Insight to All Things Currency and Treasury Management

The restructuring of the euro is unavoidable, imminent, and arguably already happening.

Two years ago, FiREapps saw that the euro would inevitably falter, and we have been working to address this risk with customers, the great majority of whom have become currency agnostic in the face of this perfect storm.

In 2012, we expect individual EU countries to revert back to their own currencies and begin the difficult work of getting their respective economic houses in order. The European Central Bank and other Federal banks around the world are encouraging financial institutions to “de-leverage,” suggesting that a euro breakup isn’t so much a “what if?” scenario as it is a question of “when and how?”

The “when” is most likely very, very soon. The “how” presents two alternatives: 1) An overnight dismantling of the euro that cripples the global financial system, or 2) A gradual breakup that, while not without impact, allows companies and financial
institutions to take preparatory action to protect assets. Thankfully, at this point, this is the most likely scenario.

So, what can you do now to make sure you will be able to safely weather the
impending euro storm?

  • Understand your foreign exchange exposure. Your survival depends on it. If (and more likely, when) individual EU countries revert back totheir own currencies, these “new old” currencies will not be pegged to the Deutsche mark with individual weights toward GDP. When this happens, it will be vitally important for multi-national companies to truly understand the relationships of buying, selling, trading, and loaning goods and serviceswithin the17 EU countries, and how operations in those 17 countries will be impacted by transactions that extend beyond the euro zone.
  • Above all else, be prepared. To protect earnings and shareholder value,boards need to brace for drastic change and extreme volatility. The first step is to give CFOs a mandate to gain a thorough understanding of the true financial exposures associated with all currency pairs, not just euro exposures to the dollar. Every business should also be running “what if?” scenarios to prepare for the new euro or euros. It’s the prudent thing to do.After all, you wouldn’t leave a door or a window open when there’s a winter storm coming. And you shouldn’t try to weather the euro crisis without identifying every point of entry for financial exposure and risk.

As stewards of fiduciary responsibility for managing the financial health of their organizations, CFOs need to be prepared. Being prepared for the impacts of the euro crisis means having a disaster recovery plan in place. What is your disaster recovery plan?