Eurobond

  

There are three countries involved in eurobonds: the lending country, the currency of the bond, and the borrowing country (not that these are lent by countries, just that these bonds are coming from and going to companies in those countries).

To be a eurobond, a bond must study abroad for at least one semester during college. Er...okay. Rather, it must have a currency that’s different from the lending country, or a currency that’s different from the borrowing country. Basically, eurobonds are bonds that are being tossed around like a beach ball by lenders and borrowers in countries with other currencies.

For instance, a Japanese company could lend a loan in British pounds to a U.S. borrower. Why bother? Well, because it helps multinational companies keep the capital flowing abroad. Plus, it’s common for international companies to choose loan currencies based on that country’s regulatory laws. The more business-friendly, the better. For borrowers, eurobonds are great for their liquidity, but are risky because of how currency rates can change among themselves.

Related or Semi-related Video

Econ: What is the European Monetary Syst...7 Views

00:00

and finance Allah shmoop What is the European monetary system

00:07

Or to put it another way where do euros come

00:10

from Most currencies cover a single country like the U

00:13

S Has the dollar The U K has the pound

00:16

of Zambia has the kwacha and so on But one

00:18

of the world's major currencies covers an entire region the

00:22

euro It's used in twenty three countries throughout Europe nineteen

00:26

countries within the European Union and four small ones outside

00:30

of the official U from France and Germany to Slovakia

00:34

and Luxemburg That's where the euro plays in the sun

00:37

When James Bond plays baccarat in Monaco he places his

00:40

bets in euros When the Knights of Malta get their

00:43

armor repaired well they pay in euros by castle in

00:47

France are Chocola in Belgium or sauerkraut in Germany or

00:51

whatever it is they eat in Portugal Yeah you're using

00:54

euros Despite the fact that it's one of the world's

00:56

widest circulating currencies the euro is actually one of the

00:59

youngest It hasn't been around for a very long and

01:02

by not around that long while we mean like it

01:05

wasn't here in the nineteen nineties So while friends dominated

01:08

TV and flannel shirts dominated fashion and Britney Spears dominated

01:13

TRL while Europe was dominated by a patchwork of currencies

01:17

France had the Frank Germany had the deutschmark Italy had

01:20

the lira in Zambia still had the kwacha well the

01:23

countries of the eurozone didn't exactly have smooth courtship In

01:27

fact they marked the first couple of decades of the

01:29

twentieth century with the biggest wars in history up to

01:31

that point and then ended the century there with a

01:34

common currency So how did they do this Well quick

01:37

timeline From nineteen fourteen to nineteen eighteen most of the

01:40

countries of Europe fought against each other in World War

01:43

I In the nineteen twenties Germany suffered through a massive

01:45

inflation and a painful political dislocation brought on by their

01:49

defeat in the war Other countries faced their own traumas

01:52

Fascism rampant in Italy paranoia and political division in France

01:57

By the nineteen thirties that continent suffered through the ravages

02:00

of the Great Depression and the rise of the Nazis

02:02

From nineteen thirty nine to nineteen forty five another war

02:06

Well this one was worse than the previous one That

02:09

conflict WW two left Everyone in Europe bombed out and

02:12

broke the center of the world economy then shifted to

02:15

the United States Meanwhile Europe split into spheres of influence

02:18

US dominated area in the West and the communist U

02:22

S S R dominated the area in the east So

02:25

for half a century or so an unending stream of

02:27

wars economic dislocation rivalry and while political confrontation marked relations

02:32

on the continent hardly a place ripe for currency unification

02:36

So what happened Well here's the short answer Eastern Europe

02:40

started instituting more socialist economic policies right after World War

02:44

Two Meanwhile the Western countries especially France the UK and

02:48

what was then known as West Germany started opening up

02:51

trade in a new series of treaties from the nineteen

02:53

fifties In the nineteen nineties the nations of Europe stopped

02:56

being openly compay edited Justus They were adding expensive social

03:00

programs Meanwhile the larger economies experienced an influx of these

03:04

huge migration policy issues The migrants came from other European

03:09

countries and largely from former colonies in Asia and Africa

03:13

will eventually none of the major European countries could really

03:16

afford to operate individually and by the late nineteen eighties

03:19

the governments of the communist countries in Eastern Europe started

03:22

to collapse The new regimes in these former Iron Curtain

03:25

nations looked to join the growing European wide market East

03:29

and West Germany reunited The former communist countries entered the

03:32

trade treaties The European Union became one of the world's

03:35

key economic organizations Pressure for a single currency began to

03:39

grow well in nineteen ninety to the members of the

03:42

European Community signed a treaty that pave the way for

03:45

a single currency A series of treaties followed until the

03:47

euro was introduced on January first nineteen ninety nine and

03:50

by two thousand two the first countries had completed a

03:53

changeover from their previous currencies Lesson here Don't LOSE HOPE

03:58

ONE DAYS Great war can become tomorrow's free trade Unified

04:01

currency zone Well a single Middle East currencies that ever

04:04

coming India Pakistan Trade Zone A gift card that works

04:08

at both Yankee Stadium and Fenway Park Yeah you never

04:12

know In a few decades maybe

Up Next

Finance: What is LIBOR?
21 Views

What is LIBOR? LIBOR is an acronym for the London Interbank Offered Rate. It is the most widely referenced benchmark for short term loans used by f...

Find other enlightening terms in Shmoop Finance Genius Bar(f)