Seeking out opportunities in a crisis

A month after landing a job running Westminster council's finances, Jonathan Hunt took a close look at where ratepayers' cash was stashed.

As well as investments in gilts and money-market funds, there were deposits with eight banks. One caught his eye — a £10 million (Dh57.48 million) balance with the British arm of Santander, Spain's biggest bank.

This made Hunt, Westminster's director of corporate finance and investment, scratch his head. At his previous employer, Transport for London, the treasury team decided the gathering Eurozone crisis meant Spanish banks were not worth the risk. It was time for prudence, Hunt decided, so he withdrew Westminster's money. "The first principle of being a treasurer is security, then liquidity, and third the return," he said. "It's a risk the council just does not need to run."

Hunt, 40, made his choice not last week, as Greece teetered on the brink and Spanish banks were hit with another downgrade by rating agency Moody's, but 18 months ago. He joined Westminster in October 2010, and by November, he had withdrawn the money.

British business has not been so quick. Until recently, a euro break-up was seen as a hypothetical threat. Now many companies are hitting the panic button, trying to work out what happens if they suddenly have to start dealing in drachmas — or pesetas or escudos. There are many questions — what would happen to payments caught in the financial system, how would the new currencies work, would the euro still hold together — but few answers.

Quantifying the impact

Ten days ago, the European Commission tried to provide some. It pulled in senior executives from the big four accounting firms to start trying to quantify the impact of a Greek euro exit — or ‘Grexit' as it has come to be known. They were asked what big businesses were doing to prepare for a break-up.

"Not much," one senior financier who attended said. "Ever since this whole thing blew up, it has seemed that the closer you are to the epicentre of the crisis, the less interested you are in thinking about it."

For the past 13 years, Europe has operated on the assumption that trade between this group of countries, now 17, takes place without currency risk. "All that started to change about six months ago," one expert said. "Anyone who tells you they are fully prepared for the full eventuality of Greece leaving the Eurozone is just plain wrong."

As a caretaker Greek government was sworn in, Cheryl Thallon, managing director of Viridian Nutrition, was taking a call from a southern European customer pleading for time to pay its bills.

Her Northamptonshire-based company exports ethical vitamins and supplements across the Continent. Although her overseas sales doubled last year, some of her distributors on Europe's periphery are feeling the pinch.

"I had a customer on the phone asking to go from the usual 30-day payment deadline to 90 days. It's very hard because you don't want to destabilise their business, but I had to say no," she said.

Hedging risk

With about half of British exports going to the EU, thousands of companies face similar problems. Smaller firms are dealing with the pressing issue of whether customers on the Continent can pay their bills, and how to hedge the exchange-rate risk if they delay.

"In some cases, British companies are asking for cash up front from buyers in highly indebted European countries," James Sproule, head of capital markets research at Accenture, the consultant, said.

Big businesses have resorted to daily "sweeping" — moving cash balances out of euros into safer currencies at the end of the day in case of default. That helps companies protect themselves, but makes the broader situation worse. By sweeping the cash out of banks in Greece every night, multinationals have added to the "run" on deposits putting the financial system under pressure.

Other companies are running down stock in southern European countries, in some cases by as much as 80 per cent. For financial services firms, the possibility that Greece could exit the Eurozone — and then redenominate all domestic wages, prices and contracts into drachma — has led to frantic assessments of whether they could trade the currency.

Banks are scared to fire up the systems they used to clear the drachma for fear it would trigger gremlins in computer networks.

"It's just another thing we know we will have to deal with if and when it becomes necessary," an executive running disaster scenario planning for a big bank said. He rates a Greek exit a 50-50 possibility.

Preparing for contingency

A full-scale break-up is still seen as highly unlikely. The Financial Services Authority (FSA) has nevertheless asked banks to plan for all eventualities. It wrote to the chief executives of financial institutions in December asking them to model three scenarios — a Greek exit, the Eurozone splitting in two, and a total break-up — and banks had to report back by February.

"A total breakdown of the Eurozone is still seen as a very remote possibility, but companies are realistically planning for a Greek withdrawal," Sproule said.

Some companies are starting to take more drastic precautionary measures, such as removing references to the euro in contracts. Where it once said that a payment would be settled in euros on a certain date, it may now refer to "the currency of Germany at the time".

Greece does not exist in isolation. It seems difficult to imagine it could exit the single currency without causing problems for Portugal, Ireland, Spain and Italy.

That's why many senior bankers believe it is impossible for Greece to leave the euro. The Germans are bluffing, they argue, and will ultimately pay whatever it takes to keep the European project intact.

Restoring confidence

Yet even if Europe threw another chunk of cash at Greece, would that restore confidence? Concerns about Spanish banks would not disappear, neither would worries about French public finances.

The Eurozone would still function less and less like a single currency, with cash continuing to flow away from the banks and countries that need it towards the banks and countries that don't.

— The Times Newspapers Ltd, London 2012