Developing Issues: Euro Crisis Contingency Plans and Tax Exposure Reviews

June 10, 2010

A roundup of topics International Treasurer is investigating.

With the global economy beginning to look a lot like it’s not fully out of crisis mode and governments desperately seeking revenue, treasurers are responding by rexamining their exposure, starting with the euro and ending with the taxman. For instance, although International Treasurer has sensed that many corporate FX managers have been sanguine about the euro’s current swoon (in some cases due to favorable hedges), it doesn’t mean they’re not looking out to positions over the next 18 months to potentially lay on new hedges. Here are some of the other issues that recent dialogue with our advisory board have highlighted:

  • Revisiting crisis contingency plans. Likewise, the wise corporate  risk managers are revisiting contingency plans created or last revised in response to the 2008 crisis Those plans are now being reviewed and adjusted to take into account the deepening crisis in Europe and/or the collapse of the euro. We will look to these reviews to help determine what new contingencies others might want to be prepared for.
  • A decline in options use. On the subject of currency, recent discussions with our advisory board have indicated that firms with a propensity to use options in their FX management programs are needing to rethink this approach. It is one thing to favor options when vols are in the 5-7 percent range, but if the new norm is more like the high teens, even for G7 currencies, then an option-heavy hedging strategy may prove unsustainable. Layer on OTC derivatives reform implications and persistent negative bias against options in hedge accounting guidance and corporate options use seems set for decline. A pullback from options in response to crisis volatility, in other words, may become permanent for many firms. We will examine this trend further to determine its breadth and where hedging strategies are heading if options are no longer on the table.
  • Tax scrutiny along with big tax change. Just using the US as an example, corporates may see 5 major tax bills coming out of Congress this year carrying significant tax changes to upset their tax planning. Along with such change, revenue-hungry tax agents have been stepping up both their scrutiny and cross-border coordination in pursuit of multinationals perceived not to be paying their fair share. In response, treasury and tax should be involved in a country-by-country review of potential exposures to proactively develop an action plan. While tax planning is always a sensitive topic, we will try to outline some of the biggest pitfalls and problem jurisdictions. 

Stay tuned for further topics raised by our advisors.

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