Euro Surpasses Dollar in Debt Markets

For the first time ever, outstanding debt denominated in euros exceeded outstanding dollar-denominated debt last month. The total is 45% of global debt in the euro and 37% for the US currency. New debt issued in the last twelve months made the difference with 49% of it in the single European currency. While this is another milestone in the rise of the euro, there are a few factors that argue against excessive concern in America. After all, this represents an increase in money owed.

The Financial Times reported yesterday that euro debt stood at “$4,836bn [$4.836 trillion for those familiar with American usage] at the end of 2006 compared with $3,892bn for the dollar, according to International Capital Market Association data.” Nonetheless, the US dollar-euro exchange rate floats, so this is something of an imprecise measure. A 25% appreciation in the US unit would just about wipe out the difference.

All the same, the Financial Times also notes, “as recently as 2002, outstanding euro-denominated issuance represented just 27 per cent of the global pie, compared with 51 per cent for the dollar.” In 2002, the exchange rates were more dollar friendly as well. So what has brought on the change? Is the dollar doomed to fall out of favor?

Not necessarily. The dollar’s day as the unchallenged global currency were numbered the minute Richard Nixon, of necessity, took the US off the gold standard. After that point, the US unit was only as good as the economic and political performance of the nation relative to the rest of the world. The important word there is “relative.” Europe had laid the foundations for post WWII recovery by then, and Asia was unlocking its human potential post independence.

However, as the FT notes, “One factor driving this [euro-denominated issuance by companies and financial institutions] is that European companies are moving away from their traditional reliance on bank loans – and embracing the capital markets to a greater degree.” In addition the euro has enhanced liquidity of the European capital markets. In a sense, it has become easier for European business to acquire money outside of a banking relationship. This increases the capital available to them, making them potentially more competitive. At the same time, it makes it easier for them to load up on debt and undermine their balance sheets. In other words, it makes them more American.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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