International money market

The core of the international money market is the Euro currency market. A Euro currency market is a time deposit of money in an international bank located in a country different from the country that issued the currency. Eurocurrency is currency deposited by national governments or corporations in banks outside their home market. This applies to any currency and to banks in any country. For example, Mauritius won deposited at a bank in South Africa, is considered eurocurrency.

Example: Euro dollars can be defined as deposits of USD in banks which are situated outside the united states. The prefix Euro may be misleading as if it is limited to Europe.

Dollar deposits outside the US (Euro dollars) and banks accepting Euro currency deposits are called Euro banks.

Euro banking activities increased following the imposition of regulation on US domestic banks. In order to escape those regulation, US banks have set up foreign branches and subsidiaries. This helped in the expansion of many US banks.

Euro bank are able to charge lower rate on dollar loans and offer a higher rate on dollar deposit than their US competitors. Euro dollar transactions are considered more risky than domestic dollar transactions in the US. This is because there is a leak of deposit insurance and government supension in the Euro dollar.

LIBOR (London InterBank Offered Rate)

LIBOR is the reference rate in London for Euro currency deposits. It is the interest rate at which a group of large London banks could borrow from each other each morning.

There is a LIBOR for Euro dollars, Euro Canadian dollars, Euroyen and even Euros. Loan interest rates are usually quoted as a percentage points above LIBOR. following the adoption of the common euro currency on 1/1/99 among the 11 countries of the Eur created a need for a new interbank offered rate designation. The EURIBOR (Euro InterBank Offered Rate) was founded. It is simply the rate at which interbank deposit if the eurozone offered by one prime bank to another in the euro zone.

Euro Credit

Euro credits or Euro loans are large bank credits, usually having maturities 3 - 10 years (ranging short - to medium term loans) put together by international bank syndicates on an adhere basis. The syndicate is set up since these loans are usually too large for a single bank to handle and hence, items are sharing risks. Interest rates are calculated by adding a margin to interbank offered rates and usually adjusted every 3 - 6 months.

The credit risk on these loans is greater than on loans to other banks in the interbank market. Thus the interest rate on Euro credits must compensate the bank or bank syndicate, for the added credit risk.

A Euro credit may be seen as a series of short term loans, where at the end of each time period (generally 3 - 6 month) the load is rolled over and the basis lending rate (LIBOR) is re-priced to current LIBOR over the next time interval of the loan.

Euro notes

Euro notes are short term notes underwritten by a group of international investment or commercial banks called a 'facility'. Euro notes are sold at a discount from face value and pay back the full face value at maturity. They have maturities ranging from 3 - 6 months. Borrowers find Euro notes attractive because the interest expense is slightly less. On the other hand, the banks find them attractive to issue because they earn a small fee from the under-writing or supply the funds and earn the interest rate.

The Euronote market is basically a borrowing market made up of 3 type of issue:

1.      Note issuing facilities (NIF)

The original Euronotes were note-issuing facilities (NIFs) which are underwritten by syndicates of banks and which are medium-term, usually 5 - 10 years. A NIF is essentially a guarantee by the syndicate for a predetermined length of time (usually 5 - 10 years) to underwrite a series of short - term bearer notes issued (usually vary 1, 3, or 6 months) by the borrower. If a borrower is unable to sell the notes at a given speed over LIBOR, then the syndicate of underwriting banks guarantees to purchase the issue. A NIF thus converts a series of short-term borrowing into a long-term borrowing facility.

2.      Euro commercial paper

Euro commercial paper, like domestic commercial papers is an unsecured short-term promising note issued by a corporation or bank and placed directly with the investment public through a dealer. This is a short term borrowing usually of less than 9 months, not underwritten by banks. Like Euronotes, Euro commercial paper is sold at discount from face value. The vast majority of Euro commercial market paper is denominated in euro and USD. The secondary market for Euro commercial paper is more active than for us paper. Euro commercial paper issues tend to be of much lower quality than their US counterparts; Consequently yields tend to be higher.

3.      Euro medium term notes (EMTNS)

These notes are issued above 9 months and less than 10 years (although some issues are for longer period). The medium-term notes market has proved an increasingly popular means of raising finance for companies over the traditional bond market. This is because the EMTHS are more flexible financial instruments due ti shorter maturity term and they have a relatively high degree of liquidity provided by the dealers in the instrument.