks. In this paper, we report an
enhanced neuro-recognition system to increase the number of recognition patterns using axis-
symmetrical mask and two image sensors. One sensor's purpose is discrimination for a known
image and another one is exclusion for an unknown image. Concretely, we implement the
proposed method to an experimental system, which has two sensors, arranged one above and
one below the moving banknote. Finally, we apply this proposed method to Euro currency,
which will be issued in 2002, using dummy notes. The effectiveness of the proposed method is
shown, numerically.

24. Cetin Ciner We investigate relations between Eurocurrency interest rates using frequency
domain methods, which permit us to decompose test statistics into short-term and long-term
causality measures. We document significant linkages between international interest rates.
Specifically, we show that the euro plays an increasingly important role in global money
markets. In fact, a subperiod analysis suggests that the euro interest rate leads the US dollar rate
during the recent financial crisis. We discuss the implications of the findings for understanding
global monetary policy dynamics as well as modeling and forecasting of short-term interest
rates.

25. Zijun Wang, Jian Yang, Qi Li This paper examines linkages among major Eurocurrency
interest rates during 1994–2002. Eurocurrency interest rate causal linkages are found to be
much stronger with additional allowance for contemporaneous causality test results than the
inference based solely on Granger causality tests. The impact of U.S. interest rates is clearly
not dominant in the Eurocurrency markets, while the Japanese interest rates are found to be
quite influential. German interest rates both cause, and are caused by, several other
Eurocurrency interest rates. By contrast, interest rates on the new currency, the Euro, do not
have a substantial influence on other Eurocurrency interest rates, which underscores its
emerging status.

26. Jhy-Lin Wu, Show-Lin Chen One stylised fact to emerge from the empirical analysis of
interest rates is that the unit‐root hypothesis in nominal interest rates cannot be rejected.
However, using the panel date unit‐root test IM, Pesaran and Shin (1997), we find support for
the mean‐reverting property of Eurocurrency rates. Thus, neither a vector‐error‐correction

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 Evolution and Implementation of Eurocurrency

model nor a vector autoregressive model in differences is appropriate for modelling

Eurocurrency rates. Instead, conventional modelling strategies with level data are appropriate.
Furthermore, the finding of stationary interest rates supports uncovered interest parity, and
hence the convergence hypothesis of interest rates. This in turn suggests a limited role for a
monetary authority to affect domestic interest rates.

27. S Ghon Rhee, Rosita P Chang There are two primary objectives in this study. First, we
examine the frequency of attaining simultaneous equilibrium on spot and forward foreign
exchange markets and on domestic and foreign securities markets. Second, we measure the
profitability of covered interest arbitrage and one‐way arbitrage. Our empirical analysis has
been conducted using real‐time quotations. The empirical results indicate that: (a) the markets
are efficient in the sense that profit opportunities from traditional covered interest arbitrage are
rarely available; and (b) the frequency of attaining simultaneous market equilibrium is
surprisingly low, thus opening the door for one‐way arbitrage.

28. Richard C Marston This study investigates how interest rates in the non-dollar
Eurocurrency markets are determined. Each of these Eurocurrency rates is linked to the
Eurodollar rate through arbitrage operations undertaken by banks. Evidence from regressions
of the Eurocurrency rates on the Eurodollar rate and the corresponding forward premium
confirms that each non-dollar rate adheres closely to interest parity. Arbitrage results in unifying
the Eurocurrency markets so that supply and demand pressures in any individual market are
spread throughout other Eurocurrency markets. Because of the overwhelming size of the
Eurodollar market, conditions in this market tend to dominate conditions in the remaining
Eurocurrency markets.

29. Fred R Kaen, George A Hachey The PURPOSE OF THIS PAPER is to explore the
relationships between Eurocurrency (external) and national (internal) money market interest
rates. The fundamental question the paper addresses is whether Eurocurrency and national
interest rate changes (first differences) lead, lag, move together, or jointly determine one
another. The analytic technique used to evaluate this question is the application of Granger
causality tests to selected series of US and UK currency denominated money market
instruments. Previous examinations of this question have produced conflicting conclusions.

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 Evolution and Implementation of Eurocurrency

Early works by Hendershott, Kwack, Mills, and Argy and Hodjera supported the position that
Eurodollar rate changes lagged changes in the US Treasury bill rate and that to the US Treasury
bill rate may not have taken place although Mills did note that European interest rates were
occasionally instrumental in determining levels of Eurodollar rates. In contrast to the above
studies, Giddy, Dufey, and Min argue that Eurodollar rates are more sensitive to market
conditions than domestic US rates, hence, US rates adjust more slowly to changing conditions
than do Eurodollar rates.

30. Stephany Grifith-Jones: The recent rapid growth of transnational banking and lending, as
well as it causes. Since the early seventies, a growing proportion of this lending has been
oriented towards developing countries. The principal causes for this trend are outlined, and the
changes in the mechanisms of the ‘Eurodollar market’ which made access to it easier for
developing countries are described. The trends prevailing in developing countries’ financing
throughout the seventies are then examined. Finally, the economic and political effects of the
rapid growth in lending by private banks to the Third World are discussed.

31. John T Barkoulas, Christopher F Baum Using the spectral regression method, we test
for long‐term stochastic memory in three‐ and six‐month daily returns series of Eurocurrency
deposits denominated in major currencies. Significant evidence of positive long‐term
dependence is found in several Eurocurrency returns series. Compared with benchmark linear
models, the estimated fractional models result in dramatic out‐of‐sample forecasting
improvements over longer horizons for the Eurocurrency deposits denominated in German
marks, Swiss francs, and Japanese yen.

32. James P Hawley: In 1979 and 1980 the U.S. government attempted to regulate the
Eurocurrency system in order to stabilize the international monetary and financial systems, and
for U.S. domestic monetary purposes. The conflict between the U.S. government (especially
the Treasury Department and the Federal Reserve Board) and U.S. based Transnational banks
(TNBs) illustrates TNB’s contradictory interests, which are neither self-evident nor easily
discernible, even to TNBs themselves. The state comes to play a mediating role vis-à-vis TNBs
in an only partially successful attempt to transform contradictory interests into coherent policy,
resulting in conflict between the state and TNBs. The origin of U.S. regulatory initiatives is
rooted in multilateral attempts to supervise between 1974 and 1978, and the failure of such

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 Evolution and Implementation of Eurocurrency

coordination during the 1978-dollar crisis. From the conflict between U.S. officials and U.S.
TNBs emerge varying concepts of TNBs interests. After examining the reasons for the failure
of the U.S. proposals. I conclude by suggesting some implications of TNBs’ contradictory
interests for statist and social conflict theories of the advanced capitalist state. Few theories of
the state have adequately considered the complexity and contradictory interests of transnational
Capital.

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 Evolution and Implementation of Eurocurrency

CHAPTER 4

DATA ANALYSIS & INTERPRETATIONS

From the detailed study and research about Eurocurrency, below are the points
analysed and suggested:

 that the “uncontrolled” Eurocurrency system is not now directly an engine of

inflation- of excess liquidity creation- as is often posited.
 that the foreign-exchange aspect of the market is particularly valuable in a regime of
floating exchange rates.
 that the growth of the market would slow down naturally if onerous regulation of
domestic markets were relaxed.
 that the flexibility of the Eurocurrency system has at times served the world economy
extraordinarily well in transferring capital, and no prima facie case for joint
international regulation or supervision exists under current institutional
arrangements.
 that countries and islands should continue to set policy individually regarding the use
of exchange controls to shield differential regulation of domestic and foreign
currency deposits or bond issues if and only if at least some major international
currencies remain freely convertible on both current and capital accounts.

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 Evolution and Implementation of Eurocurrency

Risks in Foreign Exchange can be seen now-a-days due to the economic changes.
Foreign Exchange comprises of risks related to the uncertainty attached to the
exchange rates between two currencies.

For example, the amount borrowed in foreign currency is to be repaid in the same
currency or in some other acceptable currency. Thus, if the foreign currency becomes
stronger than say, Indian rupees, the Indian borrower has to repay the loan in terms
of more rupees than the rupees he obtained by way of loan. The extra rupee he pays
is not due to an increase rate but because of unfavourable exchange rate. Conversely,
he will gain if the rupee is stronger.

The fluctuation in the exchange rate causes uncertainty and this uncertainty gives rise
to exchange rate risk. Investors and multinational businesses exporting and importing
goods and services or making foreign investments throughout the global economy are
faced with an exchange rate risk which can have severe financial consequences if not
managed appropriately.

Foreign exchange exposure is the risk associated with activities that involve a global
firm in currencies other than its home currency. Essentially, it is the risk that a foreign
currency may move in a direction which is financially detrimental to the global firm.

As we have learnt, and analysed risks involved. Let’s discuss the measures to mitigate
foreign exchange risks:

Exchange rate risk is simply the risk to which businesses and investors are exposed
to because changes in exchange rates may have an adverse effect on them. An
exporter is likely to find its sales falling or its gross margin shrinking, or both when
an appreciation occurs in its domestic currency. Therefore, fluctuation in exchange
rate can impact a business. Few of the general tools are available to cover exchange
rate risk are 1) Spot contracts, 2) Rupee forward contract, 3) Rupee roll over, 4)
Cross-currency, 5) Cross currency roll over contract, 6) Cross currency options, 7)
Currency futures, 8) Currency and interest rate swaps, 9) Arbitrage, etc.

Managing foreign exchange risk is a fundamental component in the safe and sound
management of all institutions that have exposures in foreign currencies. It involves
prudently managing foreign currency points in order to control, within set parameters,
the impact of changes in exchange rates on the financial position of the corporate.

Besides the more general third-party benefits they confer to socialist and less
developed countries, freely convertible national currencies remain the life blood of
the Eurocurrency system. Valuable though it is, the Eurocurrency market by itself
provides no substitute for using a few widely accepted national monies to organize
international trade.

Below tables will help you to understand the difference between:

1. Eurocurrency Bonds and Eurocurrency Notes

2. Eurocurrency Market and Foreign Exchange Market

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 Evolution and Implementation of Eurocurrency

Therefore, in course of understanding the euro currency the research helped me gain
more information about various EB and EN with Market involved in international
investment and finances.

1. Eurocurrency Bonds and Eurocurrency Notes:

No. Eurocurrency Bonds Eurocurrency Notes

1 Bonds are sold by the borrower to a Notes are sold by the borrower
syndicate of underwriting banks. without any underwriting
support.
2 Borrower sells the issue to the Borrower sells instruments
underwriters who thereafter sell the directly to retail investors
instruments to retail investors. without any intermediation.
3 Issue risk is assumed by the The sale of notes is based on the
underwriters and credit rating of credit rating of the borrower and
borrower is of limited importance. hence is critical to the issue.
4 Price discovery takes place through Since there is no intermediation,
demand/supply. the cost of acquiring notes is the
same for all investors.

2. Eurocurrency Market and Foreign Exchange Market:

No. Eurocurrency Market Foreign Exchange Market

1 This market deals with borrowing This market deals with the
and lending currencies. purchase and sale of currencies.
2 It is an unregulated market. These markets are regulated by
the respective national
monetary authorities.
3 This market functions on interest This market functions on
rates. exchange rates.
4 It is essentially a wholesale market. It operates at both retail and
wholesale levels.
5 Transactions are mainly done in Transactions at retail level are
standard quantities. customized.
6 Lending is not security oriented. Security based approach to
lending.
7 Eurobanks face a permanent asset No such limitations.
liability mismatch problem.

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 Evolution and Implementation of Eurocurrency

CHAPTER 5

CONCLUSION

While performing research we have outlined some of the factors involved in the development
of Eurocurrency market in the very preliminary way. We can conclude that in the 1960s and
1970s, the Eurocurrency was affected to a great extent by US monetary policy. I have shown
that controls of capital movements were influential in the development of eurocurrency.
Factors such as recycling role played by the markets, the effects of the interbank markets and
innovations, in combination with the highly competitive structure of international banking
markets, raise interesting question about the stability of the market.

The creation and growth of the Eurocurrency market has been an important side effect of the
increase of international economic activity over the past few decades. The market has
expanded largely as a means of avoiding the regulatory costs involved in dollar-denominated
financial. Due to the size and importance of the foreign exchange market, it remains largely
unregulated. There is no international organization to look over it or any institutions that sets
rules. The name Eurocurrency market is given to any bank deposits in any country held in a
different country’s currency. An example of this is United States dollar depositing in a British
bank. These banks are called Euro banks. The emergence of eurobanks has facilitated trade
and investment between countries. A Eurocurrency is any currency that is deposited outside
of the home country. Since approximately two thirds of Eurocurrency is U.S. dollars, central
banks and regulators are concerned about Eurocurrency because they are stateless money.
Eurocurrency market has very little regulations, such as taxes, restrictions on capital
movements and exchange controls. Thus, the market attracts more investors. It is easier for
banks around the world to use the Eurocurrency market to move and store funds more
profitably than they could in many countries. Since the market is relatively free of regulation,
Eurodollar market must operate on narrower margins than banks in the United States. The
Eurocurrency market gives investors the opportunity to hold short-term claims on
commercial banks, which also act as intermediaries to transform these deposits into long-
term claims on final borrowers. Not only does Eurocurrency market allow for more
convenient borrowing, it also improves the international flow of capital for trade between
countries and companies. This market also attracts domestic deposits because it offers a
higher interest rate. The largest Eurocurrency markets are located in London, New York, and
Tokyo.
One of the factors that make the Eurocurrency Market unique compared to many other
money market accounts is the fact that it is largely unregulated by government entities, it is
difficult for domestic governments to intervene, particularly in the United States. However,
with the establishment of the flexible exchange rate system in 1973, the Federal Reserve
System was given powers to stabilize lending currencies in the event of a crisis situation.

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