While the first scenario will have most businesses wiping their collective brow in relief, the latter two pose significant challenges, with a total disintegration requiring the same adjustments as a partial collapse, only on a significantly larger and riskier scale.
In looking to respond to these scenarios, a “euro crunch project” – for want of a better name – should focus on:
1. Financial exposure and mitigating financial loss: a legal and contractual/documentation review (in-country and pan-Europe); an assessment of creditors and suppliers; and a review of in-country new business initiatives.
2. Systems reviews to support transactions in the new currency: rebooking for treasury purposes; invoicing; payments; inventory management; hedging; and foreign exchange exposure.
3. A run-book (set of defined procedures) for an event response: core operational activities and risk management; incident management; risk mitigation; communications; and legal.
The project should also draw up a roadmap with critical paths for remediation and risk mitigation.
A business’s appetite for risk and financial loss will ultimately determine its response. But success under any scenario will depend in no small part on the quality of the planning before the event.
SCENARIO 1: A STABILISED EXISTING EURO
Governments regain popular support for austerity measures, stabilising the Eurozone.
Clearly this is the scenario most organisations will favour, as it provides the best chance for economic growth and substantially less turbulence for businesses to navigate.
SCENARIO 2: A CONTRACTED EURO
One or more countries are compelled to leave the euro as a result of their electorates’ rejection of austerity measures, a further deterioration in their economies, escalating interest rates and a lack of market confidence.
To succeed through this scenario, businesses must be prepared for a world where bank defaults become more likely. Companies need to prepare for this risk.
As a result, preparation should include: an on-going review of credit limits, taking into account any downgrades; repatriation of cash to a “safe haven”; adoption of cash sweeping, pooling and zero balancing (if not already performed); and the introduction of netting agreements (offsetting profits and losses on different contracts or in different currencies), to reduce credit exposure.
Businesses may also want to think about spreading exposure across several banks, rather than keeping all their eggs in one basket.
SCENARIO 3: TOTAL DISINTEGRATION
Failure to find an effective solution, wholesale rejection of austerity measures and/or the bailout of weaker countries by stronger countries leads to a collapse of the euro.
This is accompanied by a return to all members’ currencies at their appropriate value. This outcome, while similar to a contracted euro, would be on a wholly different scale and carry much more risk. Plans should be drawn up with the same approach, outcomes factored by way of a similar process, but businesses should be under no misapprehension, the stakes for everyone will grow exponentially with every country that leaves the euro.
Ultimately a view has to be taken on the amount of investment needed versus potential financial loss of not doing the work and the event occurring. But while business leaders are hoping for the best, they should also be planning for the worst.
Chris Renardson is head of program management consulting, capital markets, at Cognizant.