20th December 2011
On the surface Eurozone policymakers may be heralding a new dawn for European integration rather than predicting the demise of the single currency, but it is clear that business leaders think differently. A number of leading companies are now making active contingency plans for the failure of the Euro.
Eastwood on the FT site exposes some of the dilemmas facing businesses: "On the break-up of the Euro, the Lex Monetae – a principle of international law – provides that a debt in a member state would be converted to the currency adopted by that state at the rate prescribed by that state. But this Lex does not apply where the debt is denominated in Euros in a country which itself is not a member state (Switzerland, the UK), because the debt is not owed under the law of any particular member state
"What then? If there is no Euro does this mean that there is no debt? Unlikely. More likely, the non-member states (i.e. the rest of the world) will adopt legislation as to the value of the debt held in the non-member state, or failing legislation, presumably a new rule of international law would emerge that the debt is to be established in the non-member state's currency at the rate prevailing on the date that the Euro ceased."
The financial sector would be in the front line if the Euro were to fail and has therefore been among the first to put new risk management strategies in place. Schroders, for example, has been accelerating its existing contingency programme in recent months: "Alan Brown, chief investment officer of the UK fund manager with about £182bn in assets invested across the world, said that Schroders was looking carefully at where the banks that it deals with clear euro trades, avoiding those that cleared through the more vulnerable eurozone states and opting instead to work with banks clearing through Germany.
"He said that the fund manager had for some time been tightening up on what collateral it would take to back derivative transactions, opting where possible to deal in exchange-traded and physically-backed derivatives."
This CNBC piece highlights the plans being put in place by parts of the financial sector, including ‘war games' at the major investment banks:
"ICAP, the world's top broker for foreign exchange and government bonds, said on Monday it has tested its trading system to handle the collapse of the euro zone and re-emergence of national currencies.
"It is not alone in carrying out "war games." A senior banker at a large investment bank said he had a team of 20 people globally running all kinds of scenarios all the time. That team was now spending a lot of its time on the possible breakup of the euro. They had simulated a weekend crisis by running through the different stages of Friday night, Saturday and Sunday in one full working day. In addition, they had looked whether they would have enough people (and the right ones) available and made sure they knew where to reach them."
But – the article makes clear – contingency planning is not confined to the financial sector: "Some of the most active contingency planning is happening in European countries outside the euro zone that have strong trading links with the currency bloc – Denmark and Britain being leading examples. Of the 33 companies with the biggest exposures to the euro zone in sales terms, five are British, according to Thomson Reuters data. Health care, energy and consumer goods are among the most exposed industries.
"A number of British firms, including the world's biggest caterer Compass Group, have said they have discussed or put in place contingency plans to deal with a euro collapse but most are reluctant to give details."
BT and Ireland's largest company CRH have also outlined their plans.
Lawyers have also been at the forefront of contingency planning as companies increasingly try and understand the contractual implications of a Euro break-up.
With the corporate sector it can perhaps be seen simply as prudent risk management, but – highlighting the difference between what is being said in public and what is being planned for in private – Eurozone policymakers are also putting contingency measures in place. Of course, details are sketchy, but this is what they are willing to admit: "The ECB hosted a crisis communications exercise with officials from national euro zone central banks late last month that included a commercial bank collapse scenario.
In the event of such a banking collapse leading to a country defaulting and – in a worst case scenario – leaving the euro zone, the central bank official said policymakers' priority would be to protect the rest of the bloc.
"In such a situation, we have to safeguard the rest of the system," the official said, adding that this could involve reshaping the euro zone's EFSF rescue fund and recapitalizing banks."
The potential fallout from a failure of the Euro extends beyond economic and political considerations, and there are signs that governments are also trying to plan for the social problems that may result from a break-up.
"Recent Foreign and Commonwealth Office instructions to embassies and consulates request contingency planning for extreme scenarios including rioting and social unrest.
Greece has seen several outbreaks of civil disorder as its g
overnment struggles with its huge debts. British officials think similar scenes cannot be ruled out in other nations if the euro collapses."
More from Mindful Money:
Sign up for our free email newsletter here, for your chance to win an Amazon Kindle 3G Wifi.