How to get ahead in the euro race
A good way to measure the arbitrage cost of issuing or investing in different capital markets is to compare the levels achieved when the proceeds are swapped into a common currency. The most suitable large and liquid common denominator is US dollar Libor.
Mooyaart Termstructures has precise data on the issuing levels and theoretical swap levels attained by major borrowers. We were able to generate graphs which show how the levels achieved by triple-A euro issuers over the last year compare with those they would have achieved in the component currencies of monetary union, if the proceeds had been swapped into floating-rate dollars.
On a given day in the dollar market a triple-A issuer will issue in 10-year fixed-rate dollars and swap into floating dollars. The issuer will get funds at say Libor minus 17 basis points (bp). If on the same day that borrower had issued in 10-year euro and swapped into floating dollar, it would have got funds at say Libor minus 7bp. Clearly the euro is 10bp less attractive than the dollar.
The graphs track this difference between the euro-to-dollar swap and the dollar-to-dollar swap.