What’s on International Treasurer’s radar screen.
The International Treasurer editorial meeting this week produced a few topics that will be fleshed out in the coming weeks. One is somewhat of a recurring theme lately and involves the issue of the euro and whether it can survive. Another involves the use of collateral swaps.
Euro dissolution.
It’s a subject that comes up now again as Europe and its banks continue to struggle (or teeter on the edge of the abyss). The latest to weigh in on such a possibility is former Fed Chairman Alan Greenspan. “The euro is breaking down and the process of its breaking down is creating very considerable difficulties in the European banking system,” Mr. Greenspan said in Washington last week, according to Bloomberg. He added that this will likely lead to a slowing of the US economy.
Meanwhile, in a letter to clients, investment company Edward Jones said “widespread financial panic and euro dissolution remain tangible risks and will likely continue to drive market volatility until a resolution is reached.” What are the practical ramifications of this happening?
Members of The NeuGroup’s European Treasurers’ Peer Group (EuroTPG) want to know, and have suggested this as a topic for the group’s next meeting in November. It would be “interesting to hear from the group if they’ve dusted down their old euro conversion plans to see how to reverse engineer them if the euro does break up,” said one member.
Long-dated repos.
Crazy asset innovation got the world into the financial crisis and perhaps it will get the world out of it. The FT recently highlighted the growing use of the collateral swap, aka long-dated repos.
Writes the FT, “Prudent institutions flush with top quality government bonds (or even cash) wanted to secure a better rate of return — on a still relatively low-risk basis. We’re talking insurance firms, pension funds and other low-risk asset managers.” The FT says these risk-averse entities “weren’t keen to lend unsecured…[b]ut they were prepared to engage in collateralized swap deals with cash-strapped investment banks or the shadow banking industry (who were looking for cheap funding) — gaining extra yield on their low-yielding ‘safe’ securities by indirectly funding more risky investments elsewhere.”
Overseas cash under the microscope. Although US corporations remain committed to putting to work their growing overseas cash piles – see Microsoft’s purchase of Skype and H-P’s recent purchase of Autonomy – politicians at home are wondering what’s happening with all that cash. They’re also examining ways for them to bring it home, from another tax holiday (although it might not be as enticing a deal as 2004’s Homeland Investment Act. And there’s been some talk of making companies “promise” to hire workers if they bring the cash home at a lower tax rate) to rearranging the tax code to shaming companies into just bringing some of it home (see “Where Pay for Chiefs Outstrips U.S. Taxes” at NYT.com) . Any change in current law will have a big impact on cash-rich tech firms, many of which earn most of their profits overseas.