Greek run-off elections June 17 will herald rebirth or demise for the eurozone. Here’s what treasury can do.
One of the best practices identified by NeuGroup members over the first half of this year is to have ready a playbook for various eurozone risk scenarios with a set of mitigating actions to set in motion before and especially after certain event triggers. One potentially big trigger is set to happen on Sunday with the Greek run-off elections.
At least two of the three primary scenarios – no exit, orderly exit and chaotic exit – to be triggered by this event, according to many bank assessments circulating, will lead to a Greek exit from the eurozone. Better grab your playbooks, then, and make sure you are ready to implement the relevant to-dos.
Already there?
For a while at the end of 2011, many market observers treated a Greek exit (or any European country) from the eurozone as a bit of “when pigs fly” possibility. But as 2012 got closer, companies and market players took notice. For treasurers, the words of Benjamin Franklin became words to live by: “By failing to prepare you are preparing to fail.” As such, many companies immediately created Euro crisis playbooks and formed committees and response teams to come up with plans for a possible breakup of the zone. To that end, they (in no particular order):
- Began moving cash from risky European locales to safer havens.
- Reduced exposures to European banks.
- Identified necessary steps for business continuity.
- Reviewed supply chains and supply chain finance programs.
- Shifted emphasis to Asia.
- Took advantage of easy money in the US, built cash surpluses and issued record amounts of debt.
But now June 17 is looming as “the date,” with front-running Greek political parties New Democracy and Syriza in a dead heat followed by Pasok in third place in a run-off election. While none of the parties is seen as particularly pro-austerity, a win by Syriza would likely cause panic – and contagion across Europe and possibly the world – as it has promised to bring back many of the fiscal policies that hobbled Greece in the first place and generally undo all the measures tied to its bailout package. This could ultimately mean a Greek exit from the eurozone.
The main reason to have playbook is so people don’t forget things in the panic and chaos of a crisis. Thus this would be a weekend to make sure the right people have the playbook with them before they head home.
Trigger events: if this then that.The subject of a eurozone breakup has been a feature of just about all of The NeuGroup’s 11 treasury and finance-focused peer groups. Many companies in The NeuGroup universe created cross- functional action teams in case of a eurozone event that included members of treasury, legal, accounting, tax, operations and other areas. These teams were tasked with looking at a wide range of risks should a eurozone breakup come to pass.
What follows is a sampling of the triggers and what companies might do in reaction to them, gleaned from a few of those NeuGroup meetings.
The triggers. Some of the things that could be triggered by perceived negative results from the weekend elections include the breakup or exit of a country (immediate or expected); continued rejection or wrangling over bailout ideas; contagion to Spain, Italy and the rest of Europe; major European bank failures; and sovereign bond yields push to unsustainable levels for an extended period (Spain and Italy already on this track).
If any these were to happen:
- Treasury should consider disaster hedging and taking over management of cash in the withdrawing country; nothing but conservative investments in the eurozone after that. Implement a stricter credit policy and engage with IT to assess any system impact. If there is an immediate or imminent exit, Greek accounts will be frozen, so it is critical to implement a plan to tap alternate liquidity for immediate day-to-day needs, including cash for employees (should it be dollars or Swiss francs vs. euros?) to survive 30, 60, 90 days or longer without access to bank accounts.
One recommendation coming from The NeuGroup’s Treasury Investment Managers’ Peer Group (TIMPG) was to ensure company liquidity via “ultra-liquidity.” Several TIMPG members noted that their liquidity pools might not be as liquid as necessary if there is a quick need for cash. To solve for this, some members created an “ultra-liquid” fund to ensure the company has access to substantial amounts of cash quickly. There is also the challenge of managing short-term cash that you know will be spent soon but you don’t know the exact date.
Also, treasury should implement contingencies to get money out of a departed country ahead of almost certain capital controls and set up a means to move funds under any anticipated controls. Also, have ready plans to move money using alternate systems or payment platforms in case there is a breakdown with uncertainty surrounding timing of a Greek exit.|
- Accounting should implement currency conversion plan and assess any impact on US GAAP.
- Legal should go through contracts to make any necessary amendments to existing contracts or selectively terminate any undesirable contracts. Many corporates have already taken steps to identify existing financial and legal euro redenomination risks within their trades and transactions as well as within their operations; they likely have implemented strategies and procedures for monitoring and managing these risks. According to the law firm Orrick, “the objective is to be in a position to quickly respond to any changes, for any reason, in the current Eurozone membership, including due to a withdrawal of one or more members, a broader break up or in other ways not currently contemplated.”
- Tax should implement previously developed (or update) a tax strategy. Be ready to align it internationally.
- Operations should implement pre-prepared cost-reduction strategies and develop a “demand profile” for all customers in the eurozone. Also, be ready to execute staffing plans and protections should there be unrest – rioting or even armed conflict. This includes lists of those who should be told to stay at home or encouraged to evacuate. Plant and equipment protection should also be considered. Finally, evaluate which operations to close and if need be, whether the company should pull out of a country — a la Carrefour or Credit Agricole.
Monday morning.
Of course it’s impossible to say what will happen by Monday morning. Pandemonium? Mayhem? Calm? Serenity in the streets? Whatever happens, the fact is Europe will still be an iffy proposition. Grand solutions have been promised without success several times now. In Greece and Spain, banking systems will continue to stumble along (with an occasional trip) from mounting bad loans; economies will be erratic, surging here, nose diving there. And fears of an eventual exit from the eurozone will haunt local consumer confidence as well as the world at large. Stabilizing these countries and restoring economic growth prospects seems almost impossible at this juncture.
While all this will be shaking the world, treasurers and companies that have been prepared should be able to weather the storm. If you’re in the camp, maintain a ready stance anyway and have a nice Greekend!