The Treasury Consequences of a Greek Departure

There is considerable concern in the financial markets about the potential for a Greek exit from the euro. Increasingly, this is not limited to Greece but extends to other peripheral nations such as Spain, Portugal and even Italy. We will not dwell on the likelihood of any country leaving the euro, or the pros and cons of a single currency, but instead we focus on the treasury related consequences of a euro break up and comment on what businesses should be considering in preparation.

Paul Harrison

  • Currency Mix – at a minimum all organisations should model their Balance Sheets from a currency perspective, together with Revenues, Costs, EBITDA and Post-Financing Cash flows.  Such an exercise will clarify the company’s currency mix and, if the euro was to break up, how things would look.  This is particularly important if revenues and assets are predominantly based in one location (e.g. The Netherlands) while debt and costs are located elsewehere (e.g. Spain).
  • 3rd Party Financing – some financing agreements enable a change of currency to be applied to term loans depending on the domicile of the obligor.  Changing the currency of a company’s debt can cut both ways: it is a positive development if you have debt in a new weak currency and revenues in a new strong euro; however, it could be a problem if debt becomes denominated in the new hard euro while assets remain in a new weak currency.
  • Cash – holding excess cash in local bank accounts does run the risk of being converted overnight to a new currency (such as the New Greek drachma etc.) that is unlikely to appreciate in the short-term.  In addition, funds held in a new currency would not be incorporated immediately into a pooling structure, resulting in renewed cash management inefficiencies.  Finally, in contrast with the period prior to the adoption of the euro (which occurred in two stages – electronic banking followed by notes and coins) it seems unlikely that such an extended and stable period of preparation would happen in the event of any country making an involuntary exit.
  • Banking – some Banks are likely to be hit harder than others by any euro break-up, either because they are located where the economies have been hit hard already (e.g. Spain, Italy or Greece) or because they have significant exposure to one of the peripheral countries (such as banks in France).  This can have lending consequences, as well as more conventional counterparty risks, if working capital and other facilities are withdrawn or not renewed.
  • Operational FX Hedging – derivatives are typically used to manage the exposure of a future sale or purchase of one currency into another.  Such a hedge only works when the currency of the exposure is matched with that of the hedge – this may no longer be the case.  It is likely that new currencies will require additional hedging requirements in terms of analysis, reporting and execution.
  • Interest Rate Hedging – swaps or options that hedge an organisation’s euro debt exposure may become increasingly ineffective, both in economic and accounting terms, if debt is redenominated as a result of a Greek exit.

At a minimum these points require analysis, if not action, by management.  Understanding the issues surrounding a Greek or other currency exit can allow a company to prepare for such an event.

PMC can assist in making sure proper risks are contemplated and potential solutions implemented.

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