Supply Chain

Companies Brace for Disruption in Europe

What should CFOs do in the event that Greece or any other country exits the euro – or even if the euro zone is completely disbanded? Here’s how one...
Andrew SawersMay 23, 2012

Whatever the future holds in store for the euro zone, it’s clear that the disruption caused by any kind of breakup is completely undesirable from the point of view of any corporate. While there may be politicians or political commentators whose reputation rests on doom and disaster, this isn’t a scenario that would be welcomed by any CFO.

But to be fully prepared, some finance chiefs are seriously considering the impact of a breakup, whether that would entail the exit of a stricken country such as Greece, a more crowded rush for the exit as several countries leave the currency union at once or in rapid succession, or even a wholesale dismantling with the euro zone almost entirely fragmenting back to its original constituent currencies.

CFO European Briefing spoke to financial executives at a major European supermarket group about their preparations for a possible breakup of the euro. A senior treasury official with the company explained some of the work he and his colleagues have been doing to consider the issues that might arise should a “worst-case scenario” develop. Given the sensitive nature of the euro issue, the treasurer did not want either himself or the company to be named in this story, because of the reputational risk that the company might be seen as in some way either helping to precipitate a euro crisis by showing a lack of confidence in the currency or profiting from a pan-European disaster.

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This treasury official made clear from the outset the group’s philosophy in doing this planning exercise. “It’s part of our corporate responsibility to ensure that we keep to a normal business operating environment as much as we can and for as long as we can,” he says. “We want to be the safe port in the storm for not only our employees but also our suppliers, our customers, and ultimately our investors.”

First and foremost, then, the supermarket group has reviewed how it would continue to pay suppliers and employees should there be a significant disruption to the banking system. “What we were looking at was not only disruption to the clearing systems at a pan-European level or a local level, but potential failures of banks, especially a cash-management bank,” the treasurer says. The group uses a number of cash-management banks in Europe and has others outside the euro zone it could use as well. But he adds that the company’s scenario planning took place before the recent long-term refinancing operations: arrangements put in place by the European Central Bank to help cope with a banking crisis. “The banking sector, at least from a liquidity perspective, is in a significantly better place than it was when we put our scenario together,” he says.

The supermarket group has also been looking at its suppliers — particularly those in the countries grabbing the most headlines at the moment — and at their financing requirements. “The key thing for them is how their working capital cycle is funded and whether they can get access to the banks that they normally would use, which may themselves be in a liquidity squeeze,” the treasury official says. “Our job is to ensure the channels of liquidity are open. If we can keep that going, a lot of the disruption can be minimized relatively quickly.”

One interesting issue is that if a supplier is in a country that leaves the euro and then devalues, supply contracts priced in euros will give that supplier a significant revenue boost if they’re not redenominated in the new domestic currency. The treasury official says this had been flagged to the company’s procurement team. But while the supermarket group may need to review pricing after such an exit, it is not taking any steps now to reword the pricing terms to make allowance for that possibility in any new supplier contracts. “Our legal people felt that it was potentially a very contentious issue, particularly for any large corporation and particularly one that deals with consumers,” he says. “You do have to be aware of the lasting impact on your image and your brand if you’re seen to be exploiting the situation. In what we’re doing, we’re trying to operate normally in an abnormal environment.”

Commercial contracts, however, may be less of an issue than financial contracts. “There could be a lot of legal stuff going on. Hopefully a lot of common sense will prevail,” the treasurer says of financial contracts. The company has reviewed some of the key contracts it has, things like ISDAs (International Swaps and Derivatives Association master agreements for derivatives contracts) and debt contracts. “One of the key things to remember is as long as the euro exists in even one country, it’s still legal tender. Depending on how your contracts are worded, you could still find yourself paying in euros. You may not have too many options,” he says. This could be less of an issue for companies based in countries that seem highly unlikely to leave the euro, but may be an issue for CFOs in other, riskier euro zone countries.

While the supermarket’s multicurrency financial systems can accommodate the creation of a new currency, time would be needed for a switchover. In this regard, it would probably be best if any government adopting a new currency were to do so on a one-for-one basis initially, regardless of what happens to the exchange rate between the euro and the new currency going forward. “The best analogy you can draw on is the Czech and Slovak split on a one-for-one basis [in 1993],” the treasurer says. “Within weeks the Slovak currency had weakened. But from a retail perspective, trying to convert your systems overnight is just impossible.”

It’s still very possible, of course, that neither Greece nor any other country will leave the euro. And for most, if not all, businesses, that would be the most desirable outcome, so the company’s current planning may amount to nothing. But in any event, it isn’t trying to write a detailed manual. “It’s more about identifying the areas where we would need to do some work,” the treasurer says. “It’s actually whether we’ve already got some plans in place and, if not, making sure that we have the resources and a clear time frame of how that mitigating action could be implemented.”

To help corporates think about the euro contingency issues that might affect them, advisers Deloitte and the Association of Corporate Treasurers have prepared a guide highlighting the key factors. It covers:

Commercial and business risks, such as impact on the supply chain and a downturn on business, generally.

Credit risk, including loss of cash, bank facilities, and off-balance-sheet contingencies.

Debt and credit facilities, including future availability of bank credit and repercussions from existing covenants.

Cash management, such as the possibility that cash might be trapped in countries that impose currency controls, and the interruption to national bank systems.

FX and derivatives, such as the possibility of unplanned FX gains or losses and the possibility that derivatives may be deemed unenforceable.

Reputational risk, including compliance issues and the possibility of breaching regulations.

Andrew Sawers is editor of CFO European Briefing, a CFO online publication.