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THE INTERNATIONAL

ROLE OF THE EURO

JULY 2009

In 2009 all ECBpubli catio ns

feature a motiftaken from the

200 b anknot e.


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European Central Bank, 2009

Address

Kaiserstrasse 2960311 Frankfurt am MainGermany

Postal address

Postfach 16 03 1960066 Frankfurt am MainGermany

Telephone

+49 69 1344 0

Website

http://www.ecb.europa.eu

Fax

+49 69 1344 6000

All rights reserved. Reproduction for

educational and non-commercial purposes

is permitted provided that the source is

acknowledged.

As at 30 June 2009.

ISSN 1725-2210 (print)ISSN 1725-6593 (online)


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The international role of the euroJu ly 2009

CONTENTSABBREVIATIONS 6

FOREWORD 7

1 INTRODUCTION 9

2 MAIN FINDINGS 11

3 THE EURO IN GLOBAL MARKETS 15

3.1 The euro in international debtmarkets 15

3.2 The euro in international loanand deposit markets 22

3.3 The euro in foreign exchangeand derivatives markets 26

3.4 The euro in international tradein goods and services 34

4 THE EURO IN THIRD COUNTRIES 43

4.1 Official use: the euro in thirdcountries foreign exchange reserves 43

4.2 Private use: the euro as a parallelcurrency in third countries 48

5 SPECIAL FOCUS: CURRENCY CHOICE

IN THE ISSUANCE OF FOREIGN

CURRENCY-DENOMINATED BONDS 55

5.1 Introduction 555.2 Currency choice in international

bond issuance: a review of theliterature 55

5.3 Issuance of foreign currency-denominated bonds: 1999 to 2008 58

5.4 Modelling currency choice:empirical methodology 60

5.5 Findings 625.6 Conclusions 65

REFERENCES 66

STATISTICAL ANNEX S1

DOCUMENTS ON THE INTERNATIONAL

ROLE OF THE EURO PUBLISHED BY THE

EUROPEAN CENTRAL BANK I

BOXES

Central bank responses to liquidity1needs in foreign currency during theglobal financial crisis 28The international role of the euro2in the market for asset-backedsecurities 31Invoicing and settlement currencies3in international trade: an overview

of available data 36Exchange rate pass-through and the4international role of the euro 39Empirical determinants of the5currency composition of reserves:new evidence from a panel ofEU Member States and emergingeconomies 45Is the global financial crisis6increasing currency substitution incentral, eastern and south-easternEurope? Initial evidence from the

Euro Survey by the OesterreichischeNationalbank 50

CHARTS

1 Domestic and internationalmarket segments of euro anddollar-denominated debt 17

2 Share of the euro in portfolioinvestment assets held in debtsecurities as at end-2007 17

3 International (narrow) andglobal measures of outstanding

international debt securities 184 Stock of international debt

securities (narrow measure):outstanding amounts andcurrency shares 19

5 Outstanding volume of euro-denominated international bondsand notes by sector 20

6 Outstanding volume ofinternational bonds and notes

by sector 207 Outstanding volume of

international bonds and notesby region 21


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8 Euro share in the stock ofoutstanding international debtsecurities in selected regions(Q4 2008) 22

9 International loan markets: allcross-border loans by currency 22

10 Cross-border loans between euroarea and non-euro area entities 23

11 International deposit markets: allcross-border deposits by currency 24

12 Cross-border deposits betweeneuro area and non-euro area entities 25

13 Interbank spot foreign exchangetransactions in EBS 26

14 Settlement volumes in the CLSsystem 27

15 Currency breakdown ofsettlement in the CLS system 27

16 Currency breakdown of OTCinterest rate derivatives 30

17 Currency breakdown of OTCforeign exchange derivatives 30

18 The euros share as a settlement/invoicing currency in extra-euroarea merchandise trade 35

19 The euros share as a settlement/invoicing currency in extra-euroarea trade of services 35

20 The euros share in merchandisetrade of non-euro area countries 37

21 Trade with the euro area andtrade denominated in euro 38

22 Trade denominated in euro as a

ratio of trade with the euro area 3823 Currency composition of globalforeign exchange reserves 44

24 Share of the euro in foreignexchange reserves of selectedcountries 45

25 Net shipments of euro banknotesto destinations outside the euro area 48

26 Regional breakdown of eurobanknote purchases from andsales to destinations 49

27 The share of the euro in the

deposits of selected EU MemberStates and EU candidate countries 52

28 The share of the euro in theloans of selected EU MemberStates and EU candidate countries 53

29 Interest rate differential for theeuro versus issuance (number)of euro-denominated foreigncurrency bonds 57

30 Outstanding amount ofinternational debt securities,

by currency 5831 Average maturity of

international debt securities,by currency (1999-2008) 58

32 Gross issuance (value) ofinternational debt securities,

by type 5933 Gross issuance (number) of

international bonds and notes,by major currency 60

34 Interest rate differentials versusissuance (number) of foreigncurrency-denominated bonds 64

TABLES

1 Key data on the internationalrole of the euro 11

2 Euro-denominated debtsecurities by residence of holderand issuer as at mid-2008 16

3 Alternative measures of debtsecurities supply and majorcurrencies shares 18

4 Net issuance of international

debt securities 195 List of top 20 non-euro area

issuers of euro-denominatedbonds and non-US issuers ofUS dollar-denominated bonds 21

6 Notional principal outstandingin global derivatives markets 29

7 Relative variability of currencyshares in global foreignexchange reserves 44

8 Count model of foreign currencychoice in the issuance of foreign

currency-denominated bonds 63


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CONTENTS

5

STATISTICAL TABLES

1 Currency breakdown of portfolioinvestment assets held in debtsecurities at the end of 2007 S1

2 Currencies shares in the stockof outstanding international debtsecurities in selected regions S2

3 Outstanding international debtsecurities, by currency S3

4 The euros share as a settlement/invoicing currency in extra-euroarea exports and imports ofgoods and services of selectedeuro area countries S4

5 The euros share as a settlement/invoicing currency in extra-EUexports and imports of goods ofselected euro area countries S4

6 The euros share in exports andimports of selected non-euroarea countries S5

7 Outstanding international loans,by currency S6

8 Outstanding internationaldeposits, by currency S7

9 Countries with exchange rateregimes linked to the euro S8

10 Global holdings of foreignexchange reserves, by currency S9

11 Currency composition of foreignexchange reserves for selectedcountries S10

12 Outstanding euro-denominated

bank deposits in selectedcountries and dependent territories S11

13 Outstanding euro-denominatedbank loans in selected countriesand dependent territories S12


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COUNTRIES

AT Austria KR Korea, Republic ofAU Australia LT LithuaniaBE Belgium LU LuxembourgBG Bulgaria LV LatviaCA Canada MY MalaysiaCH Switzerland MK Macedonia, former YugoslavCY Cyprus Republic ofCZ Czech Republic MT MaltaDE Germany MX MexicoDK Denmark NL NetherlandsDZ Algeria PL PolandEE Estonia PT PortugalES Spain RO RomaniaFI Finland RU RussiaFR France SE SwedenGR Greece SI SloveniaHR Croatia SK SlovakiaHU Hungary TH ThailandID Indonesia TR TurkeyIL Israel UA UkraineIN India UK United KingdomIT Italy US United StatesJP Japan

OTHERS

ABS Asset-backed securitiesBIS Bank for International SettlementsCDS Credit default swapCLS Continuous Linked SettlementCOFER Currency Composition of Official Foreign Exchange ReservesCPIS Coordinated Portfolio Investment Survey

EA Euro areaEBS Electronic Broking ServicesECB European Central BankESCB European System of Central BanksEU European UnionIMF International Monetary FundMFI Monetary financial institutionOeNB Oesterreichische NationalbankOTC Over the counterPVP Payment-versus-paymentSPV Special purpose vehicleTARGET Trans-European Automated Real-time Gross settlement Express Transfer system

TIC Treasury International Capital

ABBREVIATIONS


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The international role of the euroJu ly 2009 7

FOREWORD

FOREWORD

This is the eighth issue of the annual review of theinternational role of the euro. It reviews trendsin the use of the euro by non-euro area residentsin global markets and in individual countriesoutside the euro area, and aims to deepen theEurosystems analytical understanding andstatistical coverage of the international use ofthe euro.

The main findings are in line with those ofearlier reviews. The international use of the eurohas continued to display a relatively high degreeof stability over the past year. Although theglobal financial crisis has had a very profoundimpact on many market segments discussed inthe review, the relative importance of majorinternational currencies has remained broadlyunchanged across nearly all market segments.The review also confirms the strong regionalcharacter of the international role of the euro.There is some evidence that the euro has furtherstrengthened its role in currency and asset

substitution in countries with close geographicaland institutional links to the euro area.

Developments in the role of the euro abroad areprimarily the result of market forces and privatesector decisions. The ECB will continue tomonitor the international role of the euro and to

provide regular information to the public.

Jean-Claude Trichet

President of the European Central Bank


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This review examines recent developments inthe use of the euro by non-euro area residentsin international trade and international financialtransactions. It provides the public with a broadset of timely indicators and statistics, drawing

partly on original data compiled by the ECB andthe national central banks of the Eurosystem aswell as on time series provided by other central

banks participating in surveys carried out by theECB. To facilitate the wider use of key data byanalysts and researchers, selected time series are

presented in a coherent and structured way in astatistical annex.

This issue of the review contains some new timeseries, in particular as regards the internationalrole of currencies in asset-backed securitiesmarkets (see Box 2). In addition, data that werenewly introduced in the most recent issues areupdated in the current version, including data onthe use of the euro in derivatives markets anddata from the Coordinated Portfolio InvestmentSurvey (CPIS) of the International MonetaryFund (IMF).

In line with earlier reviews, this issue comparesthe international role of the euro with thatof other major international currencies suchas the US dollar, the pound sterling and theJapanese yen. To facilitate comparisons

between currencies over time, the reviewconsistently removes exchange rate-relatedvaluation effects by presenting statistical time

series at constant exchange rates. During theyear 2008, for instance, the euro depreciated by5.5% against the US dollar,1 triggering, ceteris

paribus, some decrease in the relative weight ofeuro-denominated instruments relative toUS dollar-denominated instruments.

In the review, an effort is made to put theinternational market segments into a broadercontext of recent global macroeconomic andfinancial developments. In addition, cross-references have been introduced between the

various market segments. Also, where relevantand possible, the review compares theinternational use of the euro with its domesticuse in transactions between euro area residents.

This provides another relevant angle from whichto assess the degree of internationalisation ofthe euro.2

Finally, the review further deepens theEurosystems analytical understanding of thedrivers and implications of the international useof the euro. To that end, it contains a specialfocus section presenting the main findings ofrecent ECB staff research on the determinants ofcurrency choice in international bond issuance.Additional new analysis is presented on theimplications of the international role of the euroin trade invoicing for exchange rate pass-through(Box 4) and on the empirical determinants of thecurrency composition of reserves (Box 5).

The review is structured as follows. Section 2summarises the main findings. Section 3examines the role of the euro in globalmarkets, in particular debt securities markets,international loan and deposit markets, foreignexchange markets, and international trade.Section 4 focuses on the euros role in thirdcountries, i.e. countries outside the euro area,including foreign reserves, cash holdings,and bank deposits and loans. This section also

presents updated results of the survey on the useof the euro in central, eastern and south-easternEurope conducted by the Oesterreichische

Nationalbank. Finally, Section 5 contains thespecial focus chapter, which examines thedeterminants of currency choice in the issuance

of foreign currency-denominated bonds.

Change between 31 December 2007 and 31 December 2008.1In a few market segments, only a global measure is presented2of the euros international use, i.e. the sum of domestic andinternational use. This is in particular the case when data sourcesdo not provide a breakdown by residence of transacting agents.

1 INTRODUCTION


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BROAD STABILITY IN THE INTERNATIONAL

ROLE OF THE EURO, DESPITE THE GLOBAL

FINANCIAL CRISIS

This review shows that the globalfinancial

turmoil, despite having a very marked impact

on overallfinancial market activity, has not

triggered any notable shifts in the currency

preferences of market participants. As a

result, the international role of the euro, when

measured relative to the international role of

other currencies, remained fairly stable during

the review period. This also applies to recent

developments following the intensification of the

financial market turmoil in September 2008. All

in all, thisfinding corroborates the conclusion

of earlier reviews that the international role

of currencies tends to be relatively stable

over time.

During the review period, the internationalrole of the euro, when compared with theinternational role of other currencies, remainedrelatively stable across a range of marketsegments. Particularly when measured atconstant exchange rates, changes in the shareof the euro in international financial marketsremained limited over the year 2008.

In international debt markets, the share ofeuro-denominated debt securities in totaloutstanding securities increased by around 1

percentage point between end-2007 and end-2008(see Table 1).3 In cross-border loan and depositmarkets, the share of euro-denominatedinstruments in the fourth quarter of 2008, at22.2% for loans and 22.4% for deposits, wasaround two percentage points higher than oneyear earlier. In foreign exchange trading, theshare of the euro in transactions settled by theContinuous Linked Settlement (CLS) systemincreased from 37.8% on average in 2007 to41.2% on average in 2008. Finally, in globalforeign exchange reserve holdings, the share ofeuro-denominated instruments increasedsomewhat to 26.5% at the end of 2008, from25.3% one year earlier. Overall, these changes incurrency shares across market segments arerelatively limited, and their magnitude is fully inline with fluctuations observed in previous years.

At the same time, the broad stability of therelative importance of the euro as an international

See the notes to Table 1 for precise definitions of the concepts3used in this section.

2 MAIN FINDINGS

Table 1 Key data on the international role of the euro

End-2008 End-20073)

Share of the euro in: (unless otherwise indicated)

stock ofinternational debt securities (narrow definition)1) Q4 2008: 32.2% Q4 2007: 31.3%

stock ofcross-border loans1) Q4 2008: 22.2% Q4 2007: 20.7%

stock ofcross-border deposits1) Q4 2008: 22.4% Q4 2007: 20.5%

daily foreign exchange trading (settled by CLS) 2) Jan 2008 - Dec 2008(average): 41.2%

Jan 2007 - Dec 2007(average): 37.8%

settlement/invoicing of goods exports from selectedeuro area countries to non-euro area countries

2007: 40% to 79% 2006: 39% to 68%

settlement/invoicing of goods imports of selectedeuro area countries from non-euro area countries

2007: 35% to 73% 2006: 34% to 59%

stock ofglobal foreign exchange reserves1) 2008 Q4: 26.5% 2007 Q4: 25.3%

Cumulative net shipments of euro banknotes to destinationsoutside the euro area

Dec. 2008: 95.4 billion Dec. 2007: 71.1 bil lion

Sources: See respective sections of this review.1) At constant Q4 2008 exchange rates.2) Given the convention to account for both sides of each trade in foreign exchange markets, percentages add up to 200%, meaning thatthe euros actual share in total turnover is half the percentage reported in this key data sheet.3) Figures may differ from those presented in the 2008 review owing to data revisions and the recalculation of historical time series atconstant Q4 2008 exchange rates.


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currency was coupled with significant declinesin total outstanding amounts or transactionvolumes across most financial market segments.Following several years of rapid financialmarket expansion, spurred by financialinnovation and globalisation, the global financialturmoil triggered a halt or even a reversal ingrowth in some financial market segments,especially following the intensification of theturmoil in mid-September 2008. During thesecond half of 2008, the stock of internationaldebt securities decreased by 7.7%,4 the stock ofcross-border loans by 17.4%, and the stock ofcross-border deposits by 16.2%, as net issuanceof these instruments was negative throughoutthe second half of the year. Activity alsodeclined on foreign exchange markets, withdata from the EBS electronic trading systemshowing a decline in daily average transactionvolumes from USD 226 billion in the first threequarters of 2008 to USD 179 billion in the lastquarter.5 Also during the second half of 2008,global foreign exchange reserves fell by aroundUSD 300 billion, or 4.3% of their peak in mid-2008, as the central banks of some emergingmarket economies used their foreign exchangereserves to ease depreciation pressures ontheir currencies.

By contrast with this general finding, currencyshares have been considerably more volatile inthe market for asset-backed securities (ABSs),which is covered for the first time in the report

in Box 2. In this market, the share of the euroin international ABS issuance, as defined inthe box, doubled from around 30% on averageduring the years 2006-08 to almost 60% in thelast quarter of 2008, against the background ofvery severe disruptions to the functioning of theABS market in the course of 2008.

In sum, therefore, it seems that the globalfinancial turmoil has had a very marked impacton overall financial market activity, but thatthis impact has been broadly shared among

individual international currencies, leavingrelative currency shares broadly unaffected with the exception of ABS markets. The globalfinancial turmoil thus appears not to have

triggered any marked shifts in the currencypreferences of market participants. This stabilityof currency preferences is in line with theobservation that the US dollar has maintained,as the crisis has unfolded, its status as the mostimportant international currency globally, basedalso on the depth and liquidity of US financialmarkets in an environment offlight to qualityon the part of investors. All in all, these recenttrends corroborate the conclusion of earlierreviews that the international role of currenciestends to be relatively stable and that its dynamicsare characterised by considerable inertia andnetwork effects.

To deepen the Eurosystems analyticalunderstanding of drivers of the role of theeuro in global financial markets, the specialfocus section of this review examines thedeterminants of currency choice in the issuanceof international foreign currency-denominated

bonds. It investigates, in particular, whether theability to lower borrowing costs exploitingdeviations from uncovered or covered interest

parity plays any role in the currency choice ofinternational bond issuers. The analysis suggeststhat issuers prefer, all other things being equal,to borrow in currencies that are associatedwith low nominal interest rates. However,expectations of an appreciation in the issuancecurrency seem to play no role in the currencychoice. Implicit in this finding is the empiricalfailure of uncovered interest parity, a key pillar

of internationalfi

nancial theory.

THE REGIONAL PATTERN OF THE EUROS

INTERNATIONAL ROLE IS CONFIRMED

The review also shows that the international

role of the euro maintains a strong regional

pattern, i.e. its international use continues to

be most pronounced in countries with close

geographical and institutional links with the

euro area. In some countries, there is evidence

of an increasing role of the euro in currency

substitution (use of euro banknotes) and asset

substitution (use of the euro in bank deposits and

Data based on the narrow measure as reported in Section 3.1.4The data source is described in Section 3.3.5


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2 MAIN FINDINGS

13

loans) during 2008. These trends are not without

risks for the countries concerned. In particular,

the globalfinancial crisis has underscored the

risks associated with unhedged borrowing by

households and corporations in some non-euro

area EU Member States and EU candidate or

potential candidate countries, as a depreciation

of some currencies against the euro may lead

to an increase in the borrowing costs of these

economic agents.

As documented in earlier reviews, the europlays a predominant role in both internationaland domestic transactions of countries withclose geographical and institutional links withthe euro area. This applies, in particular, tosome non-euro area EU Member States, mostof the EU candidate and potential candidatecountries, and some of the other countries in EUneighbouring regions.

In terms of international trade, the eurosalready high share in settlement and invoicingcontinued to increase during 2007 in most non-euro area EU Member States and EU candidatecountries. A closer analysis of available data,also drawing on the experience of countries

joining the euro area between 2007 and 2009,suggests that network externalities and thechoice of exchange rate regime might influencethe growing use of the euro in invoicing andsettlement of trade in countries outside the euroarea (see Section 3.4).

In terms of international finance, euro-denominated instruments appear to dominatethe international asset and liability positionsof euro area neighbouring countries. On theliability side, recent data on international debtsecurities confirm the predominant share ofeuro-denominated instruments in the externaldebt of these countries (see Section 3.1). Onthe asset side, euro-denominated instruments

prevail within the foreign exchange reserveportfolios of those central banks of non-euro

area EU Member States that disclose theirreserve composition (see Section 4.1). Newanalytical findings suggest that the share ofthe euro in these reserve holdings has been

rising over time, mainly owing to exchangerate arrangements using the euro as a point ofreference and the denomination of external debtin euro (see Box 5).

In domestic transactions, the euro playsa predominant role in currency and assetsubstitution, i.e. in the use of foreign currencycash holdings and foreign currency-denominated

bank deposits and loans. The review providessome tentative evidence of an increase in currencyand asset substitution across several central,eastern and south-eastern European countries.While respondents to the latest half-yearlysurvey conducted by the Oesterreichische

Nationalbank did not report a change in behaviour(see Box 6), more recent data seem to point to anincrease in both currency and asset substitution.Specifically, the use of euro banknotes, whichis concentrated to a considerable extent in euroarea neighbouring regions, increased, with dataon cumulated shipments of euro banknotesrecording an unprecedented increase from

71.1 billion in December 2007 to 95.4 billionin December 2008. This rise signals an increased

preference for cash holdings in some non-euroarea countries, reflecting public concern about

potential bank solvency problems in the contextof the intensifying global financial turmoil. Asregards asset substitution, the share of the euroin bank deposits and loans increased in mostnon-euro area EU Member States andEU candidate countries, suggesting that the euro

has to some extent fulfi

lled a safe haven rolein a few of these countries during the globalfinancial crisis (see Section 4.2).

The analysis in this review confirms thatthe intensity of the use of the euro differsconsiderably across countries. Cross-countrydifferences are due to various elements,including trade patterns, consumer preferences,historical traditions, regulatory and supervisory

policies, and the track records of local currenciesin terms of price stability.

The global financial crisis has highlighted thatthe international use of currencies in thirdcountries may create macroeconomic and


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financial stability risks. In particular, thewidespread extension of foreign currency-denominated or foreign currency-indexed loansin some central, eastern and south-easternEuropean countries has created risks in the

balance sheets of economic agents. On the flowside, because of the low initial debt servicing costsassociated with a large interest rate differentialvis--vis domestic currency loans, the extensionof foreign currency loans may contribute tooverall credit growth, thereby potentiallycontributing to excessive credit growth during

boom periods. On the stock side, a high levelof outstanding loans denominated in foreigncurrency may pose potential risks to financialstability. Through the extension of foreigncurrency loans, banks have converted exchangerate risk into credit risk. While a change in theexchange rate no longer directly affects banks

balance sheets, it would change the value ofthe loan relative to the repayment capacity ofunhedged borrowers.


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3 THE EURO IN GLOBAL MARKETS3.1 THE EURO IN INTERNATIONAL DEBT

MARKETS

The international use of the euro in debt

securities markets arises when an instrument

denominated in euro is issued by a non-euro

area resident, is held by a non-resident, or is

both issued by and held by non-residents. A

comparison of these three aspects can be derived

indirectly by combining various data sources,

including the international investment position,

for which, in the case of the euro area, a

currency breakdown is available until mid-2008.

These data suggest that the euros use in global

debt securities markets has a similar structure

to that of the US dollar, with euro-denominated

debt held by non-residents being somewhat

more significant than euro-denominated debt

issued by non-residents.

More timely data up to the end of 2008 are

available on the issuer perspective of the

international use of the euro in international

debt securities markets. Thesefigures show that

thefinancial crisis while having led to a decline

of amounts outstanding in most international

market segments has hardly impacted the

currency composition of international debt

markets. The share of the euro in international

debt securities (excluding domestic issuance)

increased by around 1 percentage point

to 32.2% when measured at constant

exchange rates.

As in the past, three structural elements

continue to characterise euro-denominated

debt issued by non-residents. First, financial

institutions account for a larger share of total

international debt than in the case of other

major international currencies. Second, issuers

from non-euro area EU countries (in particular

Denmark, Sweden and the United Kingdom) but

also from North America are among the largest

non-euro area issuers of euro-denominated

debt. Third, in terms of the issuing countries,

the euro has retained its regional importanceas the main international currency for

issuing debt in countries in central, eastern

and south-eastern Europe.

This section examines recent developments inthe use of the euro in international debt markets,which includes bonds, notes and moneymarket instruments. The international use ofa currency in debt securities markets ariseswhen an instrument denominated in a specificcurrency is issued by a non-resident, is held by anon-resident, or is both issued by and held bynon-residents. These three distinct aspects of theinternational use of currencies can be capturedindirectly by combining various data sources,and with a significant reporting lag. Evidencefor mid-2008 is presented in Sub-section 3.1.1,which focuses on the international use of theeuro in debt securities markets but also providesa comparison with the use of the US dollar as atend-2007. In addition, more detailed evidence atthe level of third countries is presented, derivedfrom the IMFs CPIS as at end-2007.

More timely and detailed data are available forone of these three aspects, namely the internationaluse of the euro from an issuer perspective.Sub-section 3.1.2 reviews currency shares in thismarket segment and compares them with globaldebt markets which include domestic issuanceas at end-2008. Sub-section 3.1.3 provides moredetails on recent and structural developmentswithin the market segment of euro-denominateddebt securities issued by non-residents.

3.1.1 DOMESTIC AND INTERNATIONAL DEBT

SECURITIES MARKETS DENOMINATED

IN EURO AS AT MID-2008

The three aspects of the international use of theeuro in debt securities markets can be gauged bycombining information on the currency

breakdown of euro area portfolio investmentassets and liabilities with data from the Bank forInternational Settlements (BIS) on totaloutstanding debt securities denominated in euro(the global measure of international debtsecurities, which includes domestic issuance)and outstanding euro-denominated debt issued

by non-residents (the narrow measure ofinternational debt securities).6 The resulting

Debt issuance by non-residents may include issuance by6subsidiaries of euro area entities resident outside the euro area.


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figures allow a broad comparison of therespective market segments in terms of absoluteand relative magnitudes (see Table 2).7 Thesefigures suggest that, as at mid-2008, the threeaspects of the international use of the eurodiffered in terms of size:

Euro-denominated debt securities issuedby residents, and held by non-residents,accounted for the largest share of theinternational use of the euro, with a totaloutstanding amount of 2.1 trillion.

Euro-denominated debt securities issuedby non-residents, and held by residents,amounted to 1.5 trillion.

Euro-denominated debt securities that wereboth issued and held by non-residents were,in relative terms, the least important segment,with an outstanding amount of 791 billion.

The comparison suggests two preliminaryconclusions with respect to the internationalisationof euro-denominated debt securities. First, theinternational use of the euro in debt securities

markets has remained relatively small incomparison with the domestic market, as theoutstanding amount of debt securities that were

both issued and held by euro area residentsamounted to 12.6 trillion (74% of totaleuro-denominated debt) as at mid-2008. Second,within the international market segments,euro-denominated debt held by non-residentsis somewhat more significant than euro-denominated debt issued by non-residents. Thiswould suggest that the international use of theeuro in debt securities markets is driven relativelystrongly by issuance from the euro area itself.

These observations appear to be broadlycomparable with the international use of debtsecurities denominated in US dollar, which can

be approximated by combining BIS data withfigures provided by the US Treasury InternationalCapital (TIC) reporting system.8 The latter are,however, only available as at end-June of eachyear (see Chart 1). However, the share of debtsecurities held by non-residents in total US dollar-denominated debt is somewhat higher (around27%) than in the case of euro-denominated debt(17%). Further comparing the magnitude of theinternational market segments for euro and USdollar-denominated debt securities suggests thatentirely international debt securities i.e. thoseissued and held by non-residents are somewhatmore significant in the case of the US dollar.

Likewise, US dollar-denominated debt securities

which are issued domestically but held bynon-residents are somewhat more significantthan in the case of the euro. Debt securitieswhich have been issued by non-residents butheld domestically, on the other hand, are inrelative terms more significant in the case ofthe euro.

Owing to distinct valuation methods, these figures are not perfectly7comparable. In particular, data on debt issued by non-residentsand held by residents as well as debt issued by residents and heldby non-residents are derived from the euro areas internationalinvestment position, which reports figures at market value.

These figures may not be perfectly comparable as they are8derived from different sources which may have distinct valuationmethods and different reference periods. In particular, figures onUS dollar-denominated debt securities which have been issued byUS residents and are held by non-residents refer to June 2007.

Table 2 Euro-denominated debt securities byresidence of holder and issuer as at mid-2008

(international role is indicated by shaded areas)

Held by

residents

Held by

non-residents

Total

EUR billions

Issued by residents 12,603 2,118 14,722Issued bynon-residents 1,456 791 2,247

Total 14,060 2,909 16,968

As a percentage of total euro-denominated debt

Issued by residents 74.3 12.5 86.8Issued bynon-residents 8.6 4.7 13.2

Total 82.9 17.1 100.0

Sources: ECB, BIS and ECB staff calculations.Notes: Figures are only indicative as they are derived fromdifferent sources with distinct valuation methods. In particular,data on debt issued by non-residents and held by residentsas well as debt issued by residents and held by non-residentsare derived from the euro areas international investmentposition, which reports figures at market value. Figures for totaleuro-denominated debt and total euro-denominated debt issuedby non-residents, on the other hand, are based on BIS figures,which report notional amounts outstanding.


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3 THE EUROIN GLOBAL

MARKETS

17

In addition to a broad analysis by residents versusnon-residents, a more detailed geographical

breakdown of international debt securities is oftenof interest, providing useful indications onwhether an international currency is mainly usedin specific regions or globally. While informationon the residency of non-resident issuers of debtsecurities is available in a timely andcomprehensive manner (see Sub-section 3.1.3),data on holdings of cross-border debt securities

by currency at the country level are only availablefor some countries which report such informationto the IMFs CPIS.9 As in the past, such figures

continue to suggest that mainly non-euro areaEU countries and EU neighbouring countrieshold a notable share of their foreign debt securitiesin euro-denominated instruments (see Chart 2and Table 1 of the statistical annex).

CPIS figures refer to cross-border assets and therefore do not fully9correspond to total euro-denominated debt held by non-residents.For example, euro-denominated debt issued by a US entity wouldnot appear in the international investment position of the UnitedStates since it represents a cross-border claim. Likewise, CPISfigures do not fully correspond to euro-denominated debt issuedby euro area residents since, in the above example, US economicagents could also hold euro-denominated debt issued by an entityresident in the United Kingdom.

Chart 1 Domestic and international market segments of euro and dollar-denominated debt

(as a percentage of total debt securities outstanding)

euro US dollar

entirelyinternational

issued outside held domestically

issueddomestically held outside

entirelydomestic

entirelyinternational

issued outside held domestically

issueddomestically held outside

entirelydomestic

Sources: ECB, BIS, IMF, US TIC reporting system and ECB staff calculations.Notes: Figures refer to different reference periods and are only indicative as they are derived from different sources with distinct valuationmethods (see notes to Table 2).

Chart 2 Share of the euro in portfolio investment assets held in debt securities as at end-2007

(percentages)

Selected developed economies Selected emerging market economies

4844

37

20 18

107

0

10

20

30

40

50

60

0

10

20

30

40

50

60

DK SE CH JP IL US KR

28 2833

60

25

6 0 50

10

2030405060708090

100

010

2030405060708090100

UA HU RO BG PL TH MX RU

Sources: IMFs CPIS and ECB calculations.


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CPISfigures suggest that countries in the westernhemisphere and Asia hold sizeable shares oftheir foreign debt in US dollar-denominatedsecurities (see Table 1 of the statistical annex).

3.1.2 TRENDS IN THE GLOBAL CURRENCY

COMPOSITION OF INTERNATIONAL DEBT

SECURITIES MARKETS DURING 2008

Monitoring the international role of currenciesby computing currency shares in global debtsecurities markets is often carried out with afocus on the narrow measure of internationaldebt securities, as this measure is the onlyindicator which is available in a timely mannerand which unambiguously includes onlyinternational transactions. Nevertheless, ithas been argued that the concept of a globalcurrency should also reflect the size of thedomestic market segment (Thimann, 2009).Indeed, the determinants of currency preferenceswithin this narrow market segment may differfrom broader trends. For example, there areindications that financial institutions active inthese international debt markets make currencychoices on the basis of interest rate differentials(see the special focus section). Againstthis background, this sub-section reviewsdevelopments in the currency composition ofthe narrow measure and the global measure ofinternational debt securities during 2008.

As at the fourth quarter of 2008, the global

measure of euro-denominated debt, i.e. totaldomestic and international debt in euro, stood atUSD 24.6 trillion (see Table 3). The share of theeuro in global debt markets increased slightly,

by around one percentage point, to 29.5% when

adjusted for valuation effects (see Chart 3).At the same time, the share of US dollar-denominated debt securities remained broadlyunchanged when adjusted for valuation effects.

Table 3 Alternative measures of debt securities supply and major currencies shares

(fourth quarter of 2008; values at current exchange rates)

Amounts outstanding (USD billions) Shares (%)

Total Euro US dollar Japanese yen Euro US dollar Japanese yen

Narrow measure 9,625 3,098 4,299 656 32.2 44.7 6.8Global measure 83,530 24,601 33,225 11,861 29.5 39.8 14.2

Sources: BIS and ECB calculations.

Chart 3 International (narrow) and globalmeasures of outstanding international debtsecurities

(USD trillions; at current exchange rates)

Amounts

0

10

20

30

40

5060

70

80

90

0

10

20

30

40

5060

70

80

90

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

international (narrow measure)domestic

global

(percentages; at constant exchange rates)

Euro shares

1015202530354045505560

1015202530354045505560

globalnarrow

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Sources: BIS and ECB calculations.Note: The shares at constant exchange rates are reported atQ4 2008 exchange rates.


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19ECB


3 THE EUROIN GLOBAL

MARKETS

19

According to the narrow measure, internationaldebt securities denominated in euro stood at end-2008 at USD 3.1 trillion (see Table 3).10 The shareof the euro in this market segment increased byaround 1 percentage point to 32.2% when adjustedfor valuation effects (see the next sub-section for amore detailed discussion).

3.1.3 THE MARKET FOR EURO-DENOMINATED

DEBT SECURITIES ISSUED BYNON-RESIDENTS: RECENT DEVELOPMENTS

AND STRUCTURE AS AT END-2008

RECENT DEVELOPMENTS IN INTERNATIONAL

DEBT SECURITIES MARKETS

In the fourth quarter of 2008 the net issuance ofinternational debt securities (measured throughoutthis sub-section according to the narrow definition,

i.e. excluding domestic issuance) turned negative(see Table 4). This reflected the impact of theglobal financial turmoil, which intensified aftermid-September 2008 and resulted in a notabledecline in issuance of money market instrumentsand, to a lesser extent, bonds and notes (see alsoBIS, 2009).11

Some international institutions such as the BIS also refer to a10broad measure of international debt securities, which adds to

the narrow measure domestic bond issues which are targeted atinternational markets. The share of the euro in this measure hasremained broadly stable, reaching 47.7% at end-2008. However,the broad measure of international debt securities may overstatethe extent to which euro-denominated issues are targeted towardsthe international market. For example, the broad measureincludes issuances placed by a syndicate offinancial institutionsin which at least one institution does not share the borrowersnationality. In the case of the euro area, this also applies to othereuro area countries.The findings of the BIS are not fully comparable since they refer11to the broad measure of international debt securities.

Chart 4 Stock of international debt securities (narrow measure): outstanding amountsand currency shares

(USD trillions; at current exchange rates) (percentages; at constant exchange rates)

Amounts Shares

0

2

4

6

8

10

12

0

2

4

6

8

10

12

USDEURJPYother currencies

1999 2000 2001 2002 2003 2004 2005 2006 2007 20080

10

20

30

40

50

60

0

10

20

30

40

50

60

USDEURJPY

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008


Table 4 Net issuance of international debt securities

(narrow measure, i.e. excluding home currency issuance; USD billions)

Annual Quarterly

2005 2006 2007 2008 2007

Q4

2008

Q1 Q2 Q3 Q4

Euro 232.1 290.0 336.2 179.7 37.0 72.5 133.1 12.8 -38.7US dollar 321.9 752.4 729.6 110.8 34.5 38.8 93.1 23.1 -44.2Japanese yen -1.0 15.3 76.2 9.2 21.2 11.5 20.9 2.7 -25.9

Total (including. other currencies) 764.2 1,321.7 1,406.7 381.8 127.2 178.2 314.1 33.7 -144.2



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As a result of these developments, the stock ofoutstanding international debt securities declinedto USD 9.6 trillion (from USD 10.4 trillion inJune 2008). This decline in amounts outstandingwas broadly symmetric across the majorcurrencies, so that the currency composition ofthe stock of international debt securities hardlychanged, with the share of the euro increasing

by around 1 percentage point when adjusted forvaluation effects (see Chart 4).

INTERNATIONAL BONDS AND NOTES BY SECTOR

AND GEOGRAPHICAL ORIGIN OF ISSUANCE

As in the past, an updated breakdown by sectorand residency of issuer is used to underpinthe structural characteristics of internationaleuro-denominated bonds and notes (excludingmoney market instruments). As in the caseof international debt securities, the amountoutstanding of international bonds and notesdenominated in euro decreased during the secondhalf of 2008, albeit to a lesser extent as moneymarket instruments are excluded from thismeasure. The decline was distributed broadlysymmetrically across sectors (see Chart 5).

In line with previous findings, the majorityof international euro-denominated bonds andnotes thus continued to be issued by the private

sector, and in particular by the financial sector(see Chart 6). As at end-2008, financialinstitutions share in total international bondsand notes denominated in euro stood at 71.3%,which was higher than their share in international

bonds and notes denominated in US dollars(54.4%) and Japanese yen (54.7%). At the sametime, the share of sovereign issuers in total

Chart 5 Outstanding volume of euro-denominated international bonds and notes by sector

(USD billions)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

international organisationsfinancial institutionscorporationsother public entities 1)

sovereign

Sep. Sep.Mar. Mar. Sep.Mar. Sep.Mar. Sep.Mar. Sep.Mar. Sep.Mar. Sep.Mar. Sep.Mar. Sep.Mar.

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Sources: BIS and ECB calculations.1) includes public corporations, public banks and other public financial institutions.

Chart 6 Outstanding volume of internationalbonds and notes by sector

(percentages; fourth quarter of 2008)

0102030405060708090

100

0102030405060708090100

2,899 4,000 625

EUR USD JPY

sovereignother public entities 1)

corporationsfinancial institutionsinternational organisations

market size (USD billions)

Sources: BIS and ECB calculations.1) includes public corporations, public banks and other publicfinancial institutions.


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21ECB


3 THE EUROIN GLOBAL

MARKETS

21

international bonds and notes denominated ineuro remained smaller (6.0%) than in the case ofthose denominated in US dollars (11.4%).

During the review period, financial institutionsbased in the United Kingdom were the largestissuers of euro-denominated bonds (see Table 5).At the same time, investment banks in the UnitedStates were somewhat less active in issuingeuro-denominated debt than in the past. A

similar ranking for US dollar-denominatedbonds issued by non-US residents finds that in line with previous findings European

public banks are among the largest issuers ofUS dollar-denominated debt.

As in the past, a geographical breakdown ofinternational bonds and notes denominated ineuro by the region in which the issuers residesuggests that non-euro area EU countries(in particular Denmark, Sweden and theUnited Kingdom) account for the bulk of

such instruments (see Chart 7). At the endof 2008, the share of these countries in totaleuro-denominated international bonds andnotes had increased to 47.5% (from 45% at

end-2007). At the same time, the share of NorthAmerican issuers in total euro-denominatedinternational bonds and notes decreasedslightly to 23.3% (from 23.9% at end-2007).

Nevertheless, these figures underscore that, in

Table 5 List of top 20 non-euro area issuers of euro-denominated bonds and non-US issuersof US dollar-denominated bonds

(total amount issued in the review period; EUR millions)

Top 20 non-euro area issuers of euro-denominated bonds Top 20 non-US issuers of US dollar-denominated bonds

Barclays Bank plc 15,236 Kreditanstalt fuer Wiederaufbau KfW 24,453Credit Agricole SA (London) 12,599 European Investment Bank EIB 23,209Credit Suisse (London) 10,773 Newfoundland CLO 1 Ltd 15,491UBS AG (London) 9,952 Royal Bank of Scotland plc 7,910Holmes Master Issuer plc Series 2008 1 9,405 Landwirtschaftliche Rentenbank 7,050Royal Bank of Scotland plc 8,392 Westpac Banking Corp 6,776Bank of Scotland plc 8,200 Barclays Bank plc 6,387

Danske Bank A/S 7,700 Royal Bank of Canada 6,134DnB NOR Bank ASA 7,621 Rabobank Nederland 5,842JP Morgan Chase & Co 6,338 Bank Nederlandse Gemeenten NV BNG 5,455Skandinaviska Enskilda Banken AB SEB 6,210 National Australia Bank Ltd 5,332Swedbank AB 5,780 Australia & New Zealand Banking Group Ltd ANZ 5,253Colston No 2 plc 5,726 Inter-American Development Bank IADB 4,893EFG Hellas plc 5,630 Instituto de Credito Oficial ICO 4,410Svenska Handelsbanken AB 5,515 Holmes Master Issuer plc Series 2008-2 3,837Goldman Sachs Group Inc 5,093 ANZ National International Ltd (London) 3,811Greenock Funding No 2 plc 5,048 Credit Suisse (Guernsey) Ltd 3,741Toronto-Dominion Bank 5,000 Caisse dAmortissement de la Dette Sociale CADES 3,727Alpha Credit Group plc 4,809 IBRD World Bank 3,726Swedbank Mortgage AB 4,585 Svenska Handelsbanken AB 3,655

Memo item:European Investment Bank 17,486

Sources: DCM Analytics and ECB calculations.

Chart 7 Outstanding volume of internationalbonds and notes by region

(percentages; fourth quarter of 2008)

2,899 4,000

market size (USD billions)625

010

2030405060708090

100

010

2030405060708090100

EUR USD JPY

other

international organisationsoffshore centresLatin AmericaAsia & PacificNorth America

non-EU Europe

new member statesDenmark, Sweden,United KingdomEuro area



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addition to the large non-euro area EU countries,other major economic areas such as NorthAmerica account for a notable share of totaleuro-denominated debt issued by non-residents.

3.2 THE EURO IN INTERNATIONAL LOAN

AND DEPOSIT MARKETS

International loan markets contracted in the

fourth quarter of 2008 due to the globalfinancial

crisis. The share of the euro in total cross-border

loans increased by around one percentage point

to 22.2% when measured at constant exchange

rates. Likewise, international deposits contracted

during the third and fourth quarter of 2008. The

share of the euro in these markets increased by

around two percentage points to 22.4% when

adjusted for valuation effects.

3.2.1 THE ROLE OF THE EURO IN INTERNATIONAL

LOAN MARKETS

Following several years of very strong growth,the cross-border loan market stopped expandingin the course of 2008. The total outstandingamount of cross-border loans by banks tonon-financial firms and households continued toincrease during the first quarter of the year, butdeclined in the subsequent quarter.12 In thefourth quarter, outstanding cross-border loanstotalled USD 5.1 trillion, down fromUSD 6.2 trillion at the end of March 2008(see Chart 9, left panel).

This decline in outstanding amounts ofcross-border loans implying a virtual drying-upof new loan issuance can be attributed to theglobal financial turmoil, and broadly mirrors thereduction in domestic credit expansion observed

This decline reflected valuation effects, in particular a decline in12the US dollar value of non-US dollar-denominated loans. Whenadjusting for valuation effects, total cross-border loans increasedslightly during the second and third quarters of 2008.

Chart 8 Euro share in the stock ofoutstanding international debt securities inselected regions (Q4 2008)

(narrow measure, i.e. excluding home currency issuance; as apercentage of the total amount outstanding)

78.7

58.853.7

42.5

22.816.1 15.2 13.8

01020

30405060708090

01020

30405060708090

1 2 3 4 5 6 7 8

1 Central and Eastern European EU

2 DK, SE and UK

3 North America

4 Africa

5 Asia and Pacific

6 Offshore centres

7 Latin America

8 Middle East


Chart 9 International loan markets: all cross-border loans by currency

(USD billions) (percentages; at constant exchange rates)

Amounts Shares

01,000

2,000

3,000

4,000

5,000

6,000

7,000

01,000

2,000

3,000

4,000

5,000

6,000

7,000

1999 2001 20022000 2003 2004 2005 2006 2007 2008

USDEURJPYother

010

20304050607080

010

20304050607080

USDEURJPY

1999 2001 20022000 2003 2004 2005 2006 2007 2008

Source: BIS and ECB calculations.


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23ECB


3 THE EUROIN GLOBAL

MARKETS

23

Chart 10 Cross-border loans between euro area and non-euro area entities

(fourth quarter of 2008)

Banks Non-banks

Euro area

43.3%

38.2%

1.7%

8.1%

8.7%

31.6%

56.8%

1.3%4.0%

6.3%

59.9%

7.3%

4.3%

4.1%

24.5%21.6%

0.7%

5.9%

17.6% 54.3%

Total volume (USD billions)

1,245

Total cross-border loans (USD billions)

5,190


783

Total volume 2) (USD billions)

1,312

Total volume 1) (USD billions)

3,161.5

US dollareuroJapanese yenpound sterlingother currencies

Non-euro area

BanksNon-banks

Sources: BIS and ECB calculations.Note: Excluding interbank loans.1) Including loans to/from Japan, Switzerland, the United Kingdom and the United States in their domestic currency.2) Excluding loans to/from Japan, Switzerland, the United Kingdom and the United States in their domestic currency.


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within most advanced and emerging marketeconomies. Funding shortages, a generalisedincrease in risk aversion, and uncertaintiesabout the economic outlook are among themajor drivers of the slowdown in internationaland domestic credit expansion.

At the same time, the crisis did not have amarked impact on the currency compositionof total cross-boarder loans, which remainedrelatively stable throughout the year. As ofend-2008, the share of the euro stood at 22.2%,i.e. around one percentage point higher than atend-2007 when accounting for valuation effects(see Chart 9, right panel).

The currency composition of total cross-borderloans can be broken down from a euro area

perspective into three sub-segments, namely(i) loans by euro area banks to borrowers outsidethe euro area, (ii) loans by non-euro area banksto borrowers in the euro area and (iii) loans by

banks outside the euro area to borrowers outsidethe euro area. As shown in Chart 10, the shareof the euro remained most significant in thesecond sub-segment, where more than half(56.8%) of the loans were denominated in euroas at the third quarter of 2008. Loans in the firstsub-segment were mostly denominated inUS dollars, while the euro accounted for 38.2%

of such loans. When considering the share of theeuro in loans entirely outside the euro area andcomparing it with the share of other majorcurrencies in this market segment, it isappropriate to exclude loans denominated inthese currencies from and to the respectivehome countries (e.g. cross-border US dollar-denominated loans from US banks or toUS borrowers are excluded for the purpose ofsuch a comparison; see the currency breakdownon the bottom right of Chart 10).13 At the end ofDecember 2008, the share of the euro in suchpurely international loans stood at 17.6%.

3.2.2 THE ROLE OF THE EURO IN INTERNATIONAL

DEPOSIT MARKETS

As in the case of the cross-border loan market,the global financial turmoil had a significantimpact on the cross-border deposit market in thecourse of 2008.14 At the end of the fourth quarterof 2008, the total outstanding amount of cross-

border deposits, at USD 5.8 trillion, was 16%

In order to arrive at the measure of total cross-border loans13presented above, however, such loans are included (i.e. the totalon the bottom left of Chart 10 is used).Total cross-border deposits exclude interbank deposits and refer14to the sum of deposits by non-euro area residents in euro areabanks, deposits by euro area residents in non-euro area banksand deposits made entirely outside the euro area.

Chart 11 International deposit markets: all cross-border deposits by currency

(USD billions) (percentages; at constant exchange rates)Amounts Shares

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1999200020012002200320042005200620072008

USDEURJPYother

0

10

20

30

40

50

60

70

80

0

10

20

30

40

50

60

70

80

1999 2000 2001 2002 2004 2006 20082003 2005 2007

USDEURJPY



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25ECB


3 THE EUROIN GLOBAL

MARKETS

25

Chart 12 Cross-border deposits between euro area and non-euro area entities

(fourth quarter of 2008)

31.9%

50.8%

1.5%

10.0%5.7%

32.8%

46.3%

1.4%

9.1%

10.4%

71.9%

0.0%

2.5%

5.4%

10.2% 52.3%

21.7%

3.2%

2.6%

20.2%

Non-euro area


762

US dollareuroJapanese yenpound sterlingother currencies

Total volume1) (USD billions)

3,991.3

Total volume2) (USD billions)

1,830


1,109

.

0.8%

1.5

46.3%

71..4

Banks Non-banks

BanksNon-banks

Euro area

Total cross-border deposits (USD billions)

5,862


Note: Excluding interbank deposits.1) Including deposits in/of Japan, Switzerland, the United Kingdom and the United States in their domestic currency.2) Excluding deposits in/of Japan, Switzerland, the United Kingdom and the United States in their domestic currency.


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below its peak at the end of the first quarter of2008 (see Chart 11, left panel).15

This decline suggests that cross-border depositshave been negatively affected by heighteneduncertainty stemming from the intensification ofthe global financial crisis.

The share of the euro in international depositmarkets after adjusting for valuation effects increased by around two percentage points to22.4% in December 2008.

The currency composition of cross-borderdeposits can be broken down from a euro area

perspective into (i) deposits by non-euro arearesidents in euro area banks, (ii) deposits byeuro area residents in non-euro area banks and(iii) deposits made entirely outside theeuro area. The share of the euro remained

particularly significant in deposits by non-euroarea residents in euro area banks (50.8%) and indeposits by euro area residents in non-euro area

banks (46.3%). As in the case of internationalloans, when considering transactions entirelyoutside the euro area, deposits which aredenominated in other major currencies andwhich are either made by or to residents of thehome countries of those currencies are excludedfor the purpose of a comparison of the share ofthe euro with that of other major currencies.16At the end of December 2008, the share of theeuro in such a measure of purely international

deposits stood at 21.7%.

3.3 THE EURO IN FOREIGN EXCHANGE AND

DERIVATIVES MARKETS

The sometimes substantial disruptions

witnessed in foreign exchange and derivatives

markets during the period under review, while

clearly discernible in transaction volumes and

outstanding amounts, had no major impact on

the currency composition up to the end of 2008.

Indeed, currency shares in the settlement ofobligations related to foreign exchange trades

as reported by the CLS system 17 were virtually

unchanged in 2008, considerable fluctuations

in activity notwithstanding. Similarly,

developments observed in derivatives markets

by the end of 2008 point to no major changes

to the trends prevailing before the onset of the

globalfinancial turmoil in the summer of 2007,

regardless of the ruptures experienced by some

segments of the derivatives markets since then.

3.3.1 FOREIGN EXCHANGE MARKETS

The uninterrupted rise in trading on foreignexchange markets witnessed in previous yearsappears to have come to a halt in the courseof 2008, with available evidence suggesting acontraction towards the end of the review period.Data obtainable from EBS 18 show a decline involume to a daily average of USD 179 billion inthe last quarter of 2008, following transactions

This decline can be explained only to some extent by valuation15effects.As in the case of international deposits, in order to arrive at the16

measure of total cross-border deposits presented above, however,such deposits are included (i.e. the total on the bottom left ofChart 12 is used).The CLS system was launched in September 2002 and is17operated by CLS Bank International, a single-purpose bankunder the primary supervision and lead oversight of the FederalReserve System. CLS addresses the problem of foreign exchangesettlement risk, settling the two legs of a foreign exchange tradesimultaneously on a payment-versus-payment basis, as soon assufficient funds are available. It is the second largest paymentsystem settling euro transactions after TARGET.Next to Reuters Matching, EBS is the leading electronic trading18system in the interbank market for spot foreign exchangetransactions (see Gallardo and Heath (2009), pp. 84-85).According to a study conducted by the ECB in 2003, the twosystems accounted for around 85% to 90% of these transactions

(see ECB (2003), p. 26).

Chart 13 Interbank spot foreign exchangetransactions in EBS

(average daily volume; USD billions)

0

50

100

150

200

250

300

0

50

100

150

200

250

300

2006 2007 2008

Source: ICAP.


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27ECB


3 THE EUROIN GLOBAL

MARKETS

27

valued at USD 226 billion in the first threequarters (see Chart 13). Notably, volumes seemto have risen significantly with the onset of thefinancial market turmoil in the summer of 2007,

before shrinking considerably in parallel withits intensification in September 2008. The initialsurge in trading may be a reflection of heightenedactivity against the background of the evolvingstrains in financial markets in combination withthe general trend of increasing foreign exchangemarket volumes. This interpretation is supportedin particular by the spike witnessed inSeptember 2008, when average daily volumesrose to USD 274 billion, from USD 202 billionin August, in parallel with the considerabledisruptions observed in financial markets duringthat month.19 The subsequent drop may have

been triggered by a lack of trust among dealersin the interbank spot foreign exchange marketcomparable with that prevalent in interbankmoney markets at the time. Additionally, somemajor market participants such as hedge funds,using prime brokerage services enabling themto trade foreign exchange in the banks nameand with the banks credit ratings, may haveexited the market in the face of growing riskaversion and soaring costs which limited theroom for the implementation of their tradingstrategies.

The fluctuations in transactions conducted viaEBS are broadly mirrored by settlement data forobligations related to foreign exchange trades

provided by CLS. Indeed, after daily volumesaveraging 2.3 trillion between January 2006and June 2007, activity increased to 2.7 trillion

between July 2007 and September 2008, butquickly subsided from 2.9 trillion in October2008 to 2.4 trillion in December, returning toa level last seen in early 2007 (see Chart 14).Interestingly, however, this rise and fall insettlement volumes did not result in any notablechanges in the currency composition, with theUS dollar and the euro hovering around 90%and 40% respectively, which was comparativelyclose to the levels observed before the summerof 2007.20

In some segments of the foreign exchangemarkets, the global financial turmoil resultedin a temporary drying-up of liquidity andcaused considerable dysfunctions in normal

However, March, June, September and December are also19the months in which foreign exchange options and futures aresettled. This alone already increases the spot volumes transactedduring these months to a sizeable extent.The sum of currency percentage shares reported for foreign20exchange markets adds up to 200%, as the two currenciesinvolved in the settlement of one foreign exchange transactionare counted separately.

Chart 14 Settlement volumes in theCLS system

(average daily volume; EUR billions)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2006 2007 2008

Source: CLS.

Chart 15 Currency breakdown of settlementin the CLS system

(average daily volume; percentages1)

)

0102030405060708090

100

0102030405060708090100

US dollareuroJapanese yen

pound sterling

2006 2007 2008

Sources: CLS and ECB calculations.

1) The sum of currency percentage shares adds up to 200% asboth currencies involved in the settlement of a foreign exchangetrade are counted individually.


29/86


market operations. This was in particular thecase for some interbank foreign exchange swapmarkets, making it difficult for banks to refinancetheir foreign exchange positions. In response

to these temporary market disruptions, somecentral banks established, on an exceptional andcase-by-case basis, reciprocal currency swaplines (see Box 1).

Box 1

CENTRAL BANK RESPONSES TO LIQUIDITY NEEDS IN FOREIGN CURRENCY DURING THE GLOBAL

FINANCIAL CRISIS

As a result of the global financial crisis, and especially following its intensification in the autumnof 2008, financial institutions across the world faced increasing liquidity shortages. While theliquidity needs were mostly related to local currency, some financial institutions also facedincreasing funding pressures with regard to foreign currency. Foreign currency was required in

particular to fund positions that financial institutions had built up in foreign currencies.

This box reviews the policy responses of central banks to these exceptional liquidity needs inforeign currency. Central bank practices typically do not include the provision of foreign currencyliquidity, as central banks conduct monetary policy operations denominated exclusively in thecurrency that they issue. The ECB, for instance, normally conducts monetary policy operations

that are exclusively denominated in euro. When private financial institutions face funding needsin foreign currency, they therefore typically do not address central banks, but instead seek foreigncurrency funding in the markets or, via affiliated institutions, from the central bank issuing the

Swap arrangements between G10 central banks established since mid-2007

(as at June 2009)

Central bank Currency Starting date Until (latest) Max. amount

ECB providing liquidity to

Federal Reserve System EUR:USD 6 Apr. 09 30 Oct. 09 EUR 80 billionSveriges Riksbank EUR:SEK 20 Dec. 07 - EUR 10 billion

Federal Reserve System providing liquidity to

Bank of Canada USD:CAD 18 Sep. 08 1 Feb. 10 USD 30 billion

Bank of England USD:GBP 18 Sep. 08 1 Feb. 10 UnlimitedBank of Japan USD:JPY 18 Sep. 08 1 Feb. 10 UnlimitedEuropean Central Bank USD:EUR 12 Dec. 07 1 Feb. 10 UnlimitedSwiss National Bank USD:CHF 12 Dec. 07 1 Feb. 10 UnlimitedSveriges Riksbank USD:SEK 24 Sep. 08 1 Feb. 10 USD 30 billion

Bank of England providing liquidity to

Federal Reserve System GBP:USD 6 Apr. 09 30 Oct. 09 GBP 30 billion

Swiss National Bank providing liquidity to

European Central Bank CHF:EUR 15 Oct. 08 31 Oct.09 1) EUR 25 billionFederal Reserve System CHF:USD 6 Apr. 09 30 Oct. 09 CHF 40 billion

Bank of Japan providing liquidity to

Federal Reserve System JPY:USD 6 Apr. 09 30 Oct. 09 JPY 10 trillion

Sources: Central bank announcements.Note: In cases where maximum amounts have been revised, only the most recent amount is indicated.1) At least until 31 Oct. 09.


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3.3.2 DERIVATIVES MARKETS

Following its rapid expansion since the beginningof the decade, activity in global derivativesmarkets contracted for the first time on an annual

basis in 2008, specifically after the intensificationof the global financial crisis in the autumn ofthat year. By the end of 2008, notional principal

outstanding had decreased to USD 650 trillion,

following a peak of USD 766 trillion in thesecond quarter of 2008 and the USD 674 trillionrecorded at the end of 2007 (see Table 6).

The decline was particularly noticeablein market segments having experiencedconsiderable drops in prices of the assetsunderlying the corresponding derivatives, such

as commodity and equity contracts, which saw

Table 6 Notional principal outstanding in global derivatives markets

(USD billions)

Organised markets OTC markets Total

2007

Q4

2008

Q2

2008

Q4

2007

Q4

2008

Q2

2008

Q4

2007

Q4

2008

Q2

2008

Q4

Interest rate derivatives 71,051 73,779 52,711 393,138 458,304 418,678 464,189 532,083 471,389Foreign exchangederivatives 291 367 220 56,238 62,983 49,753 56,529 63,349 49,973Equity derivatives 7,735 7,862 4,929 8,469 10,177 6,494 16,205 18,039 11,423Commodity derivatives ... ... ... 8,455 13,229 4,427 8,455 13,229 4,427Credit default swaps ... ... ... 57,894 57,325 41,868 57,894 57,325 41,868

Other derivatives ... ... ... 71,146 81,708 70,742 71,146 81,708 70,742Total 79,078 82,008 57,860 595,341 683,726 591,963 674,419 765,734 649,823

Source: BIS.

currency. With the intensification of the turmoil, however, liquidity on interbank markets aswell as in some foreign exchange market segments (swap markets) dried up, and market-basedfinancing in foreign currency became increasingly difficult.1

In response to these extraordinary disruptions to normal market functioning, and with a viewto supporting the stability of the financial system, some central banks have established, on anexceptional and case-by-case basis, reciprocal currency swap lines. Around end-2007, the FederalReserve System entered into reciprocal swap arrangements with the ECB and the Swiss NationalBank in order to alleviate US dollarfinancing shortages faced by financial institutions operating

in overseas markets. As the crisis became more acute in September 2008, more widespreadcross-border foreign currency shortages prompted the conclusion of new inter-central bankcurrency swap lines. An overview of the arrangements between G10 central banks is providedin the table above.2 The liquidity arrangements listed in the table have allowed central banks toalleviate exceptional strains in the foreign currency segments of their interbank markets.

In some cases, liquidity support motivated by exceptional strains in foreign currency alsotook the form of repurchase agreements as opposed to currency swap agreements. The ECB,in particular, established repo arrangements with the Magyar Nemzeti Bank, Narodowy BankPolski and Latvijas Banka in order to support the euro liquidity-providing operations conducted

by those central banks.

1 See also Bernanke (2008) for a discussion of funding pressures in foreign currency and the policy cooperation between major central banks.

2 In addition to the arrangements mentioned in the table, swap arrangements have also been concluded involving non-G10 centralbanks. The ECB, for instance, entered into a reciprocal swap line with Danmarks Nationalbank on 27 October 2008. See also Ho andMichaud (2008) for an overview of inter-central bank arrangements globally.


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a fall in notional principal outstanding of 47.6%and 29.5%, respectively. Similarly, the notionalvalue of credit default swaps (CDS) declined toUSD 42 trillion, more than a quarter less thanat the end of 2007. Next to the severe creditmarket strains observed after September 2008,this development is also owed to multilateralterminations of outstanding CDS contractsagainst the background of the financial marketturmoil.21 However, this decline in notional

balances should be interpreted as a reductionof operational risk rather than an actual fallin counterparty risk. Indeed, the marketvalue of outstanding CDS positions, a proxyfor counterparty risk,22 increased to close toUSD 6 trillion by the end of 2008, comparedwith USD 2 trillion at the end of 2007.

Turning to contracts for which a breakdown bycurrency is available, the share of the euro, netof valuation effects owing to exchange ratefluctuations, increased over the review period.In the market for OTC-traded interest ratederivatives, it rose from 35.6% to 37.0%, mainlyagainst retreating activity in Japanese yen and

currencies from emerging and developingcountries 23 (see Chart 16). Likewise, the euroexpanded its share from 37.1% to 42.1% amongOTC-traded foreign exchange derivatives,where those of the Japanese yen and currenciesfrom emerging and developing countriesdeclined by 4.2 and 1.7 percentage points,respectively (see Chart 17). By contrast, thecomparatively stable share of the US dollar,accounting for around 80% of the total, clearly

In a multilateral termination, market participants report their21outstanding derivatives positions to a central counterparty,which then identifies exposures with identical terms potentiallyoffsetting each other. Subsequently, these contracts are replacedwith bilateral arrangements yielding the same net exposures asthe initial position, but effectively reducing gross exposures.Such services are offered, for example, by TriOptima, a privatecompany (see BIS (2008), p. 33).In general, net market value, i.e. the value of market participants22CDS positions after collateral, would be the most appropriatemeasure of counterparty risk. However, timely data with regardto this aggregate are currently unavailable.It has to be noted, however, that the share of currencies from23

emerging and developing economies is arrived at by computingthe difference between the total and the shares of AUD, CAD,CHF, DKK, EUR, GBP, HKD, JPY, SEK, and USD, which mightinclude some currencies of advanced economies not reportingseparately, even though their shares are likely to be rather small.

Chart 16 Currency breakdown of OTCinterest rate derivatives


0

10

20

30

40

50

60

70

80

0

10

20

30

40

50

60

70

80

1999 2001 2003 2005 2007

US dollareuroJapanese yenother currencies (advanced economies)other currencies (emerging/developing economies) 1)

Sources: BIS and ECB calculations.1) Difference between the total and the shares of AUD, CAD,CHF, DKK, EUR, GBP, HKD, JPY, SEK, and USD. This mayinclude some currencies of advanced economies not reportingseparately. Although their shares are likely to be rather small, thefigures reported should be seen as an upper bound.

Chart 17 Currency breakdown of OTC foreignexchange derivatives


0

20

40

60

80

100

120

140

0

20

40

60

80

100

120

140

US dollareuroJapanese yenother currencies (advanced economies)other currencies (emerging/developing economies) 1)

1999 2001 2003 2005 2007

Sources: BIS and ECB calculations.Note: The sum of currency percentage shares adds up to 200% asboth currencies involved in the settlement of a foreign exchangetrade are counted individually.1) Difference between the total and the shares of AUD, CAD,CHF, DKK, EUR, GBP, HKD, JPY, SEK, and USD. This mayinclude some currencies of advanced economies not reportingseparately. Although their shares are likely to be rather small, thefigures reported should be seen as an upper bound.


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Over the period 1999 to 2008, a total of USD 17.6 trillion of ABSs was issued on a global scale,more than two-thirds of which by issuers located in the United States (see Table). After theUnited States, the euro area (10.6%), the United Kingdom (9.6%) and offshore centres (7.2%)also accounted for a significant share of the market. Turning to the currency of denomination of

these securities, the largest proportion (85.4%) was issued in the currency of the country in whichthe issuer resided. Notably, almost all issuance originating in the United States (99.5%) wasdenominated in US dollars. By contrast, ABSs issued by SPVs established in offshore centreswere mainly denominated in US dollars (89.3%), euro (4.0%) or Japanese yen (5.1%). Similarly,a comparatively high proportion of securities issued in Australia and the United Kingdom weredenominated in non-domestic currencies.

The two main drivers behind these developments in the global ABS market appear to be theavailability of underlying assets that can be securitised and the absorption capacity of domesticfinancial markets. In the United States, in particular, the countrys sizeable debt stock and

Chart A Global amounts outstanding of credit transfer products

(USD billions)

Credit defaults swaps Asset-backed securities

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

1999 2001 2003 2005 20070

10,000

20,000

30,000

40,000

50,000

60,000

70,000

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

1999 2001 2003 2005 2007

Sources: BIS, Thomson Reuters and ECB calculations.Notes: Data for credit default swaps refer to notional amounts outstanding and are unavailable before 2004. Global amounts outstandingof ABSs are approximated by summing the principal of all securities issued between 1980 and the respective year shown in the chart, lessthe principal of all securites which matured between 1980 and that year.

Global issuance of asset-backed securities, 1999-2008

Total issuance Currency (percentages)

(USD billions) (percentages) Domestic USD EUR JPY GBP CHF Other

United States 11,983 67.9 99.5 ... 0.3 0.0 0.1 0.0 0.0Euro area 1,867 10.6 95.3 3.0 ... 0.2 1.4 0.0 0.2United Kingdom 1,689 9.6 46.9 23.0 29.6 0.1 ... 0.1 0.3Offshore centres 1,262 7.2 0.6 89.3 4.0 5.1 0.9 0.0 0.1Australia 306 1.7 59.7 26.9 12.6 0.0 0.8 0.0 0.0Japan 271 1.5 96.6 3.3 0.1 ... 0.0 0.0 0.0South Korea 80 0.5 83.6 12.1 3.9 0.2 0.0 0.0 0.2Canada 80 0.5 79.6 17.9 2.5 0.0 0.0 0.0 0.0Other countries 107 0.6 52.5 21.8 25.5 0.0 0.0 0.0 0.3Total 17,644 100.0 85.4 9.6 3.7 0.4 0.3 0.0 0.1

Source: Thomson Reuters.


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the large domestic investor base may explain the high level of total issuance.3 Conversely, inoffshore centres, the pattern of ABS issuance based on assets originating from third countriesand ABSs denominated in currencies of prospective investors may be explained by a lack ofassets and limited absorption capacity in local markets. This lack of appropriate circumstancesnotwithstanding, offshore centres still managed to attract a considerable share of the ABS market,

presumably owing to their relatively light regulation and favourable tax regimes, which probablyalso partly explains the comparatively strong position of the United Kingdom and Australia.

The international role of the euro in ABS markets

Contrasting issuance in domestic currency with that in a currency different from that of the countryin which the issuer resides, which is equivalent to the (narrow) definition of international issuanceapplied to the market for debt securities, shows that the market for international ABSs accountsfor a comparatively minor share of the total. Additionally, considering developments over time, itseems that this segment primarily came to prominence in the later stages of the current credit cycle(see Chart B). Finally, only a few currencies in the ABS markets are truly internationalised, meaningthat global issuance in the respective currency considerably surpasses the issuance by market

participants for which it is the domestic currency (see Chart C). According to this classification,the euro was the most internationalised among the major currencies, both at the peak of the creditcycle in 2007 and after the onset of the global financial crisis in 2008. Its sizeable international usewas driven to a large extent by the United Kingdom, which accounted for around three-quarters of

euro-denominated ABSs issued outside the euro area between 1999 and 2008 (see also the tableabove). The US dollar ranked second in 2007 and 2008, chiefly owing to the extent of domesticissuance activity, which dwarfs international issuance in US dollars. Remarkably, the Japaneseyens ratio dropped from 2.55 in 1999 to 1.03 in 2008, indicating a significant reduction in its

3 Implicitly, this line of reasoning is based on the assumption that domestic investors always prefer to hold securities denominated indomestic currency. Additionally, it presumes that the currency of denomination of the ABSs issued is at all times equivalent to thatof the underlying collateral. In fact, neither is the case. However, even if some investors do not favour their own currency, it appearsreasonable to suppose that a substantial number do in order to avoid exposure to exchange rate risk. Furthermore, multi-currencyABSs, where the currency of denomination of the ABSs does not match that of the underlying collateral, do not make up the major partof the global ABS market, although their share is not negligible.

Chart B Issuance of asset-backed securities

(USD billions)

0

200

400

600

800

1,000

1,200

0

200

400

600

800

1,000

1,200

1999 2001 2003 2005 2007

international issuancedomestic issuance

Source: Thomson Reuters.

Chart C Internationalised currencies in theasset-backed securities market

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

EUR USD JPY CAD GBP AUD KRW

199920072008

Sources: Thomson Reuters and ECB calculations.Note: A ratio of 1.0 implies that global issuance in the respectivecurrency equals the issuance by market participants for which itis the domestic currency.


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3.4 THE EURO IN INTERNATIONAL TRADE IN

GOODS AND SERVICES 26

Since its launch in 1999, the euro has steadily

increased its share in the settlement and invoicing

of trade in those countries for which data are

available, a trend that broadly continued to

persist in 2007.27

In addition to the regionalconcentration of the use of the euro in countries

located in the neighbourhood of the euro a

euro international role200907en[1]

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