UK Tax Policy and the Euro-dollar Market
UK Tax Policy and the Euro-dollar Market
UK TAX POLICY AND THE EURO-DOLLAR MARKET *
A. Introduction
The view of the UK Treasury and the Inland Revenue was that, the way was now open for the nationalised industries and the local authorities to borrow in this way, if the UK wanted this to happen, and that the Boards and authorities concerned were prepared to go ahead.
This led to a very important issue, which had to be fully recognised. The amendment to the Finance Bill will allow interest payments to be paid free of tax only where the bond of stock was issued through an overseas agent subject to foreign law. It did appear to mean that, when a Euro-bond was issued in London, withholding tax will still apply where the interest was paid out of UK income. Thus the effect of the amendment would be to impair the status of the London issuing houses since if the amendment leads to a rise in this type of borrowing they will be effectively excluded from participating in the increase: an increase which will derive entirely from the UK sources. It was envisaged that the UK would have a presentational problem on its hands. As, if the UK government wanted a public sector authority to borrow in foreign currencies, it had to approve in their arranging for the issue to be made through an overseas agent and in an overseas centre. In short, the UK government had cut out the possibility of the public sector itself utilising the Euro-dollar resources of London with regard to its borrowing operations .
The tax change, under which interest paid on foreign currency borrowing for home investment would be treated as an expense for corporation tax purposes, though designed to encourage such borrowing by the nationalised industries, would create an incentive also for the UK commercial concerns. Given the rate structure in the Euro-dollar market, the new tax incentive may well create substantially increased interest by UK firms, particularly those with overseas income, in currency borrowing for home activity. A central question was, how would this be regarded under the exchange control rules? There had been little interest shown by UK firms in this type of activity but given the prime need to strengthen the reserves, it plainly made sense to allow firms to borrow fairly freely in the Euro-dollar market for home investment if they found it attractive to do so. The UK governments attitude, was that, if UK firms want to borrow on
Importance of the Euro-dollar Market to Sterling
Importance of the Euro-dollar Market to Sterling
THE IMPORTANCE OF THE EURO-DOLLAR MARKET TO THE MANAGEMENT OF STERLING
A. Introduction
Throughout the 1960s, the management of sterling had been a central preoccupation of British governments. This preoccupation largely determined the way Britain viewed the Euro-dollar market*, as the government was constantly hit by the pressures which the international use of sterling placed on the British economy. The principal objective of British governments was to prevent a financial crisis by whatever means possible, in which the management of sterling was to be at the heart of governing Britain. In other words, the strain of the entire sterling area coincided with the governments strategy to achieving economic growth.
B. Government policies and the pressures of sterling
The pressure on sterling stemmed from the UKs underlying deficit in its balance of payments. This was reinforced, by the flow of funds that had arisen from an increase in foreign interest rates, which acted on the UKs reserves by encouraging an outflow of non-sterling area commercial balances, and some switching of funds into the Euro-dollar market out of sterling. In other words, a fixed exchange rate regime. If confidence in the sterling system as an important reserve and trading currency was to improve, it had to evolve as the world monetary system developed.
The sterling area had been changing throughout the 1960s. Greater independence in political, economic and financial affairs had led to a questioning of traditions and, in particular, the traditional links with sterling. The notion of devaluation, emphasised how far these changes had gone, when many of the independent territories preferred to retain the value of their currencies rather than to follow sterling. There was a situation in which there was an underlying lack of confidence in sterling with the result that many sterling area traders were reluctant to continue to use sterling as their trading currency, unless they could cover the exchange risk. There was stronger pressure than ever for the diversification of official reserves, either positively by a switch out of existing balances or negatively by retaining trading earnings in foreign currencies. No longer was there any assurance that sterling area rates of exchange would keep in line with sterling, with the consequence that: it became necessary for forward markets
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