Advertisement

Eurobonds

Advertisement

The bonds in financial markets represent a degree of value that refers to a type of loan that makes an investor (who buys the bond) to an issuer (who issues the voucher). There are several types of bonds and one of the best known today is the Eurobond , a type of public debt that is requested by the different States in order to be able to have a better and greater capacity to cope with spending and investment .

Advertisement
What are Eurobonds?

The Eurobonds are a type of foreign financing to which governments can access that can handle tax – free to the carrier and can be delivered in different currencies to countries where they originate.

Advertisement
  • Eurobonds characteristics
  • History
  • What are Eurobonds for?
  • How do they work
  • Causes
  • Advantages of Eurobonds
  • Disadvantages

Eurobonds characteristics

The most important and representative characteristics of Eurobonds are mentioned below:

Advertisement
  • They are instruments that have very good flexibility since they give issuers the ability to choose the country where they will be issued, the interest rates and the market.
  • They are simple to buy and at the same time to be sold .
  • The issuers of Eurobonds are quite varied and can range from governments, supranational institutions and firms working at a multinational level.
  • They have a low risk with respect to the exchange rate .
  • Eurobond interest is fixed and set at regular intervals , usually one year.
  • They can be backed by mortgages .
  • Eurobond interest is not subject to withholding tax.

History

The history of Eurobonds was born in 1963 and they were created by an Italian company called Autostrade , which was dedicated to the construction of highways. It was this company that issued a total of 60,000 bonds to which they gave a value of $ 250 each and delivered them as a type of loan that had a duration of 15 years . These bonds were issued by the Bank of London and it was also listed on the Luxembourg Stock Exchange . Its birth was mainly due as a reaction against the imposition of taxes established by the United States.that sought to level interests. With them, an attempt was then made to reduce the deficit that had been caused in the balance of payments by means of the decrease in the country’s demand with respect to foreign values.

What are Eurobonds for?

Eurobonds are a type of loan that serves so that countries can have a greater capacity to face expenses and so that they can face investment . They make it possible for countries that are or face large debts to have the ability to finance themselves through a guarantee provided by the European Union.

How do they work

Being a type of financial instrument , the Eurobond must be issued by the European Central Bank , which is the only institution that has the capacity to create them and it is this same entity in charge of creating the money and imposing the price that the bonds. The essence of Eurobonds is that a company can choose any country to issue bonds depending on its economic and regulatory environment , this includes, for example, the country’s interest rates , the economic cycle , the size from the market , etc.

Causes

There are several causes that can cause the acquisition of Eurobonds, some of them are the following:

  • The main reason for issuing Eurobonds is the need for capital in foreign currency .
  • To be able to face the debt that occurs as a consequence of the financial crises of the countries.
  • In order to reduce the effects that may be caused due to differences in financing between countries.
  • When it is necessary to be able to provide greater stability to the currency of a certain place.

Advantages of Eurobonds

The advantages of Eurobonds can be very important for countries, among them we find the following:

  • Eurobonds have the advantage of being able to provide benefits to companies by allowing them to obtain credits while maintaining the most stable interest rates.
  • It reduces the likelihood that interest rates will rise which could pose a risk to a country.
  • It manages to stabilize the exchange rate of the currency.
  • It provides greater peace of mind for public workers and pensioners as the country manages to have the necessary liquidity to be able to meet the payments that generally need to be paid at the end of the year.
  • They can prevent a recurrence of the financial crisis that causes a destabilizing economic and political environment.
  • Investors are able to have greater security when buying the bond because the global debt of the eurozone is manageable.
  • The costs of interest rates may be lower in countries, which would give them a much greater capacity to repay the debt outstanding rather than just keep paying interest.

Disadvantages

Eurobonds also have several disadvantages, including the following:

  • Eurobonds have the ability to increase the interest of countries that are members of the euro and this situation can cause countries with greater solvency to reject them.
  • They can lead to serious moral hazard because they could cause countries to misbehave by spending excess money and thereby accumulating debt.
  • With the introduction of Eurobonds, many of the incentives that are responsible for conducting austerity policies are reduced .
  • Loss of the signaling function of financial markets because the issuance of Eurobonds would eliminate the disciplining effect of capital markets on the ability of Member States to generate more debt.

Leave a Comment