“It is fair to say,” Richard Debs writes, “that the Federal Reserve’s regulatory philosophy with respect to international banking has been rather liberal, in the sense that it has permitted United States banks to engage in a much broader range of operations overseas than are authorized in the United States…. It has not chosen to impose a restrictive regulatory structure on international banking. I think it is clear that, without this attitude over the years, the remarkable growth of United States’ banks’ operations overseas could not have taken place.”10
The banks’ expansion has been most luxuriant where it is most free of government restrictions: above all, in the Eurocurrency business. Of all the flora of the boom, Eurobanking has been the most fecund.
Euromoney is money held outside the country in whose currency it is denominated. Most Euromoney is denominated in US dollars. Eurodollar banking started to flourish in the early 1960s. The US was exporting dollars, largely through foreign investment and military spending, and foreigners who owned these dollars began to lend and borrow them. An entrepreneur in Germany sells an auto factory to Ford—or a beer to an American soldier—and decides to hold on to the dollars, depositing them in a local bank.
The business grew extravagantly. The Eurodollar market—the total liabilities in dollars of banks outside the United States—was worth around $9 billion in 1964. By 1974 it had grown to a value of some $150 billion. As the market increased, too, US banks themselves began to trade in Eurodollars through their foreign branches and subsidiaries. The US banks now account for well over half of all Eurodollar business.
Eurolending grew faster than the world economy. Much of the banks’ business was done with other banks, as they loaned and reloaned dollars and other foreign currencies. In their domestic business, US banks were required to hold in reserve money equal to a specified proportion of the deposits they accept. There is no comparable restriction on Eurobusiness.
(The Eurocurrency market also includes Euromarks—or marks held outside Germany—Euroyen, and so forth, and it is only loosely a European phenomenon. In the 1960s, most of the borrowing and lending of foreign currencies was done by European banks; and by the European branches of US banks. But any country will do, if its banking regulations are welcoming. “Euro”-business flourishes in the permissive air of small lax nations: not only Luxembourg and the United Kingdom but Nassau, Panama, Singapore as well. Among the more recondite recent deals are, for example, a loan to a Teheran bank provided by the Cayman Islands branch of the Crocker National Bank of San Francisco, three Dutch subsidiaries of Japanese companies, and sixteen other institutions; and an issue of notes by the Ljublianska Banka of Slovenia, Yugoslavia, managed in part by a New York investment firm and denominated in Kuwaiti dinars—Eurodinar finance.)
Eurobanking is by its nature outside the control of national governments. It developed to a great extent because US banks—like German banks as well—were less restricted by their own governments in their foreign operations than they were at home. Its other reason for existing came from the fact that national governments often restricted the export of capital, as when the US in 1965 limited foreign lending by US residents, and therefore by the domestic branches of US banks.
The form of the Euromarket is determined, indeed, by the very restrictions it avoids. It is like a viscous liquid, flowing into the spaces between rules imposed by governments. Thus one official expert on Euromoney concludes that public controls of international capital flows are increasingly “futile.” “Lately the official sector…[has] begun to realise,” he writes, that “the internationalisation of private transactions has progressed to such a degree that some way is almost always found to circumvent these controls or to force further and increasing corrective action to be taken.”11
There is a sort of ontological obscurity which surrounds the Euromarket. Euromoney does not seem to exist in the same way as other money. It seems to be in several places at the same time. It looks illusory: the quickness of the hand deceives the eye, or at least the eye of the solid, temporal “official sector.”
Yet for all this dusk, the growth of Eurobanking was a consequence of certain real changes, both political and economic. One set of changes had to do, simply, with rates of growth, as the US accounted for less of the world’s economy. The US was less important, too, in the world economic order or system. From the mid 1960s, the US government ceded more and more of the responsibilities for international economic policy which it assumed after the Second World War: not to other powers, but to its own corporations.
Until 1970, the bank bonanza did not greatly affect the developing countries. Almost all Eurolending, for example, was reserved for multinational companies and for public borrowers in developed countries. Poor countries borrowed vast amounts of money; but most was owed to foreign governments and to international organizations such as the World Bank.
In the economic boom of the early 1970s, the situation changed. Countries like Brazil and Mexico, South Korea and the Philippines seemed lands of opportunity. Foreign bankers flew to São Paulo as though to the new Eldorado. The richer developing countries increased their private borrowing much faster than their official loans. From 1970 to the end of 1973, Latin American countries, for example, increased their debt to private banks more than four times as fast as their official debt.12
The most ecstatic increase came in Eurolending. Developing countries found themselves able to borrow Eurodollars from foreign banks, including the overseas branches of US banks. Brazil was the first large borrower, followed by other Latin American states. By 1972, several African and Asian countries were able to put together Eurocurrency loans. The value of Eurocurrency credits to the non-oil-exporting developing countries was around one billion dollars in 1971. In 1973, twenty-nine of these countries—from Bolivia and Nicaragua to Zaire, Zambia, and Kenya—borrowed almost five billion dollars in Euromoney.13
The lending can be explained, in part, as a consequence of economic changes. There was a delirious feeling to the new credits. People believed in 1973 that the world boom was forever. It was not only bankers who breathed the rare air of perpetually rising expectations. In several developing countries, income and profits increased faster than ever before. For auto corporations and electronics firms, drug manufacturers and engineering companies, the new world of promise lay to the south.
One can see in retrospect how businesses constructed a theoretical justification for their lending and spending. The developing world was classified into categories of promise, each more tempting than the last. One category consisted of “fast growing exporters of manufactures,” which included Brazil, South Korea, the Philippines; all seemed to be serious countries, worth a few hundred millions of Euromoney. There were also “new rich commodity exporters”—countries which profited from the boom in commodity prices of the early 1970s. Peru and Zambia, for example, were counted as promising because they exported copper. Even Zaire, one of the poorest countries in the world, became a cynosure of foreign expectations on the basis of its deposits of copper, cobalt, and manganese.
This theory of hope and riches was self-justifying. For banks, as for other multinational companies, developing countries offered profits which were no longer to be earned in the United States and Western Europe. As in the case of the more general bank boom, the expansion in lending to developing countries corresponded to the banks’ own idiosyncratic needs. Eurobankers, in particular, had quite practical reasons for wishing to see developing countries as suitable clients. There were ever more banks, with ever more money to lend. By 1973, customers in developed countries could not borrow fast enough for the enthusiastic lenders of the Eurocenters. The banks needed to lend money for more than they themselves paid for it, and their well-established customers would pay only a fraction of a percentage point above current interest rates.
It was a “borrower’s paradise” for developing countries, one US investment banker wrote late in 1973: “a growing number of banks, operating free of reserve requirement or other regulations and of the restrictions of a stagnant deposit base, seeking to make foreign loans…[and with] little ability to analyse complex credits.”14
The banks’ ventures—the flora of London and Nassau—were ever more exotic. There are businesses with names like Hypobank International, the Equator Bank, Eurobraz, the International Mexican Bank. Some US banks had regional preferences, with West Coast institutions lending, for example, to Peru and other countries of the Pacific littoral. US and foreign banks founded consortium banks for foreign lending: dividing their risk, but also their sense of bankerly reticence. They lent money in enormous syndicated loans. When sixty-four banks got together to lend $575 million to Indonesia—as they did in August 1975—few looked very closely at Indonesia’s other debts.
The extraordinary expansion of credit is difficult to explain by what are conceived of as conventional banking attitudes. It recalls, rather, J.M. Keynes’s observation of bankers and their view of the international economic situation, written in August 1931: “A ‘sound’ banker, alas! is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.”
In the years of the bank expansion, the developing countries’ financial situation changed momentously. As private lending increased, official development aid accounted for less and less of the financial flows to developing countries. In 1971, less than 8 percent of the developing countries’ external debt was owed to banks. By 1973, the proportion had risen to 13 percent.
For some countries, the new credit was almost like manna. In 1973 alone, countries were able to borrow more money from private banks than in their entire history. Zaire’s debt to banks grew 300 percent, and Zambia’s more than 600 percent. The credit was extended more easily than official aid. The sorts of political conditions imposed by the US government in its aid programs, or by the official development banks, were of little concern to British or Italian Eurobanks: even to the Eurosubsidiaries of US banks. (Cuba and North Korea, for example, have raised large Eurocurrency loans.)
But the bankers’ largesse was not universal. The more prosperous developing countries did best in the lending lottery. Brazil owes more to foreign banks than all the non-oil-developing countries in Africa, the Middle East, and South Asia together. Two-thirds of all Eurolending to developing countries went to six of the “newly promising” richer countries.
There were no Eurosyndicates for Bangladesh or Burma or Chad. The poorest countries received few commercial loans, and continued to rely on official financing. Since more of the new lending was private, the distribution of wealth was skewed ever more in favor of the richer developing countries.
Richard A. Debs, op. cit.↩
Eisuke Sakakibara, "The Eurocurrency Market in Perspective," Finance and Development (an IMF/World Bank publication), September 1975.↩
World Bank Annual Report 1975.↩
"Publicised Eurocurrency Credits to Developing Countries," UNCTAD IV, op.cit., Addendum.↩
Richard S. Weinert, "Eurodollar Lending to Developing Countries," Columbia Journal of World Business, Winter 1973.↩
Richard A. Debs, op. cit.↩
Eisuke Sakakibara, “The Eurocurrency Market in Perspective,” Finance and Development (an IMF/World Bank publication), September 1975.↩
World Bank Annual Report 1975.↩
“Publicised Eurocurrency Credits to Developing Countries,” UNCTAD IV, op.cit., Addendum.↩
Richard S. Weinert, “Eurodollar Lending to Developing Countries,” Columbia Journal of World Business, Winter 1973.↩