Debt issuances in foreign currencies: the euro comes to the fore

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April 8th, 2015

In the first two months of the year, US companies issued debt in euros totalling 33 billion dollars, a figure that breaks all records for this variable and particularly noteworthy when we realise that the total volume in 2014 was 50 billion for the whole of the year. But this rise in issuances of euro-denominated bonds is not limited to US companies; a growing appetite can also be seen in countries such as China and India for debt in the European currency. Several different factors, some cyclical and others structural, lie behind this increased presence of the euro in foreign currency bond markets, suggesting that it might not be temporary.

Of note among the cyclical aspects is the start-up of the large-scale public debt purchase programme in the euro area (quantitative easing). Firstly because it will help to prolong, for a long period, the scenario of very low interest rates and large amount of liquidity in the region. Secondly because of the perception that the euro will remain weak against the dollar and most international currencies. Both circumstances make it more attractive for agents not resident in the euro area to issue bonds in euros. Seen from a different perspective, the gradual tightening up of monetary conditions in the US and the dollar's appreciation are also encouraging issuers to use the euro as the currency for debt. Nevertheless, the dollar's predominance in foreign currency debt issuances is still indisputable. According to the latest data produced by the BIS, at the end of 2013 the outstanding balance of foreign currency debt in dollars amounted to 6.8 trillion dollars, 55% of the total. This percentage falls to 25.3% in the case of  euro-denominated debt securities and to 4.9% in the case of the yen.

At the same time, some structural factors are also playing an important role. The dollar's predominance over the last few years was accentuated by investors' uncertainty regarding the euro due to the outbreak of the sovereign debt and institutional crisis in the euro area. However, resolving the large degree of financial fragmentation between euro area countries and notable advances in governance of the Union are leading to increased investor confidence in the single currency. This will also be helped by the developments observed in the European corporate bond market in terms of size and liquidity, albeit still at some considerable distance from the standards of the US market.

One necessary condition for the euro to be used even more widely in international debt markets is for emerging countries to increase their issuances in this currency. The difficulties faced by emerging countries in accessing international markets using their own currencies means that foreign currency debt securities are the usual choice among the few available to obtain financing. The data provided by the European Central Bank are revealing in this respect: in 2013, 60% of all emerging sovereign debt issuances were denominated in foreign currencies. The gradual incorporation of an increasingly larger number of states and companies from the emerging bloc should therefore be decisive in developing a broad, deep market of international bonds denominated in euros.

In short, although the euro is far from ousting the dollar as the benchmark currency, current conditions in the global environment are helping it to become more important as a debt currency. Nonetheless, the consolidation of this trend will ultimately depend on the institutional strength and stability of Europe's economic and monetary union.