Exchange Markets in Europe
By F. G. HIRSCH
THE foreign business of banks throughout Western Europe has undergone major changes since the move to external convertibility at the end of December. Business everywhere has broadened; competition is much more extensive; dealers' pencils have sharpened. What has hap- pened is that West European currencies can now be traded freely and officially, not only against each other but also against the dollar. Before con- vertibility, there were active markets in all categories of sterling and other European cur- rencies against the dollar, but this dealing was not
officially allowed and it took place not in the domestic centres but in free markets abroad. These included New York, Hong Kong and Tangier, but by far the most important was Zurich.
The Ztirich bankers had brought the organisa- tion of a market in blocked currencies and partially convertible currencies to a high pitch.
They offered quotations in clearing balances available only for spending in one particular country or one particular purpose; they developed the world's leading market in foreign notes.
But most important of all was the market in trans- ferable sterling against dollars. Turnover here exceeded a million pounds a day, and became at times greater than the value of sterling-dollar business in London. The London banks were thus deprived of much traditional business (though one of them, Samuel Montagu, established its own subsidiary in ZlIrich). Since December 29 London has been able to compete again on equal terms.
The result has been far reaching. Virtually every banker in Ztirich admits that substantial exchange business has been lost to London. The Swiss are generous and philosophical about it. They recog- nise that much of the business on which Ztirich has grown so fast as an international centre was simply the result of other people's restrictions, and that when these restrictions went' (as they always hoped they would) business would return to tradi- tional and direct channels. They point out that some of the loss may be made up in other direc- tions—more people are now free to use ZUrich officially. The bankers also welcome the widening of the market. Previously, a dealer wanting dollars had to choose between a handful of local col- leagues; now the foreign exchange markets of Europe are open to him.
Finally, there is no reason to suppose that Switzerland will lose its attractions as a haven for rich men's money. It can still offer a substantial margin of peace, stability, and low taxation over any likely competitor. And while foreign clients keep their money in Swiss, banks, they will use them for much of their foreign exchange in trans- actions, as well as their investment business. But the Swiss banks have been obliged to reduce their margins on foreign exchange dealings under com- petition from London, where margins have always been very fine. This is somewhat of a blow, since Swiss banks rely on commissions to a much greater extent than English banks.
The Swiss are also losing a certain amount of business in gold, notably sales of Russian gold. This gold has for many years ended up in Lon- don, but it used to be put through Zurich because the Russians liked to take advantage of the small
-discount on transferable sterling. Now the Rus- sians have dealt direct with London, though the sales have not been large. It will be interesting, to see whether they continue to sell through the Communist-owned French bank, Banque Com- merciale pour l'Europe du Nord, which is used for sales against US dollars as a precaution against
any American move to block Soviet accounts. Will the masters of Soviet gold and exchange follow other powerful bankers in their distrust of the dollar, and switch to sterling as a reserve cur- rency?
London has gained most in business as a result of convertibility; but less dramatic benefits have been felt by many other centres. The total amount of business put through the exchange markets has grown following the winding-up of the European Payments Union. Virtually all transactions are now settled through the market, since use of the clearing at the Bank for International Settlements provided under the European Monetary Agree- ment involves settlement at the most unfavourable extreme of the Official dealing margins. Hence even the small countries are finding themselves using the exchange markets much more: Austria, for example, used to settle its big bilateral deficit with Germany through EPU; now it buys D-marks in the market, with, say, Italian lire of which it has a surplus.
Paris has gained in importance as a financial centre as a result of the new measures. Devalua-
uon of the franc and fiscal retrenchment have done much to restore confidence, and the French Government is making a special effort to attract foreign investment. All this should bring more foreign business to the banks. Both the ex- change market and the gold market in Paris have been growing steadily more active in the past two years or so and will now be helped by the ending of the special operations (massage) of the Bank of France which used to bolster up France's weak position. Now the financial com- munity hopes that Paris may have a chance of regaining its former premier rank among con- tinental financial centres. lBut Zurich will not be easy to displace. Nor is it the only rival. Frankfurt has grown in importance with the increasing capacity of Germany to lend; and tentative steps are being taken to improve the organisation of the money market there; in February, a specialist discount house was set up. Bankers in Frankfurt, like their colleagues in Switzerland, now enjoy complete freedom of foreign dealing, and some of them expect to see an increase in international security arbitrage (hitherto centred almost exclu- sively in Switzerland). German bankers are also playing a leading role in the formation of inter- national unit trusts. These and other ventures in financial co-operation in Europe are likely to go much farther as the Common Market takes shape.
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