Eurobond

Background

A Eurobond is a fixed-income debt instrument issued in a currency different from the domestic currency of the country or market in which it is issued. This unique characteristic makes Eurobonds accessible to a global investor base, providing opportunities to diversify investment portfolios and mitigate regional risks.

Historical Context

Eurobonds gained prominence in the 1960s as a result of increasing globalization and interconnected financial markets. Initially seen as an innovative way for companies and governments to raise capital outside their home countries, they evolved into a crucial tool for international finance and corporate funding. Their growth was spurred by the Eurodollar market, which involved U.S. dollars deposited in banks outside the United States, and laid the groundwork for the development of international bond markets.

Definitions and Concepts

A Eurobond is a bond that:

Is denominated in a currency distinct from the home country’s currency.
Is typically issued in bearer form, meaning its ownership is not registered and it does not carry the owner’s name.
Avoids withholding taxes on interest payments, making it attractive for investors looking to minimize tax liabilities and maintain anonymity.
Has various maturities, ranging from short-term to long-term durations.
May offer fixed interest rates or floating rates linked to benchmarks like the *London Inter Bank Offered Rate (LIBOR).

Major Analytical Frameworks

Classical Economics

Classical economics typically does not delve heavily into specific financial instruments like Eurobonds but focuses on broader issues such as market equilibrium and capital allocation, indirectly highlighting the bonds’ contribution to efficient international capital markets.

Neoclassical Economics

From a neoclassical perspective, Eurobonds are crucial in highlighting the importance of maximizing utility and achieving efficient asset allocation through global markets. They provide capital flow flexibility, reducing capital costs through diversification.

Keynesian Economics

Keynesian analyses consider the potential macroeconomic impacts of Eurobond issuances on aggregate demand and interest rates. Governments can use Eurobonds to finance public spending without causing inflationary pressures in domestic economies.

Marxian Economics

Marxian economists might critique Eurobonds as tools for perpetuating capital’s dominance over labor, creating further avenues for capital to accumulate beyond national regulatory frameworks, and contributing to economic inequality and instability.

Institutional Economics

This school examines how institutions and regulatory frameworks affect Eurobond markets. It studies the influence of legal systems, tax structures, and financial regulations on the behaviour and appeal of Eurobonds as investment instruments.

Behavioral Economics

Behavioral theories may look into how cognitive biases, risk perceptions, and investor sentiment affect the purchasing and selling decisions within Eurobond markets, influencing their pricing and stability.

Post-Keynesian Economics

Post-Keynesians stress the uncertainty present in financial markets, examining the speculative attractiveness of Eurobonds and their effects on economic stability and the business cycle.

Austrian Economics

Austrian economists would emphasize the importance of Eurobonds in facilitating voluntary exchanges in free markets, potentially optimizing capital resources and entrepreneur activities unrestricted by national boundaries.

Development Economics

This framework would analyze how Eurobonds help developing countries access international capital, promoting investment in infrastructure and development projects critical for economic growth and modernization.

Monetarism

Monetarists might highlight Eurobonds’ role in influencing money supply dynamics and international capital movements, examining their implications for both domestic and global inflation.

Comparative Analysis

Comparing Eurobonds with other bond types, such as domestic bonds or foreign bonds, generally shows differences in tax treatment, regulatory oversight, and risks associated with currency exposure. Eurobonds are distinct in their international nature and tax advantages, making them highly attractive for both issuers and investors.

Case Studies

Case studies frequently involve corporations and governments successfully tapping into international markets via Eurobonds:

In 1995, the Daimler-Chrysler merger partly financed through Eurobonds.
Government agencies of emerging markets like Mexico or Brazil issuing Eurobonds to attract foreign investment and finance public projects.

Suggested Books for Further Studies

The Economics of Money, Banking, and Financial Markets by Frederic S. Mishkin
International Finance and Open-Economy Macroeconomics by Francisco L. Rivera-Batiz and Luis A. Rivera-Batiz
Bond Markets, Analysis, and Strategies by Frank J. Fabozzi

Eurocurrency: Currency deposited in banks outside its country of origin, facilitating international trade and investment.
Bearer Bond: A bond that is not registered in the owner’s name and is payable to whoever holds it.
Floating Rate Note (FRN): A bond with an interest payment that fluctuates based on a