The Greek elections in June may have averted the most immediate challenge to the eurozone, but for treasurers of companies operating in Europe, the threat of a euro break-up remains all too real. A survey of UK CFOs published by Deloitte in July found 36% of respondents expect one or more countries to leave the euro by the end of 2012, while John Paulson, founder of hedge fund Paulson & Co., reportedly sees a 50% chance the euro will break up.
The continuing threat to the single currency—whether that means the exit of one or more countries or a complete disintegration—looms large for treasurers in Europe, particularly when it comes to choosing a safe haven for their deposits. Recent downgrades of a number of European banks and countries by Moody’s and S&P has added to their concerns.
While some multinational companies are sweeping funds out of Europe on a daily basis, those with deposits in the eurozone are paying close attention to their counterparties.
“Counterparty risk is a bigger concern and we’re making sure funds are spread across banks—in other words, keeping our eggs in as many baskets as possible,” says Jack Spitzer, assistant treasurer at Starwood Hotels. “We are also spending more time with our subsidiaries, looking at what relationships they are dealing with. One thing to consider is that in many countries, the bank [rating] typically can’t exceed the rating of the country, so if you are trying to maintain a minimum bank relationship credit rating, you may need to make an exception.”
While credit ratings remain important, treasurers are broadening their horizons in order to monitor counterparty risk more closely and the use of credit-default swap (CDS) spreads is becoming increasingly common.
“We’ve tightened up our credit-risk monitoring and are looking at daily CDS pricing for banks we do FX with,” says Patricia Greenfield, head of treasury operations at pharmaceutical company AstraZeneca. “If that moves more than a comfortable percentage, we don’t deal with that bank for five days.”
Other treasurers argue that the risk measures put in place during the early stages of the financial crisis are sufficiently robust. “The eurozone crisis was not a big trigger to our counterparty risk management because we made some important adjustments early in 2007 when the first indications of the U.S. subprime crisis appeared,” says Steffen Diel, head of treasury finance at SAP. “At that point we reduced our counterparty limits and started to invest in some other investment categories. We also began distributing our cash in a very broad manner among our core banks. The eurozone crisis hasn’t required any additional actions in that respect.” The additional investment categories SAP is now using include German government paper (BuBills) and tri-party repos.
Nevertheless, the recent bank downgrades in Europe have had an impact on the amount that SAP will deposit with any one bank. “When downgrades happen and certain rating categories are reached, then the counterparty limit changes,” adds Diel, who's pictured at right.
While deposits are a key concern, the counterparty risk implications of the eurozone crisis are not limited to decisions about deposits. “Treasurers are very much reconsidering their bank relationships, particularly treasurers based in southern Europe,” says Sander van Tol, managing partner at Zanders Treasury & Finance Solutions. “They are not only concerned about the risk of depositing money but are also worried about operational risk.
“With the collapse of Lehman Brothers, the operational impact was fairly limited because [Lehman] did not really focus on cash management,” van Tol adds. But for banks with more major cash management capabilities, companies may be exposed to considerable operational risk.” Van Tol says such operational risks could include the freezing or closing of bank accounts that companies need for cash management functions such as paying salaries or receiving customer payments, as well as issues that could arise if a bank’s guarantees cease to be valid.
A euro breakup may have been averted thus far, but treasurers are using all the tools at their disposal to monitor the risks and review their cash management decisions.
For an previous look at how companies are responding to the European debt crisis, see Weighing FX Options.