By Geri Westphal
Treasurers are less worried about a euro collapse lately. But as natural risk-mitigators, they are taking nothing for granted.
As we write Europe has entered what seems to be the final, painful, stages of a solution to end its economic crisis. Yes, Greek bondholders still are holding out for a better deal; but they know the end of their run is near and they’ll have to take a larger haircut than desired. On the positive side, those creditors have been given some hope — a pot sweetener — with a “gross domestic product warrant,” which will pay them some recompense if the Greek economy recovers.
So for most everyone watching, the fat lady is at last taking the stage. But treasurers can take no comfort in that zaftig indicator; they remain on high alert. And it was with this bias toward remaining alert that The NeuGroup held the second of its Euro Crisis conference calls. The latest call addressed the still possible collapse/exit of something in Europe — be it a bank, a country or the whole kit and kaboodle. Members from all four NeuGroup treasurer-level peer groups were in attendance.
The upshot is that most treasurers, beyond reducing exposures to eurozone banks and countries, have given up trying to guess what will happen and instead have focused on strengthening their business through continuity planning.
still something there
Treasurers’ sentiment changed slightly over the views presented on the first call in December, with a higher number of members believing that a euro collapse would not occur. Back in December, even though treasurers believed the probability of collapse wasn’t entirely likely, there was still enough uncertainty that they were compelled to work up contingency plans in the event they became necessary to execute. While that sentiment has softened, the risk remains; and treasurers cover risks — it’s what they do.
The latest conference call proved beneficial in that it was a reminder for members to ensure they had not missed the identification of significant exposures in their contingency planning.
Members remain at various stages of exposure identification ranging from the review of day-to-day risks associated with direct exposures and bank account management, to the evaluation of indirect exposures that may exist in current financial or client contracts and the pressures that could occur as a result of a broad-reaching liquidity squeeze.
The group discussed basic examples of ”blocking and tackling” of direct exposures, much of which was covered in the first call in December (see “Will Europe Steal Christmas?” IT, December 2011) and included the removal of cash from risky countries, frequent sweeping of balances to regional pools outside of Europe, and withdrawal of funds from money market mutual funds with high exposure to European banks. Members said they were taking appropriate steps to contain their direct exposures.
With some of the major worries and some of that blocking and tackling behind them, treasurers are now spending more time on the identification of indirect exposures that may exist in financial contracts, support guarantees, or derivative hedge contracts.
looking for the indirect
All members on the call agreed that it was pretty much impossible to plan for a catastrophic event like a euro collapse. All agreed it would hurt business.
So instead of focusing on that moving target treasurers have directed their energy toward the basics of business continuity (while taking a wait-and-see approach in deciding what additional risk mitigation strategies may be necessary). As such several members were digging out playbooks from more recent currency crises — those in Argentina and Asia — on which to model their euro-contingency planning. Most felt comfortable in following lessons learned from those events and using them as a basis for defining their own continuity objectives. The business continuity plans they’re sticking to generally include 1) the ability to ensure employees are safe; 2) payrolls can be met if banks are closed; and 3) customers still have access to goods and services.
Bring in the A Team
Some members have taken steps to formalize the contingency planning process by creating crisis teams in key areas of the business. These teams are tasked with identifying trigger events that would prompt a large-scale response. These groups meet periodically to ensure the plan is ready to launch in the event execution is necessary. Key takeaways include:
- Identifying steps necessary for business continuity.
- Keeping teams engaged with periodic updates to ensure the plan is ready to execute.
- Deflecting push-back from groups outside of treasury who say planning is unnecessary. If the bottom does fall out and contingency plans are needed, the business will likely look to treasury for immediate guidance. Prepare the plan; stand-by and wait.
- Using the opportunity to refresh or refine devaluation response plans. How will you react in a variety of devaluation scenarios to ensure business continuity?
- Review your supply-chain finance programs and consider implementing additional strategies to assist clients in the event of a significant liquidity squeeze.
There are no doubt countless other pieces of advice that are necessary to be prepared. It will be critical to continue to gather and incorporate those pieces as the situation merits.
There is no doubt the uncertainty is expected to continue well into 2012, so having prudent contingencies in place will be well rewarded in the unlikely event of withdrawal or collapse.