Currency Exposure: Can You Explain How You Are Prepared For a Euro Breakup to Your CFO?

The Germans are the big motor pulling the Euro train – and they are looking to shed a few cars. Yesterday, Der Spiegel ran a story on this topic. To summarize, this is what is going on in in Europe at the moment:

"Banks, investors and companies are bracing themselves for the possibility that the euro will break up -- and are thus increasing the likelihood that precisely this will happen."

Whether or not you prefer the economic concept of adaptive expectations to rational expectations, it is still clear that financial actors in Europe (such as banks) are growing increasingly wary of lending across borders. According to Der Spiegel, "Germany's Federal Financial Supervisory Authority (BaFin) insists that HypoVereinsbank keeps its money in Germany. When the parent bank, Unicredit in Milan, asks for an excessive amount of money to be transferred from the German subsidiary to Italy, BaFin intervenes."

Continuing, the article states that "high-ranking bank managers admit that -- this would make it possible to quickly sell off individual parts of the financial group." and that "bankers are sketching predetermined breaking points on the European map." It's not just the regulated actors -- the banks -- that are concerned: "early last week, Shell CFO Simon Henry startled the markets by saying that the oil giant, which has cash reserves of over $17 billion (€13.8 billion), would rather invest this money in US government bonds or deposit it on US bank accounts than risk it in Europe."

Yet another sign is that large amounts of money are flowing into German sovereign bonds that generate no interest whatsoever. "The low interest rates for German government bonds reflect the fear that the euro will break apart," says interest-rate expert Burkert. In other words, private investors are also searching for a safe haven.

In the CFO Journal section of today's Wall Street Journal, the same topic is discussed. Key takeaways include:

  • Investor calls increasingly hit on foreign currency exposure, so be prepared to quantify the currency risk component of your procurement contract to your CFO in the next meeting
  • The British Pound is seen as a relatively safe haven currency for European contracts, even for firms such as EAG, which mainly operates its European activities out of France. And although not stated, going with the Sterling is probably more politically palatable than outright dollarization
  • Bartering is making a first-world comeback -- chemical giant BASF is considering barter backup for deals in weak countries such as Greece, and has already accepted payment in molasses from clients in Brazil
  • Cash is king -- BASF is aggressively managing payment terms, even switching to COD terms for some customers

If you haven't done so already, this shows an urgent need to work with the finance department to revisit your corporation's working capital allocations, contracting terms, and also take another look at the health of your suppliers and customers. Yes, both the buy-side and sell-side: are these companies strong enough to deal with substantial adjustments to payments (in either direction) should there be a sudden devaluation if the Euro breaks up and weaker currencies like the drachma and peseta come back at a substantial discount?

- Thomas Kase

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