Presentation Transcript

1. EURO CRISIS: TREASURER’S CONTINGENCY PLAN Prepared by Nadine Grevaz, Gavin Jones, TeroTainijoki, Jean-Marc Servat, Fabrice Moore & Guillermo de la Fuente January 2012
2. POSSIBLE OUTCOMES AGENDA APPROACH TO CONTINGENCY PLANNING WARNING SIGNALS POTENTIAL TREASURY IMPACTS POTENTIAL ACTIONS FOR RISK MITIGATION ACTIONS LIST FOR TREASURERS CONCLUSION APPENDIX
3. APPROACH TO CONTINGENCY PLANNING Businesses generallyfailbecauseproblems are noticedtoolate…. A few key people in the companyshouldbecontingency planning and the treasurerneeds to be part of that group. 3 phases of the contingency planning : Allocation of responsibility and preliminaryassessment of the possible scenarios (i.e. task force, war room, crisiscommittee). Legal and commercial review: Identification of keyexposures. Risk mitigation. Active role for Treasurers in preparingtheircompany for anypotentialeurozoneevent. EU treaties do not allowunilateral euro withdrawal by a member state howeverthereis the possibility of a lengthy and cumbersomelawful exit by one or more members on a consensual basis.
4. POSSIBLE OUTCOMES This briefing doesn’t comment on the likelihood of the various scenarios or outcomes. Scenario 1 : Agreements reached, euro up as confidence rises Scenario 2 : Peripheral countries leave, smaller euro survive Scenario 3 : Germany and Netherlands abandon Euro for new currencies 3.a Smaller euro survive but falls sharply 3.b Euro ceases to exist (either on a consensual or non-consensual basis)
5. WARNING SIGNALS A few danger signalsTreasurersshouldbe on the lookout for to help their business to survive: The mouvement of CDS spreads Sovereign Bonds spreadswidening. Monitor rating agenciesdecisions. Follow the correlationsbeetwensovereignyields and MSCI. Keep an eye on Barclays Fiscal Strength Ratios. Monitor closely the creditriskassociatedwith countries and banks (seeF.Moore 2009 presentation) Check the exposure of any country lookingattheirInvestment Net positions (as published by IMF). Be aware of any changes on the G20 list of systematically important banks.
6. POTENTIAL TREASURY IMPACTS Whatcould the different scenarios mean for Treasurers in terms of risk/exposure ?
7. POTENTIAL ACTIONS FOR RISK MITIGATION Some actions whichmay help to mitigaterisks
8. WHAT COULD BE DONE NOW -1- Engage With your board and business - establish their concerns and risk tolerances. With your banks – a lot of information is available on likely scenarios and consequences With other corporate – what are they doing, how are they doing it, can they share information ? Develop Your understanding of the different scenarios, the probabilities and the potential consequences to both Treasury and the underlying business. Identify key trigger events that could act as an early warning that a particularly scenario is happening A Treasury checklist Credit and counterparty risk – are you overly exposed to southern European banks? Debt and credit facilities - if liquidity dries up do you have sufficient facilities available? Cash Management – where is your cash concentrated, is the any potential trapped cash FX & Derivatives – understand your exposures by country, who are hedges with. Legal - does your documentation allow for a break-up if not what legal remedies are available
9. WHAT COULD BE DONE NOW -2- An Operational checklist Start asking functional areas – AP, AR, Sourcing, IT, Finance how their operations would be impacted by a partial or full break-up of the Euro e.g. IT – how many systems would be affected if base currency needed to be changed, what time would be need to make the change, what other process outside It could be impacted AP – could we still invoice match if the ERP system is being converted Priority plan on managing the risks your checklists have identified. Communication Keep the board and other senior management updated regularly with an objective view of events affecting the Euro zone crisis The key risks of the facing the business - likelihood and consequence of each, and how they will be managed.
10. CHECK OUT YOUR DERIVATIVES: ISDA REVIEW ISDA - Defines derivative relationship between you and the counterparty : termination and default situation. Re-domination of a currency is unlikely to trigger a termination event unless you have specifically include it in the schedule as an additional termination event. Key Clauses - clarify impact with Legal team or external counsel Governing Law - is it home country or another jurisdiction. UK is often used how would that legal jurisdiction treat derivative contracts - is lexmonetaeapplicable Contracting Currency - you are obliged to pay in the currency agreed under the ISDA, you can’t decide unilaterally to pay in another currency that might be more beneficial for you. Termination Euro Is it Euro ? If so have you defined a specific country or EU. Multibank Party Is use of different branches allowed? Which locations and does that have any impact law Termination and Events of Default Would a payment delayed because of imposition of currency control trigger a default or termination event ? Non Conflict or Violation, Comply with Laws , Illegality and Force Majeure clauses Credit Support Annex (CSA’s) - proactively managing the in the money marked to market position Counterparty out of the money has to post collateral (cash/highly rated bonds) to cover the marked to market position Check the type of collateral is it acceptable if it isn’t cash, do you want collateral posting to be more or less frequent. Not risk free – collateral still needs to be delivered and could introduce cash flow volatility Your banks are normally receptive to two way CSA’s and there maybe improvement in product pricing as credit risk is reduced. Trade Confirmations Pay close attention. Trade confirmations, especially long form, can alter the ISDA agreement
11. WHAT SHOULD YOU DO DURING THE D-DAY ? Some actions to be put in place during the verybeginning of a major eurozoneevent: Updateyourcontingeny plan. Run new and more severe stress tests. Cash is King: itwillbe more important than profit. Liquiditybecomescritical. Ensure business continuity/survival. Be sure treasuryis a keystakeholder of the crisistask force in place.
12. 11.- CONCLUSIONS
13. APENDIX Hereis a brieflist of reports and websiteswith relevant information regarding an eurozonecrisis: THE BREAKUP OF THE EURO AREA (www.nber.org/papers/w13393) September 2007. IS EUROPE AN OPTIMUN CURRENCY AREA ? (www.nber.org/papers/w3579) January 1991. FAUT-IL SORTIR DE L’EURO ? (J. Sapir December 2011) . EUROZONE CRISIS: A TREASURER SURVIVAL GUIDE. TreasuryToday, December 2011. EUROZONE CRISIS-WHAT DO CLIENTS NEED TO KNOW, October 2011 (www.slaughterandmay.com/what-we-do/publications-and-seminars/publications/newsletters-and-briefings/2011/eurozone-crisis---what-do-clients-need-to-know.aspx). EUROZONE CRISIS AND EUROBOND DOCUMENTATION, November 2011 (www.cliffordchance.com/publicationviews/publications/2011/11/the_eurozone_crisisandeurobonddocumentation.html). CURRENCY RISK IN A EUROZONE BREAK-UP - LEGAL ASPECTS, November 2011 (www.scribd.com/doc/73357867/Nomura-Currency-risk-in-a-Eurozone-break-up-Legal-Aspects). UBS Investment Research: Euro break-up – the consequences, December 2011. WHAT NEXT FOR EUROZONE, November 2011 (www.pwc.co.uk/eng/publications/what-next-for-eurozone-potential-outcomes-2012.html). THE EUROZONE CRISIS-AN INDICATIVE APPROACH TO CP., December 2011 (www.slaughterandmay.com/what-we-do/publications-and-seminars/publications/client-publications-and-articles/t/the-eurozone-crisis---an-indicative-approach-to-contingency-planning.aspx). THE EUROZONE CRISIS AND DERIVATIVES, January 2012 (www.cliffordchance.com/publicationviews/publications/2012/01/the_eurozone_crisisandderivatives.html). UK ACT & DELOITTE: EURO CONTINGENCY PLAN, December 2011. (www.treasurers.org/node/7598)
14. APENDIX According to UBS, the estimatedcost of leaving the euro wouldbe a 40-50% drop in GDP in the first year for a weak country and 20-25% for a stronger one.