The Role of Eurodollar Bond Issuance in Emerging Markets

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The role of Eurodollar bond issuance in Emerging Markets

Eurodollar bonds are U.S. dollars held in banks outside the United States by a non US organization. They pay interest and principal in Eurodollars. These bonds are not registered with the Securities and Exchange Commission. Due to fewer regulatory restrictions and costs in the Euromarkets, Eurodollar bonds can be sold at lower than U.S. interest rates. Eurodollar bonds are one of the more common Eurocurrency bonds because of the international importance of the dollar.

The Eurodollar market is one of the world's primary international capital markets, and companies use Eurodollars to settle international transactions, to invest excess cash, to make short-term loans, and finance imports and exports. The development of the Eurodollar market was mainly due to the restrictions of the US regulations on international lending and investments in the 1960s. Similarly, when the German monetary authority restricted non-residents from issuing Deutsche mark bonds in the 1970s, the euro-DM market which had developed outside Germany grew rapidly.

One of the biggest reasons of the popularity of Eurodollar market is that Eurodollar deposits outside of the United States, the banks holding these deposits do not have to adhere to the Federal Reserve's reserve requirements, and the Securities and Exchange Commission does not regulate Eurodollar securities. Other reason is the fundamental factors associated with the size of an economy and the growing influence of that economy in international trade, investment and financial transactions. Therefore, following the strengthening of the real factors, market forces would dominate and, sooner or later, the government would be forced to abandon the restrictions on international use of the home currency

Many banks and corporations find the lack of regulation attractive because it lowers costs, increases flexibility, and allows for creative structuring of financial instruments....
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