The international equity market consists of all stocks bought and sold outside the issuer’s home country. Companies and governments frequently sell shares in the international equity market. Buyers include other companies, banks, mutual funds, pension funds, and individual investors. The stock exchanges that list the greatest number of companies from outside their own borders are Frankfurt, London, and New York. Large international companies frequently list their stocks on several national exchanges simultaneously and sometimes offer new stock issues only outside their country’s borders. Four factors are responsible for much of the past growth in the international equity market.
international equity market
Market consisting of all stocks bought and sold outside the issuer’s home country.
Spread of Privatization
As many countries abandoned central planning and socialist-style economics, the pace of privatization accelerated worldwide. A single privatization often places billions of dollars of new equity on stock markets. When the government of Peru sold its 26 percent share of the national telephone company, Telefonica del Peru (www.telefonica.com.pe), it raised $1.2 billion. Of the total value of the sale, 48 percent was sold in the United States, 26 percent to other international investors, and another 26 percent to domestic retail and institutional investors in Peru.
Increased privatization in Europe is also expanding worldwide equity. Although Europe is traditionally more devoted to debt as a means of financing, an “equity culture” is taking root. As the European Union becomes more thoroughly integrated, investors will become more willing to invest in the stocks of companies from other European nations.
Economic Growth in Emerging Markets
Continued economic growth in emerging markets is contributing to growth in the international equity market. Companies based in these economies require greater investment as they succeed and grow. The international equity market becomes a major source of funding because only a limited supply of funds is available in these nations.
Activity of Investment Banks
Global banks facilitate the sale of a company’s stock worldwide by bringing together sellers and large potential buyers. Increasingly, investment banks are searching for investors outside the national market in which a company is headquartered. In fact, this method of raising funds is becoming more common than listing a company’s shares on another country’s stock exchange.
Advent of Cybermarkets
The automation of stock exchanges is encouraging growth in the international equity market. The term cybermarkets denotes stock markets that have no central geographic locations. Rather, they consist of global trading activities conducted on the Internet. Cybermarkets (consisting of supercomputers, high-speed data lines, satellite uplinks, and individual personal computers) match buyers and sellers in nanoseconds. They allow companies to list their stocks worldwide through an electronic medium in which trading takes place 24 hours a day.
All the world’s currencies that are banked outside their countries of origin are referred to as Eurocurrency and trade on the Eurocurrency market. Thus U.S. dollars deposited in a bank in Tokyo are called Eurodollars and British pounds deposited in New York are called Europounds. Japanese yen deposited in Frankfurt are called Euroyen, and so forth.
Market consisting of all the world’s currencies (referred to as “Eurocurrency”) that are banked outside their countries of origin.
Because the Eurocurrency market is characterized by very large transactions, only the very largest companies, banks, and governments are typically involved. Deposits originate primarily from four sources:
■ Governments with excess funds generated by a prolonged trade surplus
■ Commercial banks with large deposits of excess currency
■ International companies with large amounts of excess cash
■ Extremely wealthy individuals
Eurocurrency originated in Europe during the 1950s—hence the “Euro” prefix. Governments across Eastern Europe feared they might forfeit dollar deposits made in U.S. banks if U.S. citizens were to file claims against them. To protect their dollar reserves, they deposited them in banks across Europe. Banks in the United Kingdom began lending these dollars to finance international trade deals, and banks in other countries (including Canada and Japan) followed suit. The Eurocurrency market is valued at around $6 trillion, with London accounting for about 20 percent of all deposits. Other important markets include Canada, the Caribbean, Hong Kong, and Singapore.
Appeal of the Eurocurrency Market
Governments tend to strictly regulate commercial banking activities in their own currencies within their borders. For example, they often force banks to pay deposit insurance to a central bank, where they must keep a certain portion of all deposits “on reserve” in non-interest-bearing accounts. Although such restrictions protect investors, they add costs to banking operations. The main appeal of the Eurocurrency market is the complete absence of regulation, which lowers the cost of banking. The large size of transactions in this market further reduces transaction costs. Thus banks can charge borrowers less, pay investors more, and still earn healthy profits.
Interbank interest rates—rates that the world’s largest banks charge one another for loans—are determined in the free market. The most commonly quoted rate of this type in the Eurocurrency market is the London Interbank Offer Rate (LIBOR)—the interest rate that London banks charge other large banks that borrow Eurocurrency. The London Interbank Bid Rate (LIBID) is the interest rate offered by London banks to large investors for Eurocurrency deposits.
interbank interest rates
Interest rates that the world’s largest banks charge one another for loans.
An unappealing feature of the Eurocurrency market is greater risk; government regulations that protect depositors in national markets are nonexistent here. Despite the greater risk of default, however, Eurocurrency transactions are fairly safe because the banks involved are large with well-established reputations.