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International Financial Organization the Behavior of Governments and Financial Institutions

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The U.K. issues more equity than either the U.S. or Japan, the U.S. issues more debt securities than the other two countries and that in these three countries debt issues are greater than equity issues by an overwhelming factor of almost 280-to-1. What could explain these findings? Figures 1 and 2 (IMF, 2006. BIS, 2006) show that most debt issues are from corporations and that Japanese (101.7% debt-to-equity) and European (69.6% debt-to-equity) corporations have more debt than U.S. companies (43.1% debt-to-equity). This explains why Japan and the U.K. issued lower amounts of debt compared to the U.S. during the period. Second, debt yields are lower in Japan compared to the U.S. and the U.K., and while equity yields are higher in the U.S. than in the U.K. and Japan, debt returns (5 to 11%) are higher than equity returns (-33% to almost 0%) in all three countries, and interest rates are declining. This means the debt is more attractive to issuers and investors than equities. For investors, debt returns are higher, so they would rather lend their funds. For companies, debt is also cheaper since the trend for interest rates is flat to declining. Therefore, investors and corporations both prefer debt over equity. Vodafone plc (2006: 2-3) is a London-based telecommunications company with a total turnover of £29.4 billion, assets of £127 billion, and over 170 million customers worldwide, making it the biggest telecoms firm in the world. With a debt of £20.1 billion and stockholders’ equity of £86.9 billion, it has a debt-to-equity ratio of 23%. Net debt is £17.3 billion after taking out cash and cash equivalents. Vodafone raises funds in various currencies by issuing debt securities because it has a good financial network in London, the world’s financial center. The company’s policy (Vodafone, 2006: 41) is to maintain the currency of debt and interest charges in proportion with expected future principal multi-currency cashflows, which explains why 113% of its net debt is in currencies other than sterling: 73% of debt is in Euro, 21% in Yen, 14% in US Dollars, and 5% in other currencies whilst 13% of net debt is in purchased forward options in anticipation of sterling denominated shareholder returns via share purchases, dividends, and share distribution. Since sterling is stronger than other currencies (the Euro, US Dollar, and Yen), it borrows funds for operations and to pay dividends in sterling. If the sterling weakens against certain currencies in which Vodafone has foreign debt, this would result in an increase in net debt from currency translation differences.