Euro Grows Into Key Tool Of International Finance
By MICHAEL R. SESIT Staff Reporter of THE WALL STREET JOURNAL
LONDON -- Despite the euro's 14% nosedive against the dollar and 23% plunge against the yen last year, Europe's year-old currency came into its own as a key instrument of international finance on global capital markets.
Last year, financial institutions, corporations, governments and international organizations -- such as the World Bank and European Investment Bank -- issued $602.2 billion (598.4 billion euros) of euro-denominated bonds on international markets, according to Capital Data Ltd. That figure accounted for 45% of all international bond issuance, surpassing the $572.5 billion, or 42%, of bonds denominated in dollars. An additional $174.2 billion, or 13%, were sold in other currencies, such as the British pound, Swiss franc and yen.
In 1998, before the birth of the euro at the start of 1999, the dollar reigned supreme, accounting for 48% of all bonds sold on international markets. At the same time, international bonds denominated in European currency units and the currencies of the 11 nations that adopted the euro amounted to $194 billion, or 22% of total issuance.
Unifying European Bond Markets
A colossal instrument of change, the euro has gone a long way toward unifying what had been a mishmash of 11 national bond markets into a whole that serves the needs of companies and investors. For pension and mutual funds, insurance companies and banks' own portfolios, the new currency achieved the depth and liquidity demanded by big institutional fund managers to feel secure that they could buy and sell securities without moving the exchange rate against themselves.
In short, the euro has created a true pan-European bond market. In the past, regulations in individual countries often prevented insurance companies and other financial institutions from investing more than a fixed -- usually small -- amount of their assets in securities issued in a currency other than that in which their liabilities were denominated.
But the euro has changed all that. Previously, for instance, a Belgian insurance company or Portuguese pension fund might have been required to invest the overwhelming majority of its assets in, respectively, Belgian franc and Portuguese escudo securities. But with the adoption of Europe's common currency, the Belgian and Portuguese national currencies effectively became the euro -- thus allowing the Belgian insurer and Portuguese pension manager to buy German, Austrian, Finnish, Italian, French securities, and so on.
Fragmented Market Rules
"We had fragmentation of different regulated markets: Investors had to buy bonds denominated in their functional currency; insurance companies had asset-liability matching regulations to adhere to," said Luigi Gubitosi, treasurer of Fiat SpA in Turin, Italy. "Now, all institutional investors can access the market in Europe."
By injecting much more liquidity, the euro also has meant that companies are selling more of their bonds to institutional investors and less to individuals, who used to be the core of the Eurobond market.
All told, companies, local and national governments, banks and other entities sold $1.349 trillion of bonds on international markets in 1999, 51% more than the $891.5 billion they issued a year earlier, according to Capital Data. All of the increase was attributed to expanded issuance by financial institutions and companies.
Alternatives to Bank Financing
The increased use of the euro and the greater liquidity it brought has significantly increased the financing options for European companies, which used to rely predominantly on bank funding. It comes at a good moment, because banks -- under pressure to improve their own returns on assets and equity -- are pulling back from corporate lending to allocate capital to higher-return investments.
Last year, European corporations sold $165.8 billion of bonds in 505 issues on international markets. That's an enormous increase over 1998, when they issued $65.1 billion in 282 issues, according to Capital Data.
The proceeds have been used to fund everything from mergers and acquisitions to corporate restructurings, which are helping to make Europe's companies more competitive. For instance, bonds played a key role in financing Olivetti SpA's takeover of Telecom Italia SpA, as well as Spanish oil company Repsol SA's acquisition of Argentina's YPF SA, and Mannesmann AG's acquisition of some of Olivetti's telecommunications businesses.
The euro "has created a broad and deep capital market, which will allow the financing of major corporate merger and acquisition activity," said William L. Wilby, a portfolio manager at OppenheimerFunds Inc. "Secondly, the euro has increased the visibility of competitive differentials and is thus spurring managements to much more rapid change."
Meanwhile, Merrill Lynch & Co. emerged as the top underwriter of international bond issues, accounting for 9.08% of all issuance, according to Capital Data. It was followed by two other U.S. firms with global reach: Morgan Stanley Dean Witter & Co., which captured 8.10% of the underwriting, and Salomon Smith Barney International with a 7.58% market share. The fourth- and fifth-ranked firms were Deutsche Bank SA and Credit Suisse First Boston.