Euromarkets

 Article pour le Palgrave Dictionnary of Transnational History  (P.Y. Saunier et A. Iriye, eds)

Euromarkets (occasionally called ‘xenomarkets’) are markets on which banks deal in a currency other than their own. For example, eurodollars are dollars held by banks outside the United States. The prefix ‘euro’ refers to the fact that such deposits first appeared in Europe in around 1955. The origins of the eurodollar are traceable partly to the Cold War, when the USSR (in particular) desperately needed international liquidity – dollars -  but did not want to hold them in the United States. The rise of the dollar as an international currency encouraged companies world-wide to hold dollar cash reserves, and banks to ask for dollars on deposit. Some countries decided that such deposits did not need to be so closely regulated as deposits in the national currency because they did not affect the internal money supply. This produced a very liberal loan market, particularly in comparison with the prevailing heavy post-war regulation. On top of that, America’s Q regulation (put in place by the 1933 Glass Steagall Act) set a ceiling on the interest rates payable on bank deposits and so savers looked for more attractive rates elsewhere. Similarly, eurobonds benefited from an equalisation tax imposed in 1963 on interest payable on foreign issues placed in the USA.

            London played a key role in the development of euromarkets. Eurodollar loans, still negligible in 1958, rose to 25 billion dollars in 1968 and 130 billion in 1973. At that time London accounted for almost 80% of the market, which was still largely controlled by London branches of foreign banks – mostly American, but also some French, Japanese and German. By 1975 there were 243 such subsidiaries in London.

            While the main incentive for the development of euromarkets was the avoidance of national regulations, their development also helped to weaken those same regulations by providing both borrowers and lenders with alternatives to nationally regulated solutions. The logical outcome of euromarkets was the liberalisation of capital movements. They undoubtedly represented one nail in the coffin of the Bretton Woods fixed exchange rate scheme, which assumed that central banks were capable of controlling exchange rates; this they could only do if they could control capital flows, at least in the short term.

            At present, the term ‘euromarket’ is less often employed, since lending in a currency other than that of the borrower or lender has now become commonplace.

Pierre-Cyrille Hautcoeur

Bakker, A. F., 1996. The Liberalization of Capital Movements in Europe : The Monetary Committee and Financial Integration, 1958-1994. Dordrecht: Kluwer.

Kerr, I. M.m (ed.), 1984. A History of the Eurobond Market. The First 21 Years. London: Euromoney Publications.

Cross references: loans, financial markets, financial centres