1. Corporate Finance
Management
Euro Currency System
Respectable Teacher:
Professor Osman Altay
Students:
Fatemeh Hashemi 093014007
Fall 2010

2. official currency of the European Union.
Eleven member states have adopted it collectively known as
Eurozone.(Austria, Belgium, Cyprus, Finland, France, Germany,
Greece, Ireland, Italy, etc.)
Taking official estimates of 2007 GDP, the Eurozone is the 2nd
largest economy in the world.
The euro was introduced to world financial markets as an
currency in 1999 and launched coin and Banknote on 1st,
January 2002.
All nations that have joined the EU since the 1993
implementation of the Maastricht Treaty
The euro sign (€) is the currency sign used for the euro the
official currency of the European Union(EU).
The design was presented to the public by the European
Commission on 12th December , 1996.
The international three-letter code (according to ISO standard
ISO 4217) for the euro is EUR

3. Maastricht Treaty
 Also known as Treaty on European union
 Signed on 7 February 1992 between members
of European community
 Led to the creation of EURO.

5. EUROPEAN MONETARY UNION
EMU is the agreement among the participating member
states of the European Union to adopt a single currency and
monetary system.
Eleven countries have been selected as the members of EMU.
As part of the EMU, these eleven countries now make up the
world's second-largest economy, after the United States
Greece and Sweden, failed to meet the convergence
requirements in time to join the EMU in the first round.
Sweden failed to satisfy two of the conditions:
laws governing Sweden's central bank were not compatible
with the Maastricht Treaty and the currency exchange rates in
Sweden were not sufficiently stable for the previous two years.
Greece failed to meet all of the requirements

6. European Monetary Institute
 The European Monetary Institute
(EMI) was the forerunner of the
European Central Bank(ECB).
 It encouraged cooperation between
the national banks of the member
states of the EU
 Further budget constraints are
required in countries ( Italy and
Belgium) meet the requirements of
the pact.

7. CONVERGENCE CRITERIA
 Price stability: Inflation rate should not exceed 1.5% that of
three best performing member state.
 Annual government deficit: the ratio of the annual government
deficit to gross domestic product (GDP) must not exceed 3%
 Government debt: the ratio of gross government debt to GDP
must not exceed 60% at the end of the preceding financial year.
 Long-term interest rates. In practice, the nominal long-term
interest rate must not exceed by more than 2 percentage points
that of, at most, the three best-performing Member States

8. • SWITCH TO THE EURO AT VARYING SPEEDS
• Banking for individuals will probably switch to Euros at a last stage
• Done largely in local currency up to final changeover
• Corporate banking may well start using earlier
• Adoption of Euro in corporate sector
• Plan of large companies to adopt euro as company currency
• Expected their customers and suppliers to use Euros in transactions
• Internationally oriented medium sized companies will probably also turn
quickly to new currency in many of their functions
• Smaller domestically oriented companies, self employed and households will
keep more or less to national currency until euro coins or notes and coins are
introduced

9. Public sector in Germany brings up rear
•German public sector didn‟t planned to switch to euro until end of
2001
•Possible to make non cash payments in Euro ex. tax
•Companies were particularly concerned to pay income and
corporation tax returns in DEM until 2001
•Preferred to use Euro right earlier
Shortening of cash changeover phase in
Germany
•In order to minimize the burden on the retail sector
•Banks and retailers continue to give out DEM coin they receive as
can be used for any vending machine

10. THE LEGAL FRAMEWORK FOR THE
CURRENCY CHANGEOVER
Based on two regulations
First regulation
•Based on article 235 of the EC treaty took effect on
June 20th ,1997 applied to all EU countries
•The existing contracts will remain in force with all
rights and obligations provided no other agreement has
been made after the advent of new currency
•Neither investors nor debtors holding long term
contracts will enjoy advantage or suffer disadvantage
through changeover of currency

11. Second regulation
•Based on article 109 of the treaty-on the introduction of the
euro was passed during the May 1998
•Established principle that who wants to use the euro can
but no one can be forced to (UK,Sweden,Denmark)
•Determines the legal status of euro vs. the national
currencies
•Euro EG opened company,stock exchange,
accounting&currency law to the Euro
•Paved way for changeover on the financial markets &
exchanges
that lead companies to adjust their accounts,equity capital
structures

12. THE EUROPEAN CENTRAL BANK
• EUROPEAN ECONOMIC AND MONETARY UNION (EMU):
• EMU consists three stages
• 1ST Stage(1 July 1990 to 31 December 1993):
 The Treaty of Maastricht in 1992 establishes the completion of the
EMU as a formal objective and sets a number of economic convergence
criteria, concerning the inflation rate, public finances, interest rates and
exchange rate stability.
 The treaty enters into force on the 1 November 1993.
• 2nd stage(1 January 1994 to 31 December 1998):
 The European Monetary Institute is established as the forerunner of the
European Central Bank

13. THE EUROPEAN CENTRAL BANK
 On 16 December 1995, details such as the name
of the new currency (the euro) as well as the
duration of the transition periods are decided.
 New exchange rate mechanism (ERM II) is set
up to provide stability between the euro and the
national currencies of countries that haven't yet
entered the euro zone
 The 11 initial countries that will participate in
the third stage from 1 January 1999 are
selected.
 On 1 June 1998, the European Central Bank
(ECB) is created
3rd Stage(1 January 1999 and
continuing)
 From the start of 1999, the euro is now a real
currency, and a single monetary policy is
introduced under the authority of the ECB.

14. ECB FUNCTIONING MECHANISM
• ECB working procedures are segregated into three parts:
• 1. GOVERNMENTAL
• 2. EXECUTIVE SECTION
• 3. GENERAL BODY

15. FUNCTIONS OF EUROPEAN CENTRAL
BANK (ECB)
 To maintain Price stability
 Implement the Monetary policy
 Issuance of euro banknotes
ECB’S MINIMUM RESERVE SYSTEM
The main features of the minimum reserve
system, which was specified in November
1998 are:
The reserve base will comprise bank
deposits, debt securities issued and money
market paper. Repos, deposits and debt
securities with a maturity of more than
two years will not be subject to minimum
reserve requirements.
 The reserve ratios will be in the range of
between 1.5% and 2.5%.

16. IMPLICATION OF FINANCIAL MARKETS
Consequences for the bond markets
• Outstanding bonds denominated in currencies of participating
countries, in ECU.
• Bonds issued by governments, banks, company and other issuers.
• It will be equivalent to 50% of the dollar bond market and 130%
of
yen bond market
• Scope for financing and investment provide new opportunities
for
market participants
• The three largest country make up more than three-quarters of
the
aggregate bond market
• Growth of overall market being neglected as the countries
continue
to consolidate the government finances.

17. Yields not uniform
• Highly liquid segment maintained by a single borrower
compared to the U.S bill market
• Yields determined by monetary and fiscal policy
• The development of economy and international capital flows
due to inflation expectations
• Yields differential between sovereign issuers will small
• Countries were expected to revalue were rewarded with lower
yields
• EMU having no currency risk and credit standing will be the
main risk factor
• Individual countries have no longer control on their own
money supply

18. Benchmark bonds
• Highly liquid at the lowest possible yields
• Appropriate yield premium
• Existence of highly developed future market
• Issue of trading bonds and coupons separately
• Pre-announcement of issues in a regular calendar and low tax rates
New issuers and market segments
• Debt Issuance by states government
• Public Sector issuers
• Supranational institutions and foreign issuers
• Sovereign borrowers from emerging economies
Corporate bonds
• France is only which has corporate bonds
• There is no difficulties for European investors
• Increased Demand from Institutional investors

19. Currency changeover in the bond markets
• ECU claims and liabilities will be converted to euros at
the rate of
1 ECU= 1 euro
New reference interest rates
• EURIBOR is replaced by FIBOR, PIBOR and EONIA
• ECB calculates overnight rate(EONIA) charged by
references bank
Consequences for the equity markets
• Second largest equity market all over the world
• Japan is leading country
• Pronounced differences in accounting, legal and tax
regulation
A “big bang” in asset allocation
• Households, institutional investors and public institutions
have
already begun to change
• Rising of capital and increase in occupational pension
funds

20. The changeover in the equity markets
• Share capital and the par value of share redenominated in Euros
• Public company‟s should have share capital of at least 50000
Euros
• Convert par value share into Euros
Consequences for the futures and options markets
• Existing will modernized and new ones will be launched
• Products become more standardized and transparent
• Liquid and trading volume increase and costs will fall
• Electronic trading is the another benchmark
Competition between the financial centers
• “Home” currency will disappear and national regulatory system
come under pressure
• London Stock Exchange and Deutsche Borse AG announced an
alliance which will allow customers to trade on both exchanges

21. OPPORTUNITIES OF MONETARY UNION
 Broader Investment & Financing Opportunities
 Greater Role in International Currency System
 Doesn‟t Affect Purchasing Power
 No Bail-Out of Member States
 Boost Growth & Employment in the Long Term
 Easier Travel & Money Transfer in EU
 Companies to Benefit in Multiple Ways
 Political Stability

22. EURO’s INTERNATIONAL ROLE
 No Hedging Costs within EU
 Euro v/s USD
 Investment & Reserve Currency

23. WHERE DID EUROPE COME FROM?
IS EURO SYSTEM A HEALTHY ONE?
A Bumpy ride… euro’s limitations are stressed, but the euro
survived.
April 2009 Greek crisis pushes the euro to a breaking point.
7/15/08 - Euro sets
record high of
10/31/07 - Euro climbs
$1.6038 after U.S.
above $1.45, for first Oct 2009-
government support
time. U.S. Fed announces US headlines
for Fannie Mae &
a 25 basis point cut in its discuss
Freddie Mac fails to
key interest rate to 4.5%. „demise of
quell concerns about
the US
wider U.S. financial
Dollar‟ as a
stability.
world
Dec 2008- ECB currency
Expected to lower
interest rates by 50
bhp
April 2009-
Greek debt
crisis turns
speculation to
Euro decline
and break-up
Oct 2008- „Flight to safety:‟
US dollar rallies as financial
crisis goes global

24. THE TURNING POINT:SEPTEMBER, 2008
7
2008 EUROPE STARTED FACING THE BIGGEST
GDP DECLINE SINCE THE GREAT DEPRESSION

25. EURO GOVERNMENTS STEP IN TO STABILIZE
THE FINANCIAL SECTOR, INCREASING DEBT
Source: European Central Bank, OCP N109, April 2010

26. RESULTING IN DEBT AND DEFICITS ACROSS
THE EURO ZONE
Euro deficit limit: 3% ● Euro debt to GDP limit: 60%

27. PIGS* IN DEBT:
A TANGLED WEB THAT TRAPS ALL OF EUROPE
* Portugal, Spain, Italy, Ireland, Greece
Source: New York Times, May 1, 2010

28. FRANCE, GERMANY & THE UK
CARRY THE LOAD
Debtor Total Germany UK France
Country Foreign
$ billions Debt
Greece $256 $45 $15 $75
Portugal $286 $47 $24 $45
Spain $1,100 $238 $114 $220
Ireland $867 $184 $114 $60
Italy $1,400 $190 $77 $511
Total $3,645 $704 $344 $911
Percentage 19.3% 9.4% 25%

29. ACTIONS SPEAK LOUDER THAN WORDS
Country Past breach periods for Past breach periods for
deficit debt
Austria 2003-09
Germany 2003-06 2003-09
France 2003-04 2003-09
Italy 2003-09 2003-09
Luxembourg
Netherlands 2004-05
Belgium 2003-09
Spain 2008
Portugal 2002; 2005-06 2005-09
Finland 2005-2007
Ireland 2008
Greece 2003-08 2003-09

30. Will the debt crisis lead to
the collapse of the euro?

31. THE EURO CRISIS
JANUARY 1, 1999: BIRTH S THE EURO AND EMU
OF
Fundamental structural issues with the euro set the stage for
today’s crisis
Conflicts
Monetary vs. Fiscal Policy
European Central Bank (ECB) has responsibility for
monetary policy;
individual central banks retained fiscal policy
responsibilities
Problem
No authority to:
• Tax
• Spend
• Enforce actions/impose penalties for non-
compliance

32. KEY THEMES
ECB has no authority
EU Members have different agendas
European? Yes. Union? No.
No common
Purpose/Identity/Language/Culture
Increasing debt becomes a vicious
cycle

33. A VICIOUS CYCLE OF GROWING DEBT
AND DECLINING GDP, EXACERBATED
BY GROWING LIABILITIES

34. what the Greece debt
problem means for the euro
and European unity?
• French banks have the biggest
exposure to Greece among European
lenders, accounting for $75billion.
Contagion from the Greek crisis is
“threatening the stability of the
financial system” like the Ebola virus
. Organization for Economic Cooperation and Development
Angel Gurria, Secretary General

35. GREEK’S DEFICIT AND DEBT FORCE THE
EUROZONE TO TAKE ACTION
Source: Association for Finance Professionals, March-April 2009

36. EVEN THE ECB SEES IT
GETTING WORSE
“The euro zone deficit will climb to 7%
in 2010”
“…by then, all euro countries will
exceed the 3% deficit limit”
Source: European Central Bank, OCP N109, April 2010

37. "..the real story behind the euro mess
lies not in the profligacy of politicians
but in the arrogance of elites —
specifically, the policy elites who
pushed Europe into adopting a single
currency well before the continent was
ready for such an experiment."
PAUL KRUGMAN
New York Times Op-ed
February 14, 2010