The changeover to a single currency is likely to have an enormous effect on European bond markets by creating new liability structures, performance benchmarks and asset allocation models. The impact should be very positive. The macroeconomic characteristics of Emu - fiscal discipline, low interest rates, reduced currency risk - and the microeconomic effect on bond markets - low operational costs, enhanced efficiency, better liquidity - should provide a major boost for suppliers and users of private debt markets.
One major effect will be a larger capital market after Emu, with at least three new market sectors likely to emerge. First, a new and integrated euro-denominated domestic market will develop comprising the existing local-currency debt of private issuers, as it is planned to redenominate all issues into euros in 2002. A deeper local high-yield market should result as investors assume more credit risk to replace lost opportunities for maximizing return from interest and currency rate differentials. Second, a broader Eurobond market will develop with the creation of a new euro-denominated Eurobond sector. With the euro as the new local currency, international and European issuers will want to tap this new market.