What’s on International Treasurer’s radar screen this week.
Several topics emanated from this week’s editorial meeting, including further investigation of the internationalization of the renminbi, a look at how a possible breakup of the eurozone will impact treasury and how Wednesday’s central bank intervention may have reconstituted a dried up global liquidity scene.
More speculation on eurozone breakup impact. Thus far many companies and their treasurers have been taking a hopeful view of the potential for a eurozone break up. It just couldn’t happen… could it? The prevailing sentiment for weeks was a definitive, “Nah! Never happen!” But that confidence has melted away as fast as good ideas to save Europe from its crushing sovereign debt issues. Companies doing business on the continent have begun to ask themselves, “What if?” and, “If so, are we prepared?” Answering either of these questions has proven pretty impossible because there is little precedent. Nonetheless, this hasn’t prevented some from asking some mundane questions like how would a breakup (and the rebirth of, say, the drachma) impact a company’s ERP system? Would it take a while to make the adjustments?
Also, some companies, in their haste to reduce exposure to the eurozone by leaving the country, might consider where that money is going to end up. Would it be better to just pay the repatriation tax and bring the money back to the US instead of potentially losing cash or most of its value by staying in a country with the European Union?
RMB stalls. Over the past two months, according to a SWIFT report, RMB payments volumes have fallen dramatically. SWIFT notes that this is “not a stellar performance for an emerging currency/economy, and it might challenge some analysts’ predictions that the RMB will be a top three currency by 2015.” Nonetheless, there is still significant RMB usage and increase with Taiwan, Russia, Indonesia, and Philippines, SWIFT said. We will follow up on our recent article, “The RMB’s Long March to International Currency” that we wrote about in October. But this could be a temporary issue, as, according to SWIFT, from October 2010 to August 2011, volumes have surged 867 percent; perhaps a bit of a step back was due.
Global liquidity. Wednesday brought coordinated action by global central banks to boost confidence in the eurozone but may have been more about greasing the wheels of global commerce that have slowed to a near standstill. All sorts of global transactions – trade finance, aircraft leasing and the like – have slowly been grinding to a halt as dollars were unavailable. This was mainly because of the expensiveness of swap-line borrowing. But now, the cost of borrowing from the currency swap lines has been cut from overnight indexed swap (OIS) +100bps to OIS +50bps. In addition, the European Central Bank cut the excess margin it was charging on these trades from 20 percent to 12 percent, according to RBS. Therefore, the all-in cost of borrowing for European banks will fall by more than 50bps. This should get the wheels moving again.