Getting to grips with financial terminology can help you understand the currency market and get the best exchange rate. If you’re not sure about the jargon, look it up in our glossary!
Austerity
Austerity means a period of reduced spending. Austerity measures are often the steps taken by governmental bodies in order to reduce their nation’s debt (e.g. spending cuts and tax hikes)
Bond Market
Interest bearing securities (securities which can be borrowed for long-term financing) are bought and sold by corporations/countries on the bond market in order to raise capital.
Credit Rating
Countries and companies are assigned a credit rating which reflects the likelihood of them defaulting. An AAA rating is assigned to countries/companies deemed extremely unlikely to default, whereas those which are in default are given a D rating. Any ratings below BBB are known as ‘junk’. Credit ratings can also be given a positive or negative outlook depending on the odds of them being downgraded or raised. The three major ratings agencies are Standard & Poor’s, Moody’s Investor Service and Fitch.
Deposit Facility
A system used by the Eurozone in which credit institutions are able to deposit overnight in an account with the national central bank of a member of the Eurozone.
Deposit Rate
The deposit rate is the interest rate paid out on the excess liquidity which credit institutions may deposit overnight in an account with the national central bank of a member of the Eurozone.
ECOFIN Council
The ECOFIN Council is made up of the finance and economics ministers of the European Union’s 27 members. When the council is discussing budgetary issues budget ministers are also in attendance
Enhanced Credit Support
These are the non-standard steps taken by the European Central Bank/Eurosystem during fiscal crises (key rates cuts are deemed standard measures).
Euro
Also known as the ‘single’ or ‘common’ currency. The Euro is the shared currency of the Eurozone, used by all of its members.
Eurogroup
This is the name given to the informal gathering of the Eurozone’s Finance Ministers which usually takes place before the monthly ECOFIN Council meetings.
European Central Bank (ECB)
From its headquarters in Frankfurt, Germany, the European Central Bank decides on and implements monetary policy for the Eurozone and its members. The ECB is governed by an executive board and the governors of the Eurozone’s national central banks.
European Commission
The European Commission is the executive body of the European Union and proposes legislation to the European Parliament and Council. As well as enforcing European law in partnership with the European Court of Justice, the European Commission implements the EU’s budget and policies. The European Commission meets on a weekly basis in Brussels.
European Council
The European Council is made up of the heads of state/government of the 27 EU member states, the president of the European Commission and the president of the European Council.
European Economic Area (EEA)
This free-trade area is made up of European Union member states plus Norway, Iceland and Liechtenstein.
European Parliament
Every five years EU voters select their Members of the European Parliament (MEPs). In conjunction with the European Council, the European Parliament is integral to the utilisation of European laws and the EU budget.
European Stability Mechanism (ESM)
The European Stability Mechanism was introduced to replace the temporary rescue fund known as the European Financial Stability Facility (EFSF). This permanent aid facility is backed by the EU’s 27 member states and exists to provide assistance to any Eurozone states experiencing fiscal difficulties. Germany has the largest financial stake in the fund and consequently exerts the most influence when it comes to agreeing bailout packages.
European Union (EU)
The European Union is the term applied to a collective of 27 European countries which have established an economic and political partnership.
Eurosystem
This is the term applied to the European Union’s central banking system, made up of the European Central Bank plus the national central banks of every EU member state.
Eurozone
A currency bloc comprised of: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Italy, Ireland, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.
Gross Domestic Product (GDP)
A nation’s GDP is worked out by taking the value of all the goods and services produced by the nation and subtracting the cost of any goods/services used in their creation. Overseas earnings/investments don’t come into the calculation of GDP.
Inflation
The consistent increase in the prices of services and goods, caused by issues in the money supply or demand/ contraction in the supply of goods etc. Central banks in industrialised nations do try to keep inflation at a moderate level as deflation (inflation falling to zero) can be damaging to economic growth.
International Monetary Fund (IMF)
When nations are in financial difficulties the International Monetary Fund lends aid to them on the condition that they adhere to strict guidelines for repairing their economy. 188 member countries provide resources for the fund.
Key Rate
The interest rate which dictates bank lending rates and the cost of credit for borrowers.
Long-term refinancing operations (LTROs)
This measure involves the ECB lending money to Eurozone banks at very low rates so that they, in turn, can lend more money to businesses and consumers, boosting economic growth.
Monetary Policy
This is the aspect of government policy responsible for managing the availability and cost of money. It outlines adjustments to the money supply and changes to official interest rates. Central bank’s are usually in control of their nation’s monetary policy.
Outright Monetary Transactions
This ECB scheme ensures that the central bank has the authority to buy potentially unlimited amounts of bonds of heavily indebted nations.
Troika
The term ‘Troika’ is applied to the union of the IMF, EU and ECB. Together the three institutions manage bailouts for European countries.
Quantitative easing (QE)
This is where a central bank creates money by crediting its own account and uses the money to buy government bonds from banks, pushing the price of the bonds up and the yields down in order to reduce the government’s borrowing costs and leave banks with more money to lend to businesses and consumers.
