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Bond Issues in European Units of Account

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Bond Issues in European Units of Account Bond Issues in European Units of Account Jean O. M. van der Mensbrugghe UBLIC ISSUES of bonds expressed in European units of account, P which amounted to the equivalent of US$5 million in each of the years 1961 and 1962, totaled $48 million in 1963. In April 1964, another bond issue in units of account equivalent to $10 million was launched by seven municipalities of Greater Copenhagen. All these issues, which were sponsored by Belgian banks and were offered on most European capital markets, provided a limited exchange guar- antee; they were subscribed without hesitation by the general public, but became the subject of controversy among government officials, bankers, and brokers. Some European central banks, particularly the Swiss National Bank, have been reported as strongly opposed to issues in European units of account.1 In order to facilitate an appraisal of the issues in European units of account and the contro- versies to which they have given rise, it has seemed appropriate to describe the origin of these issues, to examine the conditions under which the unit of account varied in the first seven bond issues, and to outline the terms of the issues. Origins A number of international public institutions and treaties have included provisions for units of account. Since its inception, in May 1930, the Bank for International Settlements, in accordance with Article 5 of its statutes, has drawn up its balance sheet in units of account, with a gold weight of 0.29032258 gram of fine gold a unit, which corresponds to the value of the Swiss franc before its devaluation in 1936.2 The agreement for the establishment of a * Mr. van der Mensbrugghe, economist in the IMF Institute, is a graduate of the University of Louvain. He was formerly on the staff of the Royal Institute for International Affairs, Brussels. He has published "Les Unions Economiques: Re*alisa- tions et Perspectives" (Brussels, 1950), as well as several articles. 1 See The Economist, November 23, 1963, pp. 791-92, and January 11, 1964, p. 128. 2 See Eleanor Lansing Dulles, The Bank for International Settlements at Work (New York, 1932), pp. 581-95, and the comments by Miss Dulles, op. cit., pp. 29-31 and 487-89. 446 ©International Monetary Fund. Not for Redistribution BOND ISSUES IN EUROPEAN UNITS OF ACCOUNT 447 European Payments Union (EPU), which was signed in Paris on September 19, 1950, stipulated in Article 26 that the accounts of the Union "shall be kept ... in terms of a unit of account of 0.88867088 grammes of fine gold" which is equivalent to one U.S. dollar. A simi- lar provision was included in the European Monetary Agreement,3 which was signed in Paris on August 5, 1955 and which came into force after the dissolution of the European Payments Union in De- cember 1958. The treaties signed in Rome on March 25, 1957, estab- lishing the European Economic Community (EEC)4 and the Euro- pean Community for Atomic Energy,5 also provided for a unit of account, which was in fact the same as that of the EPU. The statutes of the European Investment Bank, which were annexed to the treaty establishing the EEC, stipulated that the capital of the Bank should amount to 1 billion units of account, the value of one unit being 0.88867088 gram of fine gold.6 The wide use of units of account in international public agreements has led some private bankers and experts to wonder whether such a device should be extended to international private contracts. In particular, Professor Robert Triffin in 1957 wrote that "a first step in this direction [monetary integration in Europe] might be to legalize the use of exchange guarantees in terms of the EPU unit, in the writing of private as well as public contracts. This could aid greatly in the revival of capital markets, now paralyzed by exchange fears and risks."7 Three years later, in 1960, Triffin wrote, in similar fash- ion: "The first [step toward monetary integration in Europe] would be to authorize and encourage the use of the European unit of account in all international, and even national, capital transactions through- out the Community's [EEC] territory. This would contribute to the revival of the capital markets still paralyzed or handicapped today by fears of exchange rate instability." 8 The launching of bond issues in European units of account is not only an adaptation to capital transactions of a technique used in international public institutions; it also accords with the development of foreign issues in European capital markets. Until 1963, the frag- mentation of European capital markets, the high interest rates pre- vailing on most of those markets, and various restrictive controls led 3 Article 24. 4 Article 209. 5 Article 181. (i Article 4, par. 1. 7 Robert Triffin, Europe and the Money Muddle (New Haven, Connecticut. 1957), p. 291. 8 Robert Triffin, Gold and the Dollar Crisis (New Haven, Connecticut, 1960), p. 142. ©International Monetary Fund. Not for Redistribution 448 INTERNATIONAL MONETARY FUND STAFF PAPERS a number of European Governments, international institutions, and enterprises to float bond issues on the New York capital market.9 There have been numerous reports that these issues were subscribed to a sizable extent by European investors. This interest of European investors in dollar bonds has led, since 1957, to the flotation by Euro- pean Governments or enterprises of loans expressed in U.S. dollars on European capital markets; such issues on the London capital market were particularly important in 1963 and January-February 1964.10 In addition, since 1957, multiple currency loans—the princi- ple of which is actually much older—have been issued in European capital markets; these loans have been expressed in U.S. dollars, but the payment of interest and amortization could be made in a number of European currencies as well as in U.S. dollars, the fixed rate be- tween these currencies and the dollar being determined on the basis of existing parities at the time of issue. Loans in European units of account are a variant of multiple currency loans.11 European Unit of Account In the seven issues considered in this paper, the initial value of the unit of account in which the bonds were expressed was defined as being the same as the value of the unit of account used in the EPU.12 It was linked to the currencies13 of the 17 member countries of the former EPU in terms of the par values agreed between such countries and the International Monetary Fund or, if there were no such agreement, on the basis of domestic legal definitions of the cur- rency in terms of gold or of another currency defined by its gold contents;14 this is the reason why it is called a European unit of account. The prospectuses of the issues listed the values of the 17 currencies in terms of the European unit of account. 9 See Jean 0. M. van der Mensbrugghe, "Foreign Issues in Europe," Staff Papers, Vol. XI (1964), pp. 327-35. 10 See The Economist, January 18, 1964, p. 235. A loan expressed in Swiss francs was also issued in 1963 in London. 11 For differences between multiple currency loans and loans in European units of account, see Fernand Collin, The Formation of a European Capital Market and Other Lectures (Brussels, 1964), pp. 27-28. 12 See above, p. 447. 13 Austrian schillings, Belgian francs, Danish kroner, deutsche mark, French francs, Greek drachmas, Icelandic kronur, Irish pounds, Italian lire, Luxembourg francs, Netherlands guilders, Norwegian kroner, pounds sterling, Portuguese escudos, Swedish kronor, Swiss francs, and Turkish liras. 14 Par values for all the currencies, except the Swiss franc, of the member countries of the former EPU have been agreed with the Fund. Switzerland is not a member of the Fund. The gold content of the Swiss franc is defined in the Federal Coinage Law of December 17,1952. ©International Monetary Fund. Not for Redistribution BOND ISSUES IN EUROPEAN UNITS OF ACCOUNT 449 The value of the unit of account could be changed only under very strict conditions. The basic principle was that the unit of account could be modified only by a change in the value of all the 17 cur- rencies to which it was linked. If, during a given period, the parities of all but one of these currencies were changed, the value of the unit of account remained unchanged. Similarly, failing a modification of all the 17 currencies, the unit of account would remain unchanged if there were a modification in the value of the U.S. dollar, to which it was originally equal, or in the price of gold. The absence of a direct link between changes in the unit of account on the one hand, and in the price of gold on the other, indicated that the bonds in European units of account could not be considered as legally includ- ing a gold clause; such a clause is forbidden in private contracts by law or by judicial decision in a number of European countries.15 The conditions under which the unit of account would be modified, following a change in the 17 currencies to which it was linked, gradu- ally became more precise. In the first bond issue (February 1961), it was stipulated that, if all the 17 currencies were devalued or re- valued by the same percentage, the unit of account would be deval- ued or revalued by the same percentage; but if the 17 currencies should undergo differentiated changes in value, the value of the unit of account would follow the value of the currency which had devalued the least since the time of issue.
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