Eurozone crisis: Steps to safety
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Last December Holger Schmieding, chief economist of the Hamburg-based Berenberg Bank, was asked by a large UK media organisation to be on call during the Christmas and new year holiday.
“They wanted to interview me about Greece leaving the eurozone. It implied it was a done deal. I thought it was highly improbable. I spent an untroubled holiday,” he says.
Fast forward to June 2012: a UK-based economist wrote that a Greek exit would occur over the diamond jubilee weekend, when London markets were shut.
But while eurozone break-up forecasts have so far been wrong, UK companies cannot ignore the risks of dealing with companies in the single-currency area. Exports to the growth economies in Asia and Latin America are rising, but these gains are from a low base. In fact, it is exports to the EU that are the key to UK prosperity.
Figures from the Office for National Statistics for 2011 show that of the UK’s global export total of £494bn, 56 per cent (in sterling terms) went to Europe, most of that to eurozone destinations.
Greece accounted for only £2.4bn, compared with £44bn for Germany. Exports to other nations with economic problems included £27.4bn to Ireland, £15.6bn to Italy, £15bn to Spain and £2.5bn to Portugal.
Thus eurozone weakness affects the profitability of UK exporters, with a knock-on effect for domestic businesses. The more extreme scenarios – a Greek exit; Ireland, Spain, Italy and Portugal leaving the euro; Germany, Austria, Finland and the Netherlands setting up their own currency union; the euro’s complete collapse – also create substantial legal, accounting and credit risks.
Gerard Newman, a partner at PwC, the business advisers, believes the accounting and legal issues of any break-up are similar to those at the start of the single currency – but with much shorter timescales and far less control or certainty.
“If – and it’s a big if – something happens, companies would have to react with speed, with major, possibly intrusive, changes to operations,” he says.
“A new drachma [in Greece] might be worth between 30 and 50 per cent less than the euro, so liabilities could increase, finance would be tight and statutory and financial reporting more complex. But there will be problems of low or no growth even if the eurozone stays intact.”
Many companies are raising concerns. “We have clients worried about eurozone contracts, employment and relationships,” says Rob Donaldson, head of mergers and acquisitions and private equity at Baker Tilly, the accountancy group.
“There is a fear spectrum running from supply disruption to payment risks via markets becoming chaotic and currency mismatching of borrowings – imagine you have borrowed in dollars to finance a plant in Greece.”
Some companies are renegotiating contracts, says Oliver Glynn-Jones, a partner in commercial dispute resolution at Berwin Leighton Paisner, the law firm. “Clients face unprecedented economic circumstances. The euro is just one concern. Companies have to consider the currency in contracts and the jurisdiction where disputes will be settled,” he says.
“If you are writing a new contract, specifying the US dollar or other non-euro currency and stating the agreement is subject to English law could be a risk-averse move. Otherwise, you could be subject to a lower-value successor currency backed by domestic courts in your counterparty’s jurisdiction.”
Existing contracts are trickier, he says. “If the contract specifies payment in euros, that should happen as long as the euro exists even if your counterparty’s country has left.
“It is unlikely that pleading force majeure would work, because that covers events such as crashes, floods and fire that could not have been foreseen.
“A country leaving the euro is foreseeable even if the parties have given it no thought. There is an overriding legal principle known as lex monatae to determine the currency of contracts.”
Beyond legalities, companies must consider credit or solvency risk. If they have a contract that might be affected, they need to work out whether the counterparty will be able to pay in a strong currency or only in a new, devalued money.
“One client with business in southern Europe now repatriates all funds each evening to avoid risks of losing value if that country leaves the euro suddenly,” Mr Glynn-Jones adds.
It is an evolving situation, however. Nick Grandage, a partner at Norton Rose, the law firm, says: “Businesses are understandably risk averse. Many have decided they cannot make a judgment on eurozone business until they know more. But insisting on the right choice of legal jurisdiction and method of dispute resolution is vital. As circumstances evolve, prudent companies will keep contracts under review.”
Ahmed Mazhari, senior vice-president, head of sales and marketing, Europe at Genpact, the business process and technology management group, believes many companies overlook information technology. “We have a logistics client with no option than to deal with Greece,” he says.
“We have evaluated the potential impact of known possibilities on reporting, investment and especially billing and other IT systems. We asked what it would take to fix the system, and what amount of management time was involved and could it be better focused elsewhere.”
But there are also opportunities. Simon Banham, head of trade sales, mid markets, at Lloyds Banking Group, sees many companies with large cash balances. “They have built up capital in case of a eurozone crash. But many could look away from the macroeconomics and concentrate on their own business, using the cash for acquisitions and expansion,” he says.
Mr Schmieding at Berenberg Bank says: “Greece is marginal. Most companies with businesses there have wound down or made contingency plans. I believe the euro will hold together – there is a geopolitical risk in letting Greece go – and that once people see it has survived, there will be a shift to hope and optimism.
“The eurozone has so much potential upside – it is not going to disappear and while the economic data for the near future could be dire, it will improve after that.”
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