The abandonment of the euro as a national currency by one or more countries is among the most dire of the possible outcomes of the economic crisis that threatens the solvency of European nations such as Greece, Portugal and Ireland — and even of major economies like Italy and Spain. In a survey conducted by Reuters before the end of 2011, 14 out of 20 economists queried predicted that the “single currency” was not going to survive in its current form, and noted that companies are beginning to prepare themselves for the worst-case scenario.
Joan Carles Amaro, a professor of financial management at ESADE in Barcelona, outlines some of the consequences that the abandonment of the euro would have for companies. “Corporate financing would be more difficult and more expensive because of the loss of confidence in the markets of the country [leaving the euro zone],” he notes. Eventually, this credit crunch “would dry up possibilities for business growth and endanger the solvency of companies that have a great deal of short-term debt and few liquid assets.”
He warns also that there could be damaging consequences for the public finances of any country opting to give up on the euro. “Its public-sector debt would become more expensive, which would force it to cut spending and public-sector investments, which would significantly diminish its sources of demand.” Along with this, Amaro says, prices would drop for shares of those companies that depend on any market that suffers after abandoning the euro. That, in turn, would increase the perceived risk for investors in the economy of the country.
According to Reuters, some of the companies with the most active contingency plans are based in European countries outside the eurozone. However, these countries, including Denmark and the United Kingdom, have strong commercial ties inside the zone. Of the 33 companies outside the eurozone that have the largest exposure to the zone in terms of sales, five are based in the U.K., according to Reuters. Among the most exposed industries are health care, energy and consumer goods, Reuters reported.
The threat that the euro will disappear is being taken very seriously. The leaders of some companies have already said publicly that they are considering a future with that scenario. ICAP, a U.K.-based firm that acts as an important intermediary for trading government currencies and bonds, has tested how its way of doing business would perform in a scenario where the eurozone collapses and national currencies are revived.
Andrew Bailey, expert regulator of Britain’s Financial Service Authority, the country’s financial control entity, told U.K. media outlets recently that “good risk management means planning by using hypothetical models that are improbable, but are serious. This means that we must not ignore the possibility that some countries will abandon the eurozone abruptly. I have no opinion about the possibility that this will occur, but it must be included among our contingency plans.”
Debt Is Key
Rafael Pampillón, a professor of country economic analysis at the IE Business School in Madrid, believes that “the key point” in any situation in which a country abandons the “single currency” would be “the debt that its companies would have acquired in euros.” Pampillón notes that “if the new currency minted by the country of the company depreciates against the euro, and the majority of the company’s sales occur in its nation of origin, then those sales would be seriously damaged.”
In such a situation, he adds, when you have to pay what you owe in euros, it would be disastrous for companies. For example, “they would have to double their sales volumes in order to be able to deal with their euro-denominated debt if the new local currency depreciated by 50% relative to the common currency of the European community [i.e. the euro].”
For his part, Mauro Guillén, a Wharton management professor and head of the school’s Joseph H.Lauder Institute, predicts that the euro will not collapse. “It won’t [collapse] because one second before a collapse, Germany would permit the European Central Bank (ECB) to rescue all of the countries by buying debt and possibly issuing euro bonds. I say that because Germany has a lot to lose if the euro were to collapse.”
He suggests that the eurozone might viably survive, but with fewer member states. Like Pampillón, he agrees about the most delicate problem that companies would face if that were to occur. “Companies from those countries would have to pay back their euro debts, using a devalued national currency,” Guillén says. “It is obvious that they would need some help in order to do that. The European Union would have to intervene.”
Experts note that a significant number of legal and financial questions would arise from a universal discontinuation of the euro or the abandonment of that currency by any country. Amaro is certain that some companies have “already put into place their legal teams in order to analyze the contracts that are currently in effect, and their economic significance.” Most of the EU’s signed agreements and commitments do not contemplate any break up or partial disintegration of the euro, so contracts signed a decade ago could have significant repercussions in a collapse scenario.
Among other challenges, Pampillón cites the importance and difficulty of dealing with loans that were signed without taking into account the possibility that the euro would disappear, or that it might be abandoned by some economies. How would companies respond to their creditors? “If a country were to leave the monetary union, its small and midsize companies would suffer most if they had debt in international banks and in euros. If their debt is with institutions inside their own country, the logical thing is to exchange it into the currency of their own country,” he notes.
Prices and Liquidity
Given widespread doubt about the staying power of the euro, “companies have begun to consider scenarios involving an abrupt fall in share prices, and to study possible variations in the sales prices of their products,” Amaro says. Regarding the latter, some specific strategies have already become visible in the market. For example, Tui, a German travel agency, has acknowledged that it has asked Greek hotels to sign new contracts based on the possibility that Greece leaves the eurozone. If this were to happen, Tui would be guaranteed that it could pay hotel owners in drachmas, the Greek currency before the euro — or in any new currency adopted by government leaders in Athens.
Amaro also notes that companies have begun to study “how to protect their liquidity, shielding it in secure assets.” Some have commented openly that they are moving their money into safe havens. Central bank data corroborates that fact, revealing a decline in bank deposits in the weakest countries of the eurozone. Some large German companies, such as engineering firm Siemens and automakers BMW, Daimler and Volkswagen, have permission to deposit funds in the ECB, considered the most secure haven in the eurozone.
At a press conference announcing his company’s third quarter earnings results, Joe Kaeser, Siemens’ director of finance, said on November 10 that he had deposited a significant proportion of the company’s cash in the ECB, although the amount was less than half of its liquidity of more than 12 billion euros. For its part, BMW officials stated on November 28 that the firm’s strategy of managing liquidity had not changed. BMW is continuing to use a series of international commercial banks, as well as the ECB’s deposit facility. Simon Henry, chief financial officer of Royal Dutch Shell, has publicly acknowledged that, as a result of the European debt crisis, the company has been very deliberate in choosing where to invest its $20 billion in cash.
If the euro were to disappear, “the companies that have it the easiest would be the most diversified companies and those firms that have the most business outside their own countries,” Pampillón notes. He adds that big companies have an advantage when it comes to dealing with euro-related risks, since most conduct the majority of their business outside their countries of origin.
Beyond that, Amaro notes that “although every company is susceptible to the impact that a possible dismembering of the eurozone would have, the largest and most multinational companies are probably the ones that have the resources they need to carry out their contingency plans.”