Who Uses the Euromarkets and Why?

Abstract

The reasons for the public sector of an economy making use of foreign sources of funds are in general quite different from those applying to the private sector. All governments have the power to tax their residents, and for most governments this is their main source of funds. All public sector needs could be met through this channel provided this had no repercussions on other parts of the economy. In practice most governments deem it to be politically undesirable to raise all the funds required this way. The alternative to raising revenue through taxes is to borrow. Such borrowing can be on the domestic capital market if such a market exists, or on a foreign capital market. In many countries which choose to raise funds abroad, it would be quite practicable for the government to raise all the funds in the domestic market particularly since the credit standing of the government will almost always be higher than that of any private sector borrower. However any government borrowing is inevitably competing for the same funds as the private sector. Since private sector borrowing is generally thought to be essential to the growth of the economy, the government will often be reluctant to borrow such an amount as would result in ‘too high’ an interest rate. To avoid this the government may borrow abroad. It might be contended that the government should obtain all its requirements on the domestic market and let the private sector use foreign markets. In practice however this would not work so well. The eurobond market is ‘prime risk’ only, and while any developed country government can raise funds, only a small proportion of any country’s business firms would be sufficiently good risks to do so. In a country with a shortage of domestic capital, borrowing abroad by the public sector may thus be a better and cheaper solution to the problem than an attempt by the private sector to borrow abroad the same amount.