Eurozone exit: how to prepare

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At the end of last year I set out a series of predictions for 2015 including some that I believe to be likely, but not imminent. One of those is that troubles in the eurozone are far from over.

The European Central Bank’s willingness to do whatever it takes is not a substitute for structural reform – a point well understood by central bankers, and less acknowledged by politicians.

Even more concerning is that many European populaces are less willing to see the need for reform of the European social model and they are being encouraged by a range of political parties to believe that structural reform is not necessary.

Leaving aside any views on the viability or otherwise of the European social model, the start of 2015 has certainly reignited concerns over the viability of the euro far more rapidly than anticipated.

The IoD policy unit has published a paper giving greater detail about what to expect if a country were to depart the euro (it can be viewed on iod.com). Here, in brief, is a checklist – it’s by no means exhaustive – of 10 issues to consider if you are concerned about the exposure your business has to countries that might find themselves in any difficulty in a renewed crisis.

1. Accelerate payments from within the affected area, reducing terms from 90 to 60 or even 30 days may be a sensible precaution.

2. If possible, supplier and customer agreements and contracts should be drafted in English, not local, law. Contracts stipulating local law are more likely to have their payment terms devalued.

3. Reduce planned sales or plan for write-offs of collections in potentially affected countries.

4. If key products or services come from potentially affected countries, investigate alternative vendors from countries with a lower perceived risk.

5. Ensure cash positions reflect new perceptions of risk and accelerate the movement of cash out of potentially affected banks.

6. Move inventory from potentially affected countries – yes, the EU guarantees free movement of goods, but exit from the euro would be unprecedented; so too might the reactions to it.

7. Assess which financial insurance instruments (credit default swaps) can be trusted to pay out as expected – many of these failed in the recession and what appears to be certain now might well be less so in a crisis.

8. Discuss at board level contingency plans on how to deal with various crisis scenarios.

9. Consider how staff in affected countries might be paid.

10. Communicate with clients, explaining planning efforts as this will give them confidence. Assisting clients with their own contingency planning might also be beneficial.

The introduction of the euro was a carefully thought-through, detailed seven-year process. Any country exiting may well find the unwinding takes place over a weekend: it will be chaotic. While we are not making predictions about the likelihood of a country departing the euro, it would be sensible to consider what key challenges might face businesses were such a scenario to unfold. These range from coping with the reaction of a naturally nervous public, to corporate refinancing and the longer-term implications.

About author

James Sproule

James Sproule

James Sproule has been Chief Economist and Director of Policy for the Institute of Directors since January 2014. Prior to joining the IoD James led Accenture’s UK Research and Global Capital Markets Research. He started his financial career as a merchant bank economist working with both Bankers Trust, Deutsche Bank and Dresdner Kleinwort, and eventually helped to found the boutique bank Augusta and Company.

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