ECONOMIC

eign central banks in exchange markets (Chart 7). The strains experiencedwithin the European snake arrangement were a major factor in the heavyintervention activity. Early in the year heavy pressure on the French francled the authorities to break the link with the currencies adhering to the snake.Upward pressures on the German mark, reflecting both the large Germancurrent account surplus and the continued significantly better inflationperformance of the German economy compared with its trading partners,caused considerable strain among the currencies remaining in the snake. Inthe fall of 1976, therefore, the central values of the currencies within thesnake were realigned, with the mark appreciating by 2 percent, the Swedishkrona and Norwegian krone depreciating by 1 percent, and the Danish kronedepreciating by 4 percent. The largest changes in the foreign currency markets,however, involved the pound sterling, the Italian lira, and the Mexicanpeso, which depreciated by 16 percent, 2134 percent and 37J/i percentrespectively against the U.S. dollar between the end of 1975 and the endof 1976.INTERNATIONAL FINANCIAL MARKETSThe unrest in the exchange markets and the financing difficulties thatsurfaced during the year for a number of industrial and developing countriesobscured the relative ease with which deficits of many other countriescontinued to be financed. Activity in the international capital market wasbrisk during 1976. On the demand side, expectations that borrowing costswould rise in 1977 buoyed activity; in addition, there was an exceptionallystrong surge in Canadian demand for long-term funds. Concurrently thesupply of funds to the bond markets was encouraged by low demand fordomestic credit in the United States and Europe resulting in declines inshort-term interest rates during the year. As funds became more abundant,bond yields began to fall. Medium-term credits arranged in the Eurocurrencymarket also showed a substantial increase last year, as risingdemands for finance from almost all the main categories of borrowers weremet by increases in supply sufficiently large to allow borrowing costs to decline.Total borrowing in the markets for medium-term Eurocredits, Eurobonds,and foreign bonds amounted to $48 billion in the first 10 months ofthe year, representing an annual rate of $58 billion, an increase of more thanone-third from the 1975 total.New issues of Eurobonds during the first 10 months of the year at $12j/2billion were well above the volume issued in the corresponding period of1975, a previous peak for the Eurobond markets. Industrial countries issued69 percent of all bonds during the first 9 months of 1976, taking a considerablylower share of loanable funds than in 1975. Japan was very active in themarket, but some borrowers from countries in deficit—for example, theFrench, the British, and especially the Canadians—also increased their use ofthe Eurobond markets. Canadian issues of $2% billion in the first 10 monthsof last year were more than twice as large as in all of 1975 because ofexceptional needs for long-term finance, relatively high domestic interest128