Monday, December 18, 2017
Business

Debt crisis shrinks international use of euro

FRANKFURT, Germany — International use of the euro slipped last year because of the debt crisis in Europe, while the U.S. dollar held its own as the world's leading currency for reserves held by central banks.

Currencies not traditionally used as reserves, such as the Canadian and Australian dollars, gained in favor, as those countries enjoyed steady growth and lower debt than major economies.

The European Central Bank said this week that the euro's share among the currency reserves held globally by central banks fell to 23.9 percent in 2012 from 25.1 percent in 2011. The dollar's share was little changed at 61.9 percent.

The ECB said the financial crisis that has afflicted the 17-country eurozone was a factor discouraging use of the euro for reserves, which are often held in the form of government bonds. Lending across borders in the eurozone has dropped, diminishing the liquidity that reserve holders like to see. Lower liquidity means there are fewer buyers and sellers readily found.

The eurozone countries have struggled with heavy levels of public debt — Greece, Portugal, Ireland and Cyprus have needed financial rescue. Even larger economies like Spain and Italy have worryingly high debt.

In its annual report on international use of the euro, the ECB also found that there was less borrowing in euros internationally by companies because they could get lower interest rates by selling bonds denominated in U.S. dollars.

Countries hold reserves of foreign currency to help backstop their own currencies' value in case of a financial crisis and for trade purposes. The country issuing the reserve currency can benefit because demand from abroad supports its exchange rate and can mean lower borrowing costs for the government, as has been the case with the U.S. dollar in its role as the leading reserve currency.

Demand for dollars in the form of U.S. Treasury bonds by other countries — such as China — helps keep down the interest rate that the U.S. government pays to borrow.

A key finding of the report was that nontraditional reserve currencies such as the Canadian dollar and the Australian dollar are in greater demand because of their growing economies and better public finances. The category of "other" currencies saw its share of officially disclosed reserves increase from 5.7 percent to 6.1 percent, ahead of both the yen at 3.9 percent and the pound sterling at 4.0 percent.

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