Don’t Wait for Greece

Companies need to start planning now for possible exits from the euro.

Only a few months ago, most analysts were saying that the eurozone debt crisis was easing. Greece had accepted an austerity plan in return for bailout funds, Italy and Spain had conservative governments that promised to put their financial houses in order, and the euro was holding firm. Then came the Greek elections, where voters, fed up with austerity, rejected both major parties and France’s election of Socialist Francois Hollande, who vowed to combat the German-led policy of financial austerity.

Suddenly, it seems quite possible that Greece will exit the euro. Spain, Portugal and Italy could be in trouble as well, maybe even to the point of quitting the euro.

What’s a U.S. company with factories, suppliers or major markets in Europe to do?

In a new report, Breaking Up Is Hard to Do, PricewaterhouseCoopers says the key thing is to prepare for what might happen, rather than just waiting for more information. “There are a lot of different possible scenarios, and things could happen very quickly or over a prolonged period,” says PwC partner Shyam Venkat, one of the report’s authors, pictured at right. “But the key is doing your homework.” 

The report offers four scenarios: A concerted rescue of the entire eurozone that would entail recession, slow growth and significant inflation; voluntary defaults for the zone’s more indebted nations, starting with Greece; an exit from the euro by Greece, followed by a firewall protecting the zone’s remaining members; or a falling away of all the weaker, more debt-burdened economies, including Greece, Portugal, Spain, Ireland and Italy, and establishment of a strong but smaller eurozone composed of Germany, France, Holland and Finland.

“Regardless of what happens, companies can and should be thinking about how they would deal with currency controls, about their suppliers, about how a devaluation would affect reported profits from European sales, and about investment decisions on where to source and where to sell,” Venktr says.

Among the steps PwC suggests: Moving cash out of euros into safer currencies; negotiating shorter supply contracts in the eurozone; setting cash aside for bond repayments; increasing cash reserves; and assessing net euro exposure.

U.S. companies today, Venkat says, exhibit a range of responses, from a wait-and-see attitude to setting up multidisciplinary teams to plan and prepare steps that could be taken. “It’s a little like baseball,” he suggests. “You can’t know if you’re going to get a curve ball, but you’re better off if you’re prepared to have one pitched at you.”

Brian Kalish, finance practice director at the Association for Financial Professionals, says most treasurers and CFOs he meets are not preparing for such a challenge. “For most of them, it’s kind of wait-and-see,” he says. “There’s a kind of crisis fatigue at this point, and a sense that, ‘Hey, Germany’s going to save us.’”

Companies may also be overconfident about their ability to hedge against the problems in Europe, but as JP Morgan Chase CEO Jamie Dimon can attest, the benefits of hedging can be overrated.

Axel Merk, president and CIO at Merk Funds, offers another bit of advice. ‘Monitor capital flows closely,” he says, “because that will warn you if the market thinks a country is likely to default or leave the eurozone.”

 

 

The PwC report, Breaking Up Is Hard to Do, is here.

For an earlier story about the practical implications of the European debt crisis, see Breaking Up the Euro.

 

 

 

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