10. Eurodollars

“In the opinion of Milton Friedman, eurodollars have always represented unsanctioned private money creation because they’re dollars which are transferred about without observation of the principles that govern dollar transfers in the US.”

 

Half euro, half dollar? No, Eurodollar is just a way of

funding, based on the belief that everyone wants to have the currency of the

world the US dollar. The US dollar is the currency of the world because it is

the most liquid one and the one most financial transactions are made in.

Eurodollars are time deposits in dollars. They are pretty much the offshore dollar market. There is not really a connection to Euros, it could also be Yendollars, nevertheless, it is called Eurodollar. The most important thing is that dollars are the basis of the Eurodollar market.

What is very complicated to grasp is that foreign banks receive dollar payments, but the dollars never leave the states. Back in the day it was due to special regulations, nowadays were most regulations have been lifted, it still continued to be that way but also due to the funding market.

 

Why does it not leave the country, if Apple pays 1 Million dollars from his Barclays San Fransico Bank to its German HSBC bank, doesn’t someone send dollars to Germany to keep them in a safe over there? No, the money goes from Barclays San Francisco to HSBC New York and then to HSBC Germany. HSBC Germany only gets a 1 Million Dollar deposit at HSBC New York, they don’t get actual money/currency.

Now HSBC Germany has Dollar Deposits in the States, which is helpful especially working with international clients. Whereas HSBC New York acts like a money dealer, taking a loan and borrowing at the same time.

Furthermore, with a dollar deposit, you can borrow or lend money. Now HSBC Germany has a surplus of 1 Million Eurodollars . Maybe

Citi Bank London needs 1 Million Dollars to settle payments. It could borrow the money from HSBC Germany for the night to settle payments.

That's why the Eurodollar market is a borrowing and lending market because banks want to have a matched books, which means that

their assets are as big as their liabilities. Banks want to have matched books because they don’t earn money with cash sitting around and they are in trouble if they don’t have enough money to meet their payments. So they like to match their cash inflows and outflows. Due to the fact that the Fed is not going to act as the lender of last resort for the international banks (e.g. HSBC Germany) involved in Eurodollars, these banks need to keep a very close eye on matching their assets and liabilities and if they know that they need to make a big payment in lets say two months they sign contracts with other banks to borrow money in two months. They calculate the interest rate on these credits based on the interest rate now combined with the expectation of the future development

of interest rates.

By the way, these agreements to lend or borrow money in the future are not on the balance sheets of the bank and Eurodollars do not

have to follow regulations so they are hard to grasp, identify and I needed quite a while to understand the concept of Eurodollars.

 

Financial Times Quote: In the quote, you can see that the Eurodollars stay within the USA but they are not regulated by the Fed and that is why we have to pay close attention to them because the regulations for them might be too lose.

Introduction

The first article: The hierarchy of money

The second article: Why do we need banks?

The third article: Why we need a central bank?

The fourth article: How can banks create money out of thin air?

The fifth article: Why do we need central banks especially in a crisis?

The sixth article: What are clearing houses?

The seventh article: What are Fed Funds?

The eighth article: What are dealers, brokers and repos?

The ninth article: Quantitative easing and open market operation

The tenth article: Eurodollars

The eleventh article: Discounts, Discounts, Discounts

The twelfth article:  Why dealers provide liquidity

Written by: Philine Paschen

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