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DIVISION OF I N T E R N A T I O N A L F I N A N C E ! J P " ™ B O A R D OF G O V E R N O R S i OF THE J J* 1 ? No«J 1* iJSCRVZ BAtsX F E D E R A L RESERVE SYSTEM October 27, 1961 i 1 CAPITAL MARKET DEVELOPMENTS ABROAD I. II. III. I, Switzerland P r i v a t e I n t e r n a t i o n a l Long-term Capital Movements f o r 1959 Nine Charts on F i n a n c i a l Markets Abroad Switzerland: Money and Capital Markets During September R e f l e c t i n g t h e s u b s t a n t i a l t h i r d - q u a r t e r i n f l o w s of funds from abroad, t h e Swiss money market was h i g h l y l i q u i d i n September. The President of the National Bank of Switzerland s t a t e d r e c e n t l y that the i n f l o w of funds, t o g e t h e r with boom c o n d i t i o n s i n Switzerland, were r a i s i n g the danger of i n f l a t i o n , and warned t h a t the banks should pursue a prudent c r e d i t p o l i c y . Long-term bond y i e l d s continued t o f a l l , the drop i n September being sharper than i n August. • Stock p r i c e s showed a small i n c r e a s e i n September, a f t e r having d e c l i n e d s e v e r e l y i n July and August. New i s s u e a c t i v i t y d e c l i n e d s e a s o n a l l y i n August, and picked up i n September. I t was reported t h a t i n the f i r s t part of September, Swiss enthusiasm f o r f o r e i g n bond i s s u e s waned considerably because of the i n t e r n a t i o n a l s i t u a t i o n . The $lL m i l l i o n i n c r e a s e i n o f f i c i a l gold and f o r e i g n exchange r e s e r v e s i n September was the s m a l l e s t monthly i n c r e a s e s i n c e l a s t A p r i l , due i n part t o the f a c t t h a t toward the . of the month s e v e r a l l a r g e Swiss commercial banks increased t h e i r short-term investments abroad. The spot d o l l a r i n Zurich was stronger a t the end of- September and i n e a r l y October, and spot s t e r l i n g strengthened throughout September* The discounts on both the three-month forward d o l l a r and three-month forward s t e r l i n g were reduced in l a t e September and the f i r s t week of October, t h e discount on t h e three-month forward d o l l a r f a l l i n g t o t h e lowest l e v e l s i n c e l a s t December. Switzerland has agreed t o lend SF 215 m i l l i o n ($50 m i l l i o n ) t o the United Kingdom, repayable in 196U, The loan ( s u b j e c t to approval by the Swiss Parliament) would fund the outstanding balance of Switzerland 1 s short-term a s s i s t a n c e to t h e United Kingdom under the "Basle agreements. , r Money Market. The Swiss money market i n September was h i g h l y l i q u i d and was s c a r c e l y a f f e c t e d by end-of-quarter demands f o r funds. On September 15 the balances maintained by banks, trade and industry with t h e Swiss National Bank reached t h e i r h i g h e s t l e v e l s i n c e l a s t A p r i l . The l i q u i d i t y of the market i s r e l a t e d to the s u b s t a n t i a l i n f l o w s of funds from abroad which occurred i n July and August and, at a reduced r a t e , most o f NOT FOR PUBLICATION DECONTfiOiLED AITJEB SIX MOUTHS NOT FOR PUBLICATION September. Banks continued t o show l i t t l e i n t e r e s t i n accepting 3-month d e p o s i t s , The r a t e s on 3-month deposits with large banks i n Zurich remained at t o 2 per cent through September 7 and became u n i f i e d at 1 3 A P e r cent by September 15. (See Chart 5 . ) May July July Aug. Sept. 15 7 23 15 15 Rate on 3-month deposits with large banks i n Zurich Interbank c a l l loan rate i n Zurich 1 1/2 1 3/U - 2 1/U 11/2-2 11/2-2 1 3/U 1 1 1 1 1 In a recent report t o the Council of the Swiss National Bank, Dr„ W. Schwegler, President of the Bank, said that the current boom in the Swiss economy i s placing an increasing s t r a i n on resources and r a i s i n g the danger of i n f l a t i o n . One of the consequences of present demand pressures i s the high l e v e l of imports5 in the f i r s t eight months of t h i s year, imports were 22 per cent greater than i n the corresponding period of I960„ As a r e s u l t , the current account of the balance of payments has been i n d e f i c i t , the d e f i c i t amounting t o $130 m i l l i o n for the f i r s t r f i a l f of 1961. Dr. Schwegler s a i d that i t i s only because p o l i t i c a l f a c t o r s have generated a large inflow of c a p i t a l from abroad that gold and foreign exchange reserves have r i s e n and the market has been l i q u i d . He warned that because the o v e r - a l l balance of payments might turn unfavorable, the banks should pursue a prudent credit p o l i c y and watch t h e i r l i q u i d i t y p o s i t i o n c l o s e l y . Bond Market. Since the middle of J u l y , the increasing l i q u i d i t y of the money market has been accompanied by f a l l i n g y i e l d s on long-term bonds. The d e c l i n e i n y i e l d s i n September was sharper than i n August, i n r e f l e c t i o n of a stronger demand for bonds. The y i e l d to maturity on the Swiss Confederation 3% bond of 1967-73 f e U f r o m 3.05 per cent on September 1 t o 20 9k per cent on September 29, and was s t i l l at that l e v e l on October l l u (See Chart 6 , ) Since the beginning of 1961 the movements of the y i e l d have gone through three s u c c e s s i v e phases of d e c l i n e , r i s e , and decline« The f o l l o w ing government bond y i e l d f i g u r e s include the low point of the January-May decline and the peak of the May-July r i s e . Gov't bond y i e l d Jan. 6 May 12 July lit Sept. 1 Sept.15 Sept. 29 Oct. Hi 3.00 2.83 3.12 3.05 3.02 2.9U 2.91* NOT FOR PUBLICATION New mortgage rate 3.76 3.76 3.76 3.76 3.76 n.a. n„a. NOT FOR PUBLICATION - - 3 - In contrast with the f a l l i n y i e l d s on long-term bonds, y i e l d s on medium-term deposit c e r t i f i c a t e s of cantonal banks rose again i n the f i r s t h a l f of September, a f t e r having r i s e n s l i g h t l y i n August,. and on dep o s i t c e r t i f i c a t e s of f i v e large banks the y i e l d s remained unchanged. Yields on deposit c e r t i f i c a t e s 12 cantonal banks 5 large banks July Aug. Aug. Sept. 31 15 31 15 3.29 3.30 3.30 3.32 3.25 3.25 .3.25 3.25 New I s s u e s . New money r a i s e d by public i s s u e s of s e c u r i t i e s i n August ca^tie to $15.3 m i l l i o n , which was l e s s than the January-July monthly average because new i s s u e a c t i v i t y i s s e a s o n a l l y low i n August. For the s i x t h time i n eight months t h i s year the amount exceeded the amount r a i s e d i n the corresponding period of l a s t year, and new money raised i n the e i g h t month period reached $389 m i l l i o n , 70 per cent more than i n January-August I960. New i s s u e a c t i v i t y picked up i n September, and the i s s u e s were helped by increased demand r e f l e c t e d i n the d e c l i n e i n y i e l d s on outstanding i s s u e s i n the market. New public i s s u e s (new money r a i s e d ; $ m i l l i o n s ) . Swiss i s s u e s Foreign i s s u e s Total January-June July August 160.9 lu7 1.3 58.9 219.8 3.U Uo 7 U.7 J anuary-J une July , August 187.8 20.2 7.0 12U.3 1|2.0 • 8.3 312.1 61=9 15.3 1960 1961 —— In September the Government of Finland f l o a t e d a $7 m i l l i o n , l5~year loan on t h e Swiss market. The bonds were priced to give a y i e l d t o maturity of 5 per cent per annum. Of the 19 foreign-loan i s s u e s f l o a t e d i n Switzerland i n the f i r s t nine months of t h i s year, t h i s loan gave the t h i r d highest y i e l d t o maturity at the time of i s s u e . Higher y i e l d s were o f f e r e d only by t h e i s s u e s of the Argentine Government ( 6 | per cent) and of a Portuguese petroleum r e f i n i n g company (5 3 A per c e n t ) , and a l l the other 16 loans y i e l d e d U 1 / 2 per cent except for the h per cent y i e l d on an IBRD i s s u e . Despite the r e l a t i v e l y favorable terms, i t i s reported that the Finnish NOT FOR PUBLICATION NOT FOR PUBLICATION - u - Government i s s u e was under subscribed when o f f e r e d t o the p u b l i c , and that approximately one-half the i s s u e was sold t o private purchasers. Investors were said t o have had some h e s i t a t i o n s about the i s s u e because of Finland's exposed p o s i t i o n i n r e l a t i o n to the Soviet Unione On the other hand, observers also b e l i e v e that Swiss enthusiasm f o r foreign i s s u e s i n general waned considerably i n the f i r s t part of l a s t month because of i n t e r n a t i o n a l p o l i t i c a l t e n s i o n s . I t was f e l t that unless the i n t e r n a t i o n a l s i t u a t i o n improved, y i e l d s on f o r e i g n bonds would have t o be higher than i n the recent past i f they were t o a t t r a c t Swiss lenders. . Foreign i s s u e s i n October included a $9.3 m i l l i o n loan for 16 y e a r s , at-'5 per cent, by the Tiroler Vasserkraftwerke of Innsbruck. Foreign borrowings i n September-October September Republic of Finland „ October Tiroler Wasserkraftwerke A. G. (Austria) Coupon Issue price rate Amount (mil.$) Term 7„0 1971-76 9.3 1971±/ Yield to maturity $ 100 5 5 100 5 . 1 / Call date not y e t reported. On October 23 the Swiss Government and the IBRD entered into an agreement whereby the Swiss Government w i l l purchase SF 100 m i l l i o n ($23.2 m i l l i o n ) of IBRD bonds. Half the t o t a l w i l l be purchased on November 1 , and the remainder next January 1. The loan w i l l be repaid i n two equal i n s t a l l ments i n 1966 and 1968. The i n t e r e s t r a t e , and the y i e l d t o maturity, are "3 3/U per c e n t . This i s lower than the y i e l d on the SF 100 m i l l i o n IBRD i s s u e f l o a t e d p u b l i c l y i n Switzerland l a s t March (U per c e n t ) , which was a s e r i a l bond i s s u e repayable between 1971 and 1979. Switzerland has been an important source of funds for the IBRD., Including t h i s l a t e s t loan, the IBRD has borrowed $70 m i l l i o n from the Swiss Government and has raised an additional $162 m i l l i o n in Switzerland v i a public o f f e r i n g s and private placements. Of the t o t a l , $206 m i l l i o n i s s t i l l outstanding. With long-term borrowing c o s t s i n the United Kingdom s u b s t a n t i a l l y higher than i n Switzerland, s e v e r a l B r i t i s h firms are said t o be considering loans in t h e Swiss market. The head of Switzerland's Department of Finance and Customs sjbated r e c e n t l y that future a c c e s s i b i l i t y - t o ' the Swiss c a p i t a l market w i l l depend upon i n t e r n a l f i n a n c i a l conditions i n Switzerland, He indicated that the government would not r e s t r i c t c a p i t a l exports i f the market remained as l i q u i d as i t i s now, but, i n order to avoid price i n c r e a s e s , would r e v i s e i t s p o l i c y i f the general s t a b i l i t y of i n t e r e s t r a t e s were threatened. NOT FOR PUBLICATION , NOT FOR PUBLICATION - 5 - Stock Market. Following the d e c l i n e i n August, the general l e v e l of i n d u s t r i a l stock p r i c e s (Chart 7) showed s c a r c e l y any change during the f i r s t three weeks of September. Traders were c a u t i o u s , and a "wait-and see" a t t i t u d e prevailed. Although p r i c e s advanced i n the l a s t week of t h e month and the f i r s t week of October, when i n v e s t o r s 1 concern over the i n t e r national s i t u a t i o n was said to have diminished, p r o f i t - t a k i n g and some r e assessment of the Berlin s i t u a t i o n were given as reasons f o r a moderate f a l l i n p r i c e s in the second week of October. I n d u s t r i a l share index June 16 Aug. h Sept. 1 Sept. 8 Sept. 15 285 252 236 23k 235 Foreign exchange. Swiss gold aid foreign exchange reserves continued to increase i n the f i r s t three weeks of September, the r i s e i n that period amounting t o # 6 m i l l i o n . In the f i n a l week of the month they dec l i n e d by $32 m i l l i o n , p r i n c i p a l l y because of an increase i n short-term i n vestments abroad by several large commercial banks i n Switzerland. The r e serve increase f o r the month of $11; m i l l i o n was the smallest since l a s t April. Reserves f e l l again by $1 m i l l i o n i n t h e f i r s t week of October, but i n t h e second week rose $20 m i l l i o n . Swiss National Bank reserves millions) Aug. Oct. 31 23 30 Ik Gold Foreign Exchange Total 2,128 2,153 2,173 2,526 306 327 275 " 2li2. 2,73li 2,780 2,718 2,768 On the Zurich market the spot d o l l a r remained almost continuously at the Swiss National Bank support price of SF It.315 during most of- the month. In the l a s t week of September and the f i r s t week of October demand for d o l l a r s increased, and the r a t e rose to U.325 on October 6. Spot s t e r l i n g continued to strengthen s t e a d i l y , r i s i n g from SF 12.11 on September 1 to SF 12.16 on September 29 and subsequently reaching SF 12.18 i n t h e f i r s t week of October. The discount on the three-month forward dollar remained at about 1 . 1 per cent per annum u n t i l the l a s t week of the month. I t then declined i n the next two weeks and reached 0 . 7 per cent i n the f i r s t week of October. This was the smallest discount since December 1960. The discount on three-month forward s t e r l i n g was reduced more sharply, from 5 . 1 per cent per annum i n the t h i r d week of September to U per cent in the f i r s t week of October. NOT FOR PUBLICATION NOT FOR PUBLICATION - 6 - The discount on the forward dollar has f a l l e n i r r e g u l a r l y since March 1961, when, immediately following the German and Dutch revaluations, i t stood at 2.9 per cent. According to press reports, an agreement was signed on October 20 under which Switzerland w i l l lend to the United Kingdom SF 215 m i l l i o n ($50 m i l l i o n ) at 3 per c e n t , repayable i n Swiss francs by the end of 1961t. The Swiss Parliament i s expected t o approve the loan by the end of t h i s year. The proposed loan would fund the outstanding balance of Switzerland's short-term a s s i s t a n c e t o the United Kingdom under the "Basle agreements. European Section. NOT FOR PUBLICATION II• - 7 - Private International Long-term Capital Movements f o r 1959 A p u b l i c a t i o n of the United Nations Economic and S o c i a l Council, e n t i t l e d "Economic Development i n Under-Developed Countries - International Flow of Private Capital, 1959-1960" presents a c o l l e c t i o n of a v a i l a b l e data on private i n t e r n a t i o n a l long-term c a p i t a l movements, together with comments on p a r t i c u l a r circumstances a f f e c t i n g private c a p i t a l transactions i n major lending and borrowing countries„ The composition of available data varies from country t o country, with respect t o completeness and d e t a i l „ Heavy r e l i a n c e i s placed on U.S. balance of payments data published by the Department of Commerce, and on the Balance of Payments Yearbook? published by the International Monetary Fund. The paper does not e x p l i c i t l y evaluate the adequacy of the a v a i l a b l e data as a measure of aggregate i n t e r n a t i o n a l p r i v a t e c a p i t a l movements, but seems t o assume that the missing data are not very important. According to the paper, the outflow of private long-term c a p i t a l (including reinvested p r o f i t s ) from main capital-supplying countries exceeded $5 b i l l i o n in 1959* of which more than 2 b i l l i o n went to underdeveloped countries» The United States was by f a r the l a r g e s t exporter of p r i v a t e -capital, contributing i n 1959 $3»3 b i l l i o n (or $2 0 2 b i l l i o n excluding reinvested p r o f i t s ) . The next l a r g e s t c a p i t a l exporter was the United Kingdom, with nearly $900 m i l l i o n . The f i g u r e s on private c a p i t a l imports and exports of individual developed countries are shown i n the tabic, on page 8. I t i s d i f f i c u l t t o determine from the paper the extent to which the f i g u r e s are comparable i n composition or accuracy. Information on Swiss private c a p i t a l movements, for instance, i s e n t i r e l y lacking, and French data are fragmentary. Switzerland i s , however, known t o be a large importer and exporter of private c a p i t a l , with the balance probably on the side of exports. As to France, i t i s believed that i t s c a p i t a l exports t o countries outside the franc zone were n i l , and that the estimated outflow went e x c l u s i v e l y t o the r e s t of the franc zone. Comparable data are given f o r most of the tabulated countries for 1958, and for some countries f o r 1957 and I960. These time s e r i e s reveal year-to-year f l u c t u a t i o n s , which are believed to be inherent i n the nature of private c a p i t a l investment. Over the period shown, the U.S. and the U.K. were c o n s i s t e n t l y large net exporters of private longterm c a p i t a l , and Canada, Australia, and I t a l y large net importers. Germany, the Netherlands, and Belgium were sometimes net importers and at other times net exporters of c a p i t a l 0 The i n f l o w of private long-term c a p i t a l i n t o underdeveloped countries as a whole i s estimated at about 92.0 b i l l i o n i n 1959, of which $1.2 b i l l i o n went to Latin.America, $0.L b i l l i o n t o Asia, and $ 0 , 3 b i l l i o n to A f r i c a , and l e s s than $ 0 . 1 b i l l i o n to Greece, Portugal and Spain, NOT FOR PUBLICATION NOT FOR PUBLICATION Estimated Private Long-term Capital Movements, 1959 (In millions of dollars) u. s . U. K. Germany Netherlands Belgium Franc area France Italy Australia 2 / Japan Canada Outflow Inflow 3,300 888 U70 369 n.a. n.a. n.a. h2 16 90 113 1,000 U90 207 352 757 n.a. 311 326 120 1,200 Net Outflow 2,300 398 263 17 1/8U -""757 3/(350) - 269 - 310 - 30 - 1,087 n . a . - Not available. 1 / Includes short-term, except commercial paper. 2 / F i s c a l year ending June 1959. 3/ Estimated average for 1956-59. Of the estimated t o t a l outflow of private long-term capital of over $5 b i l l i o n in 1959, direct investments accounted f o r about $3.5 b i l l i o n . Direct investments of the United States amounted t o nearly $2.U b i l l i o n , of which $1.6 b i l l i o n was invested in developed countries (Canada, Europe, Japan, and Australia), and $750 million i n underdeveloped countries. Over one-third of the t o t a l went to Canada, and about one-fourth to Latin America. Direct investments represented in 1959 over half of the outflow of long-term private c a p i t a l from the United Kingdom, about two-thirds of the outflow from the Netherlands, but only about one-sixth of the outflow from Germany. The data on p o r t f o l i o investment and loans and credits do not give a clear picture of these kinds of international c a p i t a l movements, as available information i s not s u f f i c i e n t l y homogenous to permit i n t e r national comparisons„ International Operations Section. II. Nine Charts on Financial Markets Abroad Chart Chart Chart Chart Chart Chart Chart Chart 1 2 3 h 5 o 7 8 - Interest Arbitrage U.S./Canada Interest Arbitrage New York/Londo^ Interest Arbitrage New York/Frankfurt Interest Arbitrage Frankfurt/London Short-term Yields Long-term Yields Industrial Stock Indices Major Currencies in Terms of Spot United States Dollar Chart 9 - 3-month Forward Rate—London Quotations NOT FOR PUBLICATION INTEREST Thursday figures ARBITRAGE, THREE-MONTH RATI UNITED S T A T E S / C A N A D A • TREASURY DIFFERENTIAL AND BILL RATES FORWARD r CANADIAN DOLLAR OF CANADA + RATE DIFFERENTIAL WITH FORWARD EXCHANGE COVER N I T I N C E N T I V E IN F A V O I O F C A N A D A + 11*1 INTEREST ARBITRAGE, NEW YORK / LONDON Friday f igui 3-MONTH TREASURY BILL RATES RATE D I F F E R E N T I A L A N D 3 - M O N T H FORWARD STERLING S P R E A D IN FAVOR OF L O N D O N FORWAR.D_.RATt . I • I RATE D I F F E R E N T I A L W I T H FORWARD EXCHANGE COVER IN FAVOR OF N E W YORK 1961 INTEREST A R B I T R A G E , Friday figure! 3-MONTH GERMAN TREASURY 3-MONTH NEW BILL YORK/FRANKFURT RATES A N D 1 INTERBANK INTERBANK VOAN RATE- LOAN RATES 1/~\ \/ RATE D I F F E R E N T I A L A N D FORWARD DEUTSCHE MARK 1 .INTERBANK \ LOAN RATE FORWARD RATE DISCOUNT ( - ) RATE D I F F E R E N T I A L W I T H FORWARD EXCHANGE COVER V •_ J I960. S Note: Special forward dollar rata available to German commercial bonks. M $ 1941 D w INTEREST A R B I T R A G E , F R A N K F U R T / L O N D O N Friday figui 3 - M O N T H TREASURY BILLS — A N D L E N D I N G RATES LOAN BATE RATE D I F F E R E N T I A L AND FORWARD STERLING GERMAN \ INTEBIANK X P R E M I U M + OR D I S C O U N T - RATE D I F F E R E N T I A L WITH in FORWARD EXCHANGE i/ — COVER z a 11—1/I' SHORT-TERM INTEREST RATES * |Vv. X / \ ' 0. 1. U4 f r\ ~ ~ f ' 1 1 1 \ v i i i \ \ M V . 1 i L GERMANY 1 1 1 1 1 1 1 1 I A « A / A CANA V — J \ if \W' # /A A . H JAPAN V h EUI0-D0UAI - LONDON t I O A 1- 3 month Ireosury bill rolej lor oil counlnei except Japan (3-month interbank depoiil role) and Switzerland (3-month depoiil rate). 3 month role lor U. S dollar depotill in London > V Yj. LONG-TERM BOND YIELDS /\/ \4 INDUSTRIAL STOCK INDICES * \> MAJOR CURRENCIES IN TERMS OF THE SPOT U. S. DOLLAR -:v -u. sr.1 Above FRENCH F R A N t — v , / — \6o\U por MONTH FORWARD RATES - LONDON QUOTATIONS j A ^ / \ .Per c>nl p«r /'GERMAN MARK PREMIUM + FRENCH FRANC /
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