The growing internationalization of financial markets has become an important trend. Before the 1980s, U.S. financial markets were much larger than financial markets outside the United States, but in recent years the dominance of U.S. markets has been disappearing. (See the Global box, “Are U.S. Capital Markets Losing Their Edge?”) The extraordinary growth of foreign financial markets has been the result of both large increases in the pool of savings in foreign countries such as Japan and the deregulation of foreign financial markets, which has enabled foreign markets to expand their activities. American corporations and banks are now more likely to tap international capital markets to raise needed funds, and American investors often seek investment opportunities abroad. Similarly, foreign corporations and banks raise funds from Americans, and foreigners have become important investors in the United States. A look at international bond markets and world stock markets will give us a picture of how this globalization of financial markets is taking place.
International Bond Market, Eurobonds, and Eurocurrencies
The traditional instruments in the international bond market are known as foreign bonds. Foreign bonds are sold in a foreign country and are denominated in that country’s currency. For example, if the German automaker Porsche sells a bond in the United States denominated in U.S. dollars, it is classified as a foreign bond. Foreign bonds have been an important instrument in the international capital market for centuries. In fact, a large percentage of U.S. railroads built in the nineteenth century were financed by sales of foreign bonds in Britain. A more recent innovation in the international bond market is the Eurobond, a bond denominated in a currency other than that of the country in which it is sold for example, a bond denominated in U.S. dollars sold in London. Currently, over 80% of the new issues in the international bond market are Eurobonds, and the market for these securities has grown very rapidly. As a result, the Eurobond market is now larger than the U.S. corporate bond market.
A variant of the Eurobond is Eurocurrencies, which are foreign currencies deposited in banks outside the home country. The most important of the Eurocurrencies are Eurodollars, which are U.S. dollars deposited in foreign banks outside the United States or in foreign branches of U.S. banks. Because these shortterm deposits earn interest, they are similar to short-term Eurobonds. American banks borrow Eurodollar deposits from other banks or from their own foreign branches, and Eurodollars are now an important source of funds for American banks. Note that the euro, the currency used by countries in the European Monetary System, can create some confusion about the terms Eurobond, Eurocurrencies, and Eurodollars. A bond denominated in euros is called a Eurobond only if it is sold outside the countries that have adopted the euro. In fact, most Eurobonds are not denominated in euros but are instead denominated in U.S. dollars. Similarly, Eurodollars have nothing to do with euros, but are instead U.S. dollars deposited in banks outside the United States.
World Stock Markets
Until recently, the U.S. stock market was by far the largest in the world, but foreign stock markets have been growing in importance, with the United States not always being number one. The increased interest in foreign stocks has prompted the development in the United States of mutual funds that specialize in trading in foreign stock markets. American investors now pay attention not only to the Dow Jones Industrial Averagebut also to stock price indexes for foreign stock markets such as the Nikkei 300 Average (Tokyo) and the Financial Times Stock Exchange (FTSE) 100-Share Index (London). The internationalization of financial markets is having profound effects on the United States. Foreigners, particularly Japanese investors, are not only providing funds to corporations in the United States but also are helping finance the federal government. Without these foreign funds, the U.S. economy would have grown far less rapidly in the last 20 years. The internationalization of financial markets is also leading the way to a more integrated world economy in which flows of goods and technology between countries are more commonplace. In later chapters, we will encounter many examples of the important roles that international factors play in our economy.
International Bond Market, Eurobonds, and Eurocurrencies
The traditional instruments in the international bond market are known as foreign bonds. Foreign bonds are sold in a foreign country and are denominated in that country’s currency. For example, if the German automaker Porsche sells a bond in the United States denominated in U.S. dollars, it is classified as a foreign bond. Foreign bonds have been an important instrument in the international capital market for centuries. In fact, a large percentage of U.S. railroads built in the nineteenth century were financed by sales of foreign bonds in Britain. A more recent innovation in the international bond market is the Eurobond, a bond denominated in a currency other than that of the country in which it is sold for example, a bond denominated in U.S. dollars sold in London. Currently, over 80% of the new issues in the international bond market are Eurobonds, and the market for these securities has grown very rapidly. As a result, the Eurobond market is now larger than the U.S. corporate bond market.
A variant of the Eurobond is Eurocurrencies, which are foreign currencies deposited in banks outside the home country. The most important of the Eurocurrencies are Eurodollars, which are U.S. dollars deposited in foreign banks outside the United States or in foreign branches of U.S. banks. Because these shortterm deposits earn interest, they are similar to short-term Eurobonds. American banks borrow Eurodollar deposits from other banks or from their own foreign branches, and Eurodollars are now an important source of funds for American banks. Note that the euro, the currency used by countries in the European Monetary System, can create some confusion about the terms Eurobond, Eurocurrencies, and Eurodollars. A bond denominated in euros is called a Eurobond only if it is sold outside the countries that have adopted the euro. In fact, most Eurobonds are not denominated in euros but are instead denominated in U.S. dollars. Similarly, Eurodollars have nothing to do with euros, but are instead U.S. dollars deposited in banks outside the United States.
World Stock Markets
Until recently, the U.S. stock market was by far the largest in the world, but foreign stock markets have been growing in importance, with the United States not always being number one. The increased interest in foreign stocks has prompted the development in the United States of mutual funds that specialize in trading in foreign stock markets. American investors now pay attention not only to the Dow Jones Industrial Averagebut also to stock price indexes for foreign stock markets such as the Nikkei 300 Average (Tokyo) and the Financial Times Stock Exchange (FTSE) 100-Share Index (London). The internationalization of financial markets is having profound effects on the United States. Foreigners, particularly Japanese investors, are not only providing funds to corporations in the United States but also are helping finance the federal government. Without these foreign funds, the U.S. economy would have grown far less rapidly in the last 20 years. The internationalization of financial markets is also leading the way to a more integrated world economy in which flows of goods and technology between countries are more commonplace. In later chapters, we will encounter many examples of the important roles that international factors play in our economy.
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