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Eurobonds Essay

1743 words - 7 pages

The bond market is a less known in the financial world than the share market, but it doesn’t mean that it is not as important as the share one in terms of volumes. The main reason may be that the Governments are a big part of this market. Because unlike a share, a bond is a debt contract not a proportion of capital.
Usually, the international bond market is divided in three entities: the domestic bonds, the foreign bonds and the Eurobonds. The Eurobonds segment of the international market is, according to David. L. Scott and almost all dictionaries “a type of foreign bond issued and traded in countries other than the one in which the bond is denominated.”
This paper is going to focused on ...view middle of the document...

..), countries can also have sovereign wealth funds, loans made to other countries, making up more money. But
Countries can also raise huge amounts of capital by issuing bonds. In the international bond market, there is different type of bonds such as the domestic bonds, the foreign bonds and the Eurobonds. (Example as follow)

UK Governments (need to borrow money)
INTERNATIONAL MARKET

Eurobonds: in $, in the Eurozone
Domestic Bonds: in £, in the UK
Foreign Bonds: in $, in the US

The main advantage of this latter according to Tim Bennett is that when a Government issues domestic bonds and saturates a market, lenders can be fed up with it and don’t want to invest more. Eurobonds allow Governments to expand their markets and go somewhere else.
For a country, issuing Eurobonds is the easiest way to borrow money as cheaply as possible, but also it is a possibility to tap a market that wouldn’t otherwise have access to.
The most common Eurobonds is according to Moorad Choudhry the Euro-dollars, for an historical reason but also because of the importance of the US currency in the economy. But there are some other currencies in which investors trust. The most common are the pound, the euro and the CHF.

Eurobonds is another way for government to raise more funds to finance their economy, but where do the investors find their interests?

II

Eurobonds issued by Governments are well known among the investors because this tool is one of the safest ways to earn money. As F.Fabozzi, says “The term Eurobond meant a type of security rather than the currency of the obligation” (2005, p.410). Even though the incomes would be less attractive than investing into stocks or so on, the revenues are 100% sure because this is obvious, there is no worries about a country bankruptcy. The bonds are also popular because they are tax free and virtually free of regulation by any government. But the question is: How a Eurobond would be safer than any other instrument? On what do the investors based their believing?
In the Financial World, investors have come to depend upon Credit Rating Agencies because according to the European Commission, CRA issue opinions on the creditworthiness of a particular issuer of financial instrument. (2006, p.2) That’s mean that they assess the likelihood that an issuer will default on its financial obligations or debts...
How do this work? When the issuer is 100% sure not to default on its financial obligations, his grade would be AAA which is the best one, lesser is the likelihood, lesser is the grade. (Example with the Euro zone)

The second variable that needs to be considered is the fact that Eurobonds are issued in another currency than the domestic currency of the country. This is something reassuring the investors because as Bahmani-Oskooee, Mohsen says, in case of depreciation of a currency, it would help the importation market and domestic residents in term of domestic currency, but it wouldn’t help...

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