Euro breakup – Have you planned ahead?

20th December 2011

On the surface Eurozone policymakers may be heralding a new dawn for European integration rather than predicting the demise of the single currency, but it is clear that business leaders think differently. A number of leading companies are now making active contingency plans for the failure of the Euro.

Eastwood on the FT site exposes some of the dilemmas facing businesses: "On the break-up of the Euro, the Lex Monetae – a principle of international law – provides that a debt in a member state would be converted to the currency adopted by that state at the rate prescribed by that state. But this Lex does not apply where the debt is denominated in Euros in a country which itself is not a member state (Switzerland, the UK), because the debt is not owed under the law of any particular member state

"What then? If there is no Euro does this mean that there is no debt? Unlikely. More likely, the non-member states (i.e. the rest of the world) will adopt legislation as to the value of the debt held in the non-member state, or failing legislation, presumably a new rule of international law would emerge that the debt is to be established in the non-member state's currency at the rate prevailing on the date that the Euro ceased."

The financial sector would be in the front line if the Euro were to fail and has therefore been among the first to put new risk management strategies in place. Schroders, for example, has been accelerating its existing contingency programme in recent months: "Alan Brown, chief investment officer of the UK fund manager with about £182bn in assets invested across the world, said that Schroders was looking carefully at where the banks that it deals with clear euro trades, avoiding those that cleared through the more vulnerable eurozone states and opting instead to work with banks clearing through Germany.

"He said that the fund manager had for some time been tightening up on what collateral it would take to back derivative transactions, opting where possible to deal in exchange-traded and physically-backed derivatives."

This CNBC piece highlights the plans being put in place by parts of the financial sector, including ‘war games' at the major investment banks:  

"ICAP, the world's top broker for foreign exchange and government bonds, said on Monday it has tested its trading system to handle the collapse of the euro zone and re-emergence of national currencies.

"It is not alone in carrying out "war games." A senior banker at a large investment bank said he had a team of 20 people globally running all kinds of scenarios all the time. That team was now spending a lot of its time on the possible breakup of the euro. They had simulated a weekend crisis by running through the different stages of Friday night, Saturday and Sunday in one full working day. In addition, they had looked whether they would have enough people (and the right ones) available and made sure they knew where to reach them."

But – the article makes clear – contingency planning is not confined to the financial sector: "Some of the most active contingency planning is happening in European countries outside the euro zone that have strong trading links with the currency bloc – Denmark and Britain being leading examples. Of the 33 companies with the biggest exposures to the euro zone in sales terms, five are British, according to Thomson Reuters data. Health care, energy and consumer goods are among the most exposed industries.

"A number of British firms, including the world's biggest caterer Compass Group, have said they have discussed or put in place contingency plans to deal with a euro collapse but most are reluctant to give details."

BT and Ireland's largest company CRH have also outlined their plans.

Lawyers have also been at the forefront of contingency planning as companies increasingly try and understand the contractual implications of a Euro break-up.

With the corporate sector it can perhaps be seen simply as prudent risk management, but – highlighting the difference between what is being said in public and what is being planned for in private – Eurozone policymakers are also putting contingency measures in place. Of course, details are sketchy, but this is what they are willing to admit: "The ECB hosted a crisis communications exercise with officials from national euro zone central banks late last month that included a commercial bank collapse scenario.

In the event of such a banking collapse leading to a country defaulting and – in a worst case scenario – leaving the euro zone, the central bank official said policymakers' priority would be to protect the rest of the bloc.

"In such a situation, we have to safeguard the rest of the system," the official said, adding that this could involve reshaping the euro zone's EFSF rescue fund and recapitalizing banks."

The potential fallout from a failure of the Euro extends beyond economic and political considerations, and there are signs that governments are also trying to plan for the social problems that may result from a break-up.

"Recent Foreign and Commonwealth Office instructions to embassies and consulates request contingency planning for extreme scenarios including rioting and social unrest.

Greece has seen several outbreaks of civil disorder as its g
overnment struggles with its huge debts. British officials think similar scenes cannot be ruled out in other nations if the euro collapses."

 

More from Mindful Money:

The aims and failures of the eurozone

The IMF: Is it up to the job?

From European Union to Fiscal Union

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11 thoughts on “Euro breakup – Have you planned ahead?”

  1. James says:

    Inflation harms poor people also, by destroying the value of their lifetime savings, and leaving them dependant on benefits.

    1. Peter Morgan says:

      Hi James

      Poor people don’t have savings. The main people that will lose out through inflation are people with lots of money and pensions. Also even if inflation targeting is a good idea why does that mean the interest rate should be the tool to hit it?

      Thanks for your comment.

      1. Critic Al Rick says:

        The main people that will lose out through inflation are … those on fixed incomes.

        The ranks of those on fixed incomes to be joined over the next 15 years or so by the very people you suggest have been favoured by BoE policy – the Baby Boomer Generation (BBG)!

        Further favouring of the BBG by BoE policy?!

        Pah!!

        1. Peter Morgan. says:

          The only reason the interest rate has been so low in the last few years is because of the low level of aggregate demand. If this was not the case the interest rate would have been increased compensating for the loss of return from inflation. The current economic condition is the result of thirty years of decisions that were favourable for the Baby Boomer Generation. The property boom was created by the expansion of credit performed by the Bank of England, which created a generation of property magnets. Not all of the Baby Boomers benefited from this but most did. It is now coming back on them due to the over saturation of debt, which originally pushed their property prices up, that now has to be paid back. As the amount of money in the economy has diminished the central banks are lowering interest rates to keep debt payments viable. Even with the interest rates at half a percent the money supply is so low they have had to QE their way out of debt default.

          I stand by my comments. But thank you for your response.

          1. Critic Al Rick says:

            Hi Peter

            Thank you for your response. You are entiltied to your opinions; I stand by mine.

            I would suggest that the BoE Baserate has been too low for at least a decade; primarily in the interests of one sector of society over everyone else – not the Baby Boomer Generation but the Banksters et al.

            I would also suggest that your opinions are commensurate with the philosophy of ‘divide and rule’. Who are your ultimate paymasters?

          2. Peter Morgan says:

            The reason interest rates have been so low over the last decade is because inflation has been relatively low. The low interest rates over last few years are what I allude to. They artificially increased property values in the benefit of existing home owners. When inflation increased over the last thirty years the interest rates has risen in tangent.

            This created enormous repossessions in the early nineties and cost the then younger generation enormous amounts of money. The current situation with low interest rates have occurred due the expectation inflation would fall, which it has. The only reason interest rates have not risen in tangent with inflation in recent years is due to the over satuaration of debt creating more problems with future demand than an interest rate increase justifies.

            In short the Bank of England has got so many people into so much debt to push the property prices of the ‘favoured generation’ up and given them huge savings that it has led to an inability to control inflation with the interest rate without created worse outcomes.

            The current situation which is you claim negative to BBG is only as a result of the benefits they received in the past.

            In relation to who is my paymaster. I am self employed. Who would be my paymaster and benefit from criticising the Bank of England in this country anyway. They are the ones with all the money and are supported by the government. What is it you are inferring to?

          3. Critic Al Rick says:

            Interest Rates and Inflation Rates are parameters which the BoE can and does influence; the BoE has steered the Economy by meddling with them.

            You say: “The reason interest rates have been so low over the last decade is because inflation has been relatively low.”.
            The reason why official inflation has been relatively low is because housing costs were excluded from the reckoning; if housing costs had been included at the time when house prices were rocketing official inflation figures would have rocketed. I would suggest that housing costs were deliberately excluded from the reckoning in order to deliberately fudge official inflation figures in order to steer the Economy in the intended favour of the steerers; interest rates would have been increased by a responsible and competent authority acting in the best long term interests of the majority to curb rocketing house prices in order to prevent further distortion of an already crippled Economy. An Economy crippled by irresponsible and incompetent governance; an Economy having been distorted over previous decades whilst favouring one sector of society over all others – not the BBG.

            I agree the high interest rates of the early 90’s were intended to curb high inflation. I would suggest the high inflation was deliberately caused by the BoE whilst attempting to ‘inflate away’ the significance of National Debt at that time. And not, I would add, without unintended consequences detrimental to the health of the Economy; as, contrary to popular belief, is always the case with Inflation. I would suggest that the selling off of the nations ‘family silver’ during the Thatcher era helped compensate (hide) those unintended consequences; although one wonders if they were unintended, things seemed to start to ‘go to pot’ soon after we became a Member of the so-called European Common Market. Did that favour the BBG?!

            The current situation is very seriously negative, not only to the BBG, but to everybody; except, perhaps, the perpetrators. If you can’t see that yet, then time will reveal. I was self-employed, but my paymasters were those I was serving; their paymasters had paymasters had paymasters had … At the top of the hierarchy are those that rig the playing-field … rigged in their favour … the favoured sector of society – not the BBG.

            The BoE help rig the playing-field by setting interest rates and influencing inflation. One wonders if they’ve gone a rig too far … one wonders if they’ve finally lost control. One wonders if they’ve lost the plot … or are on course to achieve the Banksters’ ultimate goal. One wonders …

          4. Peter Morgan says:

            The baby boomers have a voting block the decisions made with the interest rate and property were used to make the economy look artificially strong for the ‘perpetrators’ as you call them to be voted back in. The baby boomers did benefit in the short term at the expense of the future. You are right the ship will go down taking everyone with it but it was the central bank and government that played on the baby boomers generations wants to get voted in to do this.

            Can you see my point. I am saying the government and central bank used the baby boomer voting black to their favour in the short run. They will keep playing to their needs because they are the largest voting body in the country, their needs will be put before everyone elses no matter what happens to the economy. Anyway I think we actually agree to a certain level but have a different way of explaining it. Both of us think the problem is universal. I guess the only option is to the leave the country if you want to avoid it.

  2. Critic Al Rick says:

    You suggest the BoE’s policy has been to favour the Baby Boomer Generation (BBG); you’re obviously from a different generation. You suggest the rich/poor divide is between the BBG and everyone else.

    Have you not heard of the Occupy (Wall Street, London, etc) Movement; the protest concerning the 1%; the wealthiest 1% benefitting greatly at the expense of the downtrodden 99%. Well, you surely can’t deny that most of the BBG are amongst the 99%; can you?

    If some of the BBG have benefitted from the meddlings of the BoE then I would suggest most have been incidental beneficiaries, the intended beneficiaries being amongst the 1%, more particularly the 1% of the 1%. I would also suggest that not all the 1% are amongst the BBG; nay, not all of the 1% of the 1% are amongst the BBG.

    So don’t blame the BBG for the hardship imposed on younger generations. Blame the f—— Banksters aided and abetted by treacherous Politicians.

  3. geoffk says:

    As a saver who lives off interest. I reckon the last five years have cost me over 100k…

  4. Critic Al Rick says:

    Hi Peter

    I can see your point, I just don’t agree with it!

    Labour have a very large voting block comprising the Public Sector and Benefit Claimants; largely engineered by themselves at great expense to Private (ex Cartel, etc) Sector Tax Payers, including the BBG of the Private (ex Cartel, etc) Sector. I exclude Cartels, etc because I regard them as Quasi Public Sector; all part of the Insider Sector (Public + Benefit Claimants + Quasi Public); the Sector harbouring 99% of UK Parasites.

    If the Coalition is pandering to the BBG it has a very peculiar way of doing it!
    For instance, by allowing the systematic destruction of the BBG’s pensions.

    Incidentally, the ‘perpetrators’ are immune to elections; elections merely decide which set of puppets are to have their strings pulled by the ‘perpetrators’. The puppets rig the playng-field in sympathy with the ‘perpetrators’ ‘requests’

    The ‘perpetrators’ are certainly not the BBG. Nor will I ever concede that the BBG has ever been the intended primary beneficiary of (supposed) Govt policy; on that score, however, I will agree to disagree!

    We do agree that the UK is a sinking ship; it is a universal problem inasmuch as the West is a sinking flotilla. To where does one flee? I hope I’ll make my escape before the ship finally sinks; via a wooden box!

    Peter, I hope to argue with you again!

    Rick.

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