The First Eurobond: How Autostrade's 1963 Loan Escaped New York

On 1 July 1963 a small group of bankers signed a loan agreement in a room at Schiphol airport outside Amsterdam and then went home. None of them had come to the Netherlands for a meeting. They had come because the signature had to happen somewhere that was not London, and Schiphol was the nearest place a Dutch notary could witness the deed between flights.

The borrower was Autostrade — Concessioni e Costruzioni Autostrade — the company building and running Italy's motorway network, and behind it stood IRI, the state industrial holding company that owned it. The amount was $15 million. The term was fifteen years. The coupon was 5½ per cent, payable once a year against a paper coupon clipped from a bearer certificate. S.G. Warburg & Co. of London led the issue, with Banque de Bruxelles, Deutsche Bank and Rotterdamsche Bank alongside.

Every element of that description was a deliberate act of avoidance. Dollars borrowed by an Italian company through a British merchant bank, signed in the Netherlands, with interest paid in Luxembourg and the certificates payable to whoever held them. No government's rules covered the whole transaction, because it had been assembled so that no government's rules would.

The Dollars That Stayed Abroad

A market in dollars held outside the United States existed before anyone had a use for it on this scale. Its origin is usually dated to 28 February 1957, when the London branch of Moscow Narodny Bank moved $800,000 out of the American banking system and into a deposit in London. Soviet institutions had watched Washington freeze Egyptian assets during the confrontation over the canal in 1956, and drew the conclusion that dollars held in New York were dollars held at the pleasure of the United States Treasury. Dollars held in London were still dollars, and they still bought oil and machinery, but nobody in Washington could reach them.

What turned a Cold War precaution into a market was a British policy accident later the same year. Sterling came under attack in the autumn of 1957, Bank Rate went to 7 per cent, and the Treasury restricted the use of sterling credits to finance trade between third countries. London's merchant banks and overseas banks had built their business on exactly that trade. Denied sterling, they did the obvious thing and quoted the same credits in dollars, funding themselves in the deposit market that Moscow Narodny and others were feeding. Catherine Schenk's reconstruction of the Bank of England's files shows officials watching this happen, deciding that a market in foreign currency between non-residents was not their business to police, and declining to intervene — a non-decision that determined where the next three decades of international finance would be booked (Schenk, 1998).

Deposits quadrupled between 1958 and 1963. By the time Autostrade needed money there was a large pool of dollars in Europe earning short-term rates, and no instrument through which those dollars could be lent for fifteen years.

The Tax That Closed New York

Long-dated dollars came from New York. European borrowers had been raising them there through Yankee bonds — foreign issues registered with the Securities and Exchange Commission and sold to American investors — and the flow had grown large enough to alarm an administration already losing gold. Under the postwar system of fixed parities agreed at Bretton Woods, every dollar that left the country was a potential claim on the American gold stock, and the claims were mounting faster than the stock.

On 18 July 1963, seventeen days after the Autostrade signing, President Kennedy sent Congress a special message on the balance of payments. He asked for an interest equalisation tax on American purchases of foreign securities, which, he told Congress, "would stem the flood of foreign security sales in our markets and still be consistent with both economic growth and free capital movements". The rate ran from 2.75 per cent of the purchase price for paper maturing inside three years up to 15 per cent for the longest maturities, and it applied to purchases made after the day of the message. Congress took a year to pass it and made it retroactive to 19 July 1963.

Arithmetically the tax added roughly a percentage point to the cost of borrowing in New York. Practically it closed the market. Foreign issues in the United States collapsed, and the borrowers who had relied on them needed somewhere else to go within weeks.

Each measure was designed to keep American capital at home. Each one instead taught a class of borrower to raise dollars without touching the United States, and the offshore market absorbed the business the controls displaced.

Warburg's Arithmetic

Siegmund Warburg had been arguing since the late 1950s that Europe's savings could be lent to Europe's borrowers without an American intermediary, and that London was the natural place to arrange it. Niall Ferguson's biography, written with access to the firm's papers, puts the claim plainly: if anyone could claim to be the father of the Eurobond market, it was Warburg (Ferguson, 2010). Sir George Bolton of the Bank of London and South America, who had done more than anyone to push British overseas banks into dollar business, made the case alongside him. The two men sounded out American opinion in 1962, and by early 1963 the Bank of England had let it be known that it would not object.

Ian Fraser, the Warburg director who did the work, spent roughly six months assembling a security that could exist in the gaps between four tax systems. Gary Burn's study of the period argues that the Bank of England's permissiveness was not passive at all but a considered strategy to rebuild London as an international centre using a currency that was not its own, at a time when sterling could no longer support the role (Burn, 2006).

Four Jurisdictions, No Tax

Fraser's structure, rather than the modest sum it raised, is why the deal is remembered.

Nothing here was hidden. The prospectus described a bond issued outside Britain by an Italian toll-road operator with interest payable in Luxembourg, and any tax inspector who read it would have understood the design. Fraser then persuaded the London Stock Exchange to list paper that was neither issued nor redeemed in Britain, giving the bonds a quotation in the one city that had no fiscal claim on them (Bullough, 2018).

Chris O'Malley's history of the market treats the Autostrade issue less as an invention than as an assembly of existing techniques into a form that could be repeated, which is what mattered (O'Malley, 2015). A one-off arrangement is a piece of tax planning. A structure that a syndicate can reproduce next month for a different borrower is a market.

The Belgian Dentist

Bearer form determined who bought the bonds. A bearer certificate has no owner of record; whoever physically holds it collects the coupon, and no register exists for a revenue authority to consult. That characteristic gave the market its archetypal investor, coined by Christian Hemain of International Financing Review and used ever afterwards in dealing rooms: the Belgian dentist, a well-off Continental professional who wanted a hard-currency coupon from a name he recognised, and who preferred not to discuss the holding with his own tax office.

The archetype was a caricature with real money behind it. Continental Europe in the 1960s combined high marginal tax rates, exchange controls of varying rigour, and a large stock of private wealth that had learned during two wars to value assets it could carry. Dollar bonds in bearer form, quoted in London, paid in Luxembourg and issued by governments and blue-chip companies, answered that demand precisely.

Mechanically the market ran on paper. Certificates travelled between London, Brussels and Luxembourg in briefcases and armoured vans, and the coupon sheets came back the same way. Volumes rose faster than the couriers could manage.

Building the Plumbing

Settlement broke first. By 1968 the volume of paper moving between the three centres had produced fails, lost certificates and reconciliation backlogs of a kind that would cripple the New York back offices during the same decade. The market's answer was to stop moving the certificates.

On 1 December 1968 the Brussels office of Morgan Guaranty Trust launched the Euroclear System: bonds were immobilised in a depository and ownership changed by book entry, with cash and securities exchanged simultaneously so that neither side could deliver and go unpaid. It was the first international central securities depository. Continental banks, unwilling to leave the infrastructure of their own market in American hands, founded Cedel in Luxembourg in September 1970. The two systems linked in 1980 through the arrangement the market called the Bridge, and Morgan Guaranty's ownership of Euroclear passed to 120 user institutions from 1972.

Dealers organised themselves in parallel. The Association of International Bond Dealers was constituted under Swiss law in Zurich in February 1969, out of the same settlement chaos, writing the trading rules, standard documentation and settlement conventions that a market with no exchange and no regulator otherwise lacked. It became the International Securities Market Association in 1992 and later the International Capital Market Association — a private rulebook that outlasted several of the tax regimes the market had been built to escape.

The Bank of England, surveying the result in its bulletin for the third quarter of 1970, noted that "the very rapid growth of euro-currency markets in recent years has been accompanied by a similar broadening of international capital markets". Official language for a market its own officials had chosen not to regulate.

What London Got

Issuance reached a record $6.4 billion in 1972, fell to $2.1 billion in the recession year of 1974, and then more than quadrupled to $8.5 billion in 1975 as the oil surpluses of the Gulf states arrived looking for dollar assets. Recycling those deposits through London and into sovereign borrowers produced the syndicated lending boom whose ending, when Mexico suspended payments in August 1982, took a decade to work through.

For Britain the consequence was structural. A country with a weakening currency, exchange controls on its own residents until 1979, and a shrinking share of world trade became the booking centre for a dollar market it did not issue and could not have supported in sterling. American, Japanese and Continental banks opened London subsidiaries to be near it. When the Stock Exchange abolished fixed commissions and single capacity in October 1986, the firms that bought the old brokers and jobbers were largely institutions that had come for the Euromarket first.

The tax rules that produced the market did not survive it. Washington repealed the interest equalisation tax in 1974, once floating rates after the suspension of dollar convertibility in August 1971 had removed the gold constraint the tax was meant to protect. Britain abolished exchange controls in 1979. Bearer certificates gave way to global notes held in depositories, and the anonymity that had defined the instrument was progressively closed off by information-exchange agreements from the 1990s onward. What remained was the market: by its fiftieth anniversary in 2013 the outstanding stock of international bonds was reckoned in the region of $4 trillion.

The fifteen-year bond signed between flights at Schiphol ran to its final maturity in 1978. Because the certificates were payable to bearer, Autostrade never held a list of the people who had lent it the money.