FINANCE - MARKETS

Secret stories

The rise of the euromarket



Italy’s motorways--here, the Autostrada dei Fiori from the heights of Genoa towards Ventimiglia--helped set Luxembourg’s financial sector on the road to success Photo: Shutterstock

Italy’s motorways--here, the Autostrada dei Fiori from the heights of Genoa towards Ventimiglia--helped set Luxembourg’s financial sector on the road to success Photo: Shutterstock

This summer, Paperjam’s Marc Fassone is exploring financial sector news and stories that have gone under the radar. Today, the “euromarket” that marked the beginning of the internationalisation of finance and its entry into the modern era.

After 1945, major industrial countries, led by the United States, decided to strictly regulate banking activities. But soon came the economic boom of the 1950s, during which many borrowers began looking for ways to bypass these regulations.

First came “eurodollars”, dollars held outside the US. In the 1950s, deposits in US currency accumulated in European banks for various reasons. The Soviets, for example, transferred their greenback assets to the old continent, fearing that they would one day be blocked in the United States.

And it was in Luxembourg City that the idea emerged of using these funds, which were beyond the control of the US, for international loan operations. The eurodollar market was born and would soon flourish as European currencies became (again) convertible at the end of 1958. The eurobond market came next, in 1963, with the issue of a eurodollar bond on behalf of Autostrade, a motorway concessionaire in Italy. Eurobonds are stateless bonds that circulate freely in Europe.

Finally making good on 1929

BIL was involved in these operations, and the financial centre benefited--at last--from the innovations of 1929 which enabled financiers to circumvent restrictive national rules, including the interest equalisation tax. Introduced in the United States in 1963--the year of Luxembourg’s thousandth birthday--this regulation was intended to curb the export of American capital and increase the cost of foreign issues in the United States. The fact that Pierre Werner, then prime minister, had started his career in banking was a plus. He knew the importance of attracting banks to Luxembourg and also knew how to talk to them.

The euromarket exploded in the 1960s and favoured the rise of Luxembourg’s financial centre. New prospects opened up for Luxembourg banks: traditionally focused on the domestic economy, they now became international business institutions. And new international players were arriving. Between 1967 and 1979, the number of financial institutions established in Luxembourg rose from 26 to 100. The creation in 1965 of the financing holding company, through which international groups could raise bonds and make the proceeds available to their companies, played a part in this uptick.

The end of the Bretton Woods system (of using the US dollar as an international standard) and of the fixed exchange rate system, alongside the influx of petrodollars due to the oil shocks of the early 1970s, led to an explosion in eurocredits, loans granted by commercial banks primarily to emerging countries. In 1980, eurocredits represented the largest share of bank loans. As with eurocurrencies and eurobonds, the financial centre played a prominent role in the syndication and listing of eurocredits.

The debt crisis would cause this market to explode, forcing the sector to reinvent itself.

This article was originally published in Paperjam. It has been translated and edited for Delano.