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Topics to be Covered
Eurocurrency Market Origins of Offshore Banking
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Eurocurrency Market
Eurocurrency Marketis the deposit and loan market for foreign currencies.
Banks that accept deposits and make loans in the Eurocurrency market are called Eurobanks. The term Eurocurrency or Eurobank is a misnomer since it refers to offshore banking and is not limited to Europe.
Copyright 2007 Pearson Addison-Wesley. All rights reserved.
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The reserve-currency status of the dollar was an important factor. Some communist countries were the earliest source of dollar deposits held in Europe. Eurobanks developed as a result of profit considerations.
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LIBOR
London Interbank Offered Rate (LIBOR)the interest rate at which large London banks make deposits or lend to each other. In the Eurodollar market, loan interest rates are quoted as percentage points above LIBOR.
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The U.K. and U.S. banks account for the largest shares of foreign assets, primarily cross-border interbank claims. Interbank claims are deposits held in banks in other countries.
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International banking facilities (IBFs) are international banking divisions of onshore U.S. banks.
The loans and deposits of IBFs are kept separate from the rest of the U.S. banks business because IBFs are not subject to reserve requirements, interest rate regulations, or FDIC deposit insurance premiums.
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Characteristics of Eurobanks
Eurobanks are just like domestic banks in terms of maximizing spreads and managing risk.
Deposits are for fixed terms ranging from days to years, mostly for less than six months. Eurocurrency deposits are similar to domestic banks certificates of deposits.
Eurocurrency loans can range up to 10 years or more. Large loans are generally made by syndicates of Eurobanks.
Copyright 2007 Pearson Addison-Wesley. All rights reserved.
20-17
International Debt
Petrodollarsare Eurodollar deposits arising from the trade surpluses of OPEC nations. In turn, the Eurobanks lent these petrodollars to developing countries.
Refer to Table 20.4 External debt of developing countries during the debt crisis period.
Copyright 2007 Pearson Addison-Wesley. All rights reserved.
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Debt/Equity Swap
Debt/Equity Swapinvolves an exchange of a developing countrys debt for an ownership or equity position in a business in the debtor country. The use of debt/equity swaps has stimulated the growth of a secondary market where creditor commercial banks may sell their developing country debt.
Copyright 2007 Pearson Addison-Wesley. All rights reserved.
20-21
IMF Conditionality
The International Monetary Fund (IMF) has been an important source of funding for debtor countries with repayment problems.
IMF Conditionality refers to the IMF pre-conditions which require borrowers to adjust their economic policies to reduce balance of payments deficits and improve the chance of debt repayment. These conditions involve macroeconomic targets such as money supply growth and the budget deficit.
Copyright 2007 Pearson Addison-Wesley. All rights reserved.
20-22
IMF
The IMF is a multinational organization of over 180 countries. Its objective is to provide short-term loans to countries with temporary balance of payments disequilibria (if the countries agree to certain IMF conditions). IMF policy is determined by member countries votes. Voting power is based on a countrys quota or financial contribution to the IMF. The U.S. has the most votes since its quota accounts for almost 18% of the total fund.
Copyright 2007 Pearson Addison-Wesley. All rights reserved.
20-23
Corruption thrives in countries where government policies create economic distortions or imperfect markets.
The more competitive a countrys markets, the fewer the opportunities for corruption. In the late 1990s, both the IMF and World Bank began including anticorruption policies as part of their lending process.
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Country risk analysis involves the evaluation of both qualitative and quantitative factors.
Copyright 2007 Pearson Addison-Wesley. All rights reserved.
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Economic growth
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