Global central banks moved to shore up market confidence and the eurozone as a whole. But threats loom.
The world’s major central banks Wednesday made a coordinated move to shore up the global financial system but that doesn’t mean multinationals should pull back on any efforts to mitigate the impact of a possible eurozone breakup. The hopeful strategy of “they’ll figure it out” seems to be slowly fading.
Many companies, including most of those in the NeuGroup peer group universe, have been taking some action to prepare, from shifting deposits from European banks that seem most vulnerable to deleting from portfolios any European financial institutions that are there. Some are shifting assets altogether out of Europe. This is because every day new signals appear that things are direr than previously thought. To that end, companies and their treasurers should be reading as many tea leaves as they can, be they rating agency actions, bank client notes or other indicators that point to how or why a eurozone collapse, or at the least a member breaking away (or falling out), is possible.
Here are a few recent items:
- S&P on Tuesday downgraded big banks worldwide. Although it was more a change in criteria, the downgrades will have an impact. Banks are already under considerable pressure due to Europe’s sovereign debt crisis, and the downgrades will put further pressure on them as many will have to pony up more collateral against their derivatives contracts due the cuts. Also, the downgrades will have a big impact on funding costs for the bank sector; bank funding is used more often in Europe than in the US.
- According to Reuters, EU Economic and Monetary Affairs Commissioner Olli Rehn said the zone was “entering the critical period of 10 days to complete and conclude the crisis response of the European Union.” The problem is getting all members to agree to stricter rules going forward. Eurozone officials have said that if Germany and France can’t get all of the 27 countries of the EU to impose rules for a tighter eurozone fiscal union, or “deeper integration” as Commissioner Rehn put it, there could be collapse. “The economic and monetary union will either have to be completed through much deeper integration or we will have to accept a gradual disintegration of over half a century of European integration,” he said in prepared remarks.
- Bank note 1: Recently the Nomura fixed income research team issued a note delving into the crisis as well as the contractual implication of a break-up or drop out. It points out that European yields remain unsustainably high (except for safe-haven Germany, where they are flat to negative), and that government changes in Greece and Italy may not help, all of which points to the possibility that the eurozone doesn’t survive (see related story here).
- Aforementioned German bonds. German 1-year bond yields turned negative for the first time on record, according to the Financial Times, as investors sought the short-term debts of perhaps Europe’s “safest” haven amid fears the eurozone will unravel.
- Bank note 2: Morgan Stanley’s Graham Secker notes that the European economy’s performance will be largely driven by policy makers – never a good sign. And it’s currently a “damned if they do damned if they don’t” scenario that they face. If they do the right thing and impose tighter fiscal policy it will lead to weaker growth with little balance-sheet improvement. And if they don’t – that is, if they go and adopt populist policies due to social unrest – it will lead to weaker growth with little balance-sheet improvement.
- German cooperation: European finance ministers have been weighing whether to use more radical options to strengthen the eurozone’s rescue fund (the European Financial Stability Facility – EFSF). However, according to reports, Germany has resisted allowing anymore ECB support of troubled peripheral countries.
- Perception: Intrade, the online prediction platform that allows users to predict outcomes of future events, puts the probability of “Any country currently using the Euro to announce their intention to drop it midnight ET 31 Dec 2012” at 49.8 percent.
- An anonymous survey of corporate treasurers by treasury management system provider IT2 revealed that 53.5 percent of corporate treasurers believe that the Eurozone “will split within the next twelve months.”
But while the possibility of a split remains a reality, what treasurers should do remains up in the air. It seems Nomura was on the right track in terms of the legal aspects of what happens to contracts. Ironically, it could be “lex monetae” (internationally recognized rules for sticking to one’s obligations) and jurisdictions of contract law almost seem to be the least complicated aspect of the “what ifs.” And in any case, as the IT2 survey also revealed, treasurers are confident they are prepared: 74.2 percent are confident that “corporate treasury policy already in place is positioned to protect corporates from the financial consequences of a Eurozone split.” And 78.5 percent believe that their companies can accommodate a eurozone split.