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CAPITAL ACCOUNT DEFICIT: An imbalance in a nation's balance of payments capital account in which payments made by the country for purchasing foreign assets exceed payments received by the country for selling domestic assets. In other words, investment by the domestic economy in foreign assets is less than foreign investment in domestic assets. This is generally not a desireable situation for a domestic economy. However, in the wacky world of international economics, a capital account deficit is often balanced by a current account surplus, which is generally considered a desireable situation. If, however, the current account does not balance out the capital account, then a capital account deficit contributes to a balance of payments deficit.
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                           EURODOLLARS: Deposits denominated in U.S. dollars in banks located outside of the United States or domestic branches of foreign banks. While such deposits originated with European banks, hence the "Euro" part of the name, they can be held by banks from any foreign country. Eurodollars are an attractive investment because they are NOT in U.S. banks and thus are NOT subject to U.S. banking regulations. Eurodollars, along with other institutional investment near monies, are added to M2 to derive M3. Eurodollars deposits are held in foreign banks or domestic branches of foreign banks that are denominated in U.S. dollars. They are termed Eurodollar deposits because they first emerged and proliferated in European banks. However, after the name was well-established, banks operating in other countries got into the act, competing for these dollar-denominated Eurodollar deposits.Going ForeignThese deposits come in wide range of a different varieties--long term, short term, fixed interest rate, variable interest rate. Some Eurodollar deposits are overnight, while others mature after 20 years. Some carry fixed interest rates until maturity, while others have interest rates that vary with market conditions.Whatever the structure of Eurodollar deposits, a major attraction is limited government regulations. Because the deposits are NOT part of the U.S. banking system, they are also NOT under U.S. banking regulations. In particular, banks holding Eurodollar deposits operate under different, usually lower, reserve requirements. Eurodollar deposits are usually quite large, measured in millions rather than hundreds or thousands. Big money investors circulate the globe with these Eurodollar deposits in search of the best returns. Because Eurodollars are relatively liquid, but not quite as liquid as savings accounts or money market deposits, they are part of M3 but not part of M2. Eurodollars can be converted to currency or checkable deposits easier than selling off corporate stocks, a factory, or small kitchen appliances, but not quite as easy as transferring funds from savings to checking. Eurodollars and M3M3
June 2004 (Billions) |
| | Component | Amount |
|---|
| | M2 | $6,292.7 | | Near Monies | 3,000.3 | | Institutional Money
Market Mutual Funds | 1,112.2 | | | Large-Denomination
Time Deposits | 1,014.3 | | | Repurchase Agreements | 535.8 | | | Eurodollars | 338.0 | | |
| | Total M3 | $9,293.0 |
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The table to the right presents values for M3 and its two key components, M2 and assorted near monies. Eurodollars in June 2004 were just under $340 billion. This represented about 11 percent of the near monies added to M2 and just under 4 percent of total M3.Other M3 Near MoniesEurodollar deposits are one of four near monies included in M3. The other three are: (1) institutional money market mutual funds, (2) large-denomination time deposits, and (3) repurchase agreements. In particular, the Eurodollar deposits included in M3 are those held by U.S. residents at banks Britain and Canada.- Institutional Money Market Mutual Funds: These are deposits with nonbank mutual fund companies that are typically owned by institutions (rather than consumers). More specifically they are money market mutual funds with a minimum initial deposit of $50,000.
- Large-Denomination Certificates of Deposit: These are certificates of deposits issued by banks with a minimum deposit of $100,000. Such certificates of deposits also tend to be owned by businesses and other institutions, rather than consumers.
- Repurchase Agreements: These are short-term transactions in which a financial asset is sold, then automatically repurchased after a specified time (often overnight). The difference between the sale price and repurchase price is the interest payment on this short-term loan. Overnight repurchase agreements are commonly used by banks to generate interest on business checking accounts (which cannot legally receive interest payments).
Recommended Citation:EURODOLLARS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: May 14, 2024].
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