Board of Governors of the Federal Reserve System

December 1986

The Cost Competitiveness of the Europaper Market

Rodney H. Mills

Abstract:

Very little has been written about the cost competitiveness of the market for Europaper (Euronotes and Eurocommercial paper) despite the extraordinarily rapid growth of this market over the past three years. This paper tries to compare costs to the borrower on 3-month Europaper with similar costs in the U.S. commercial paper market. On the basis of weekly data in the period June-October, the conclusion is reached that the costs may have been lower in the Europaper market roughly one-third to one-half of the time. Rates paid to investors are, at most times and for most borrowers, lower in the U.S. market than in the Euromarket, but the higher remuneration to dealers in the U.S. market frequently means that all-in costs to the borrower are lower in the Euromarket. Because of the nature and limitations of the data, cost comparisons were limited to estimated rates paid in the two markets only by borrowers whose U.S. commercial paper is rated P-1 or A-1. U.S. market borrowing costs were estimated from published composite rates for double-A borrowers, with adjustments where the long-term debt rating of the borrower was not double-A, and from market reports about dealer fees. Europaper borrowing costs had to be inferred from secondary market quotations. Fluctuations in the relative rates suggest the frequent appearance and disappearance of "windows of opportunity" for borrowing in the market with the lower cost at the time.

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