A roundup of issues International Treasurer is investigating.
Treasurers shouldn’t take today’s stock market rout as an instant verdict on the Securities and Exchange Commission’s new short-sales rules. True, the major indices were off more than 1.5 percent at mid-day. A looming downgrade for Greece ahead of its big bond sale, and disappointing US jobs and manufacturing data were the proximate causes for declines. But relief over the extent to which the old uptick rule has been watered down may have goaded some bears.
The new short sale rule is both a bit tougher and a bit more lenient than the Depression-era uptick rule, repealed in 2007. On the tougher side, the old uptick rule allowed you to short if the last price move was up. For the new rule, you have to find someone willing to buy the stock at a price above the best national bid. That’s a big dampener. But the rule only kicks in when a stock has fallen 10 percent. Short bears can do a fair bit of damage before they’re shooed away. And long investors can still sell all they want.
From a treasury perspective, it’s unlikely the new rule will dampen the volatility of individual stocks much. That’s not necessarily a bad thing—markets should be free to move both up and down. But the short sale rule will do little to fend off true bear raids, or ease the problems stemming from share price volatility embedded so deeply in credit counterparty evaluations.
The market indigestion today stemmed at least in part from Moody’s threat to downgrade the country before its big bond offering, as well as the continuing deterioration of the political situation there. While there are several vectors of infection from the Greek crisis into the world of treasury—not least the effect on the euro—perhaps its most worrisome is its potential effect on European banks. Unlike, say, the emerging markets crises of the 1990s, the Greek crisis is largely a local affair, with exposure concentrated in the eurozone’s two strongest member countries.
According to capital markets commentator Dennis Gartman, the breakdown of exposure runs thusly:
- France: $75.7 billion
- Switzerland: $64 billion
- Germany: $43.2 billion
- US: $16.4 billion
- UK: $12.3 billion
- The Netherlands: $11.8 billion
- All Others: $79.4 billion
A default or significant restructuring by Greece could hurt the ability of French, Swiss and German banks to provide credit at a time when the eurozone economies are still struggling. Plus, Spain looms as a potentially even bigger problem than Greece for those banks. MNCs that depend on institutions in those countries should make sure their contingency plans are iron-clad.