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Research:
Euro The Euro Cometh

Changes in the Financial Market

It's a whole New World....
   Forex
The interbank Foreign Exchange market will stop quoting and transacting USD-DEM, USD-FRF etc.
EUR-USD rates will start to be quoted. Online information vendors plan to display the equivalent USD-DEM levels for reference purposes
With no more trade in DEM-FRF and FRF-ITL etc, there will be no more "Bilateral exchange rate risk" amongst the "In" countries and Dealing Rooms in both banks and corporates could suddenly find themselves with extra hands
Turnover in the EUR is expected to be twice the turnover in the Japanese Yen

   Money
The ECB (European Central Bank) will take over responsibility for guiding short-term money market rates, through the use of Open Market Operations such as Repos. It will act through the respective national Central Banks
A new Benchmark Interest Rate, namely the EURIBOR, will appear, which will be applicable to EUR money markets, that is, the common money market for the 11 countries. This will replace existing individual currency benchmarks such as FIBOR and PIBOR
The "Days Basis" for EURIBOR will be "Actual/360"
The EURIBOR is an Euroland creation. The British Bankers' Association (BBA) of the City of London is promoting a competing benchmark called the EuroLIBOR. Which one will gain wider acceptance will be an interesting side show

   Bond
Government debts in "Euroland" will be redenominated in Euro. This will pave the way for corporate bonds also to be redenominated into Euro
Different "day count" and other conventions across countries will get harmonised. An "Actual/ Actual" day count basis has been proposed for adoption across Euroland
It is expected that the European bond market will be second in size only to the American market and that it has the potential to become as large and efficient as its counterpart across the Atlantic
Since individual governments will continue to have control over fiscal policies, debt issued by, say, Italy, will be priced differently from that issued by, say, Germany. In other words, while "Exchange Rate" risk will be eliminated between two countries, "Country Risk" will remain

   Equity
Equity prices will be quoted in Euro. That is to say, prices for Deutsche Telekom and Daimler Benz will now be available in EUR, rather than DEM
Over time the plethora of stock indices, such as the DAX and the CAC, could get replaced by a single pan-European index
Similarly, the number of stock exchanges is also likely to be reduced and business could get concentrated in 2-3 large electronic pan-European online exchanges, much like the NSE in India
Companies may no longer need to get listed separately in every country
The Equity market itself is expected to grow in size, due to a larger investor base and continued privatisation of both pension funds and industry

   Corporate Finance
European companies will be able to market their bond and equity issues to investors outside their own countries, opening up a much wider investor base
Mergers & Acquisitions activity could pick up as small national companies tend to get together in response to a single "Euroland" market for their products and services

The whole scenario is easily comprehensible to those in India. Imagine if Bihar, Maharashtra, Gujarat and Tamil Nadu all had different currencies and were preparing to give them up in exchange for a single pan-Indian currency, "The Indian Rupee". What subtler changes would follow?

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There are issues relating to the Euro that are not as yet fully clear. This is just an attempt to record aspects of what we know so far, as also to say what is as yet unknown. No predictions are being made, nor trade recommendations being given. Neither the firm or the authors bear any responsibility for any losses that might accrue to anyone due to any actions taken/ not taken based on this report or otherwise.
 
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