A resurgent euro crisis has treasurers paying attention, seeking hidden exposures.
Like the Hollywood movie monster that just won’t die, the Euro crisis is back. And recent headlines like ones about Ireland’s growing budget deficit, or the Dutch government quitting or Europe rejecting austerity measures through elections, are forcing treasurers to keep their contingency plans fresh and on the hunt for any hidden exposures.
At a recent NeuGroup Treasurers’ Group of Thirty (T30) meeting, one member company offered up its very detailed approach to teasing out the unknowns. The company-wide effort has resulted in a few strategies across a spectrum of scenarios and provided an executable playbook in the event future fallout occurs.
To lead the project the company formed a steering committee made up of leaders from different but relevant departments like treasury, accounting, tax, audit, legal and others. And a working group within the committee came up with a playbook plan and risk assessment reporting.
As part of the overall risk review, the team identified three possible scenarios created a scenario based on the impact of the event: 1) status quo, 2) one country drops out, and 3) full eurozone break-up. They engaged key areas of the business to identify possible outcomes under each scenario with no commitment to forecasting the actual event. They attempted to be as objective as possible, thereby removing the pressure of having to choose the “right outcome.” They were then able to look at each scenario without bias and able to better define the possible impacts.
From this company’s point of view, if a country left the eurozone, the company would take that procedure and replicate with any other country that left; i.e., once one country’s procedure has been established, the company would have a playbook for all others.
Trigger events. The treasurer noted that each organization will need to address relevant trigger events that are specific to their company. So it is important to understand what trigger events should be monitored to ensure an early warning of potential disruption. Members were instructed to try not to prescribe what might happen, but instead use it as a contingency planning tool. The key is to understand where the cash is and how it can be accessed. Also, identify what key stressors exist in the supply chain and figure out how you can contain risk to prevent significant business disruption.
Counterparty scorecard. You’ve got to do business with someone, so with whom within your bank group is better to do business? To address these issues, the company has formalized a counterparty risk-assessment program that measures risk in three categories including CDS/Equity, Debt Spread and Static Data. Each individual bank is weighted within each category and then across the total category to arrive at a total weighted score. Totals are divided into a green/yellow/red scorecard analysis that is reviewed on a bi-weekly basis to stay abreast of potential early warning signs of imminent counterparty risk. The company keeps a scorecard that sorts its bank partners by their performance and the company’s willingness to continue the business relationship. These two scorecards provide a good picture of the risk level.
Even though most members believe a Greek exit or total euro collapse is unlikely, they continue to spend time identifying possible risks and preparing robust risk mitigation strategies that can be implemented if necessary. Many believe it is prudent to have a playbook standing by in the unlikely event of major disruption to the euro. By pooling resources across different teams, treasury can reduce the labor and time cost associated with contingency planning.