Contingency planning for a breakup of the eurozone is already under way at UK-based multinationals
Pharmaceuticals giant GSK says: “As part of our standard risk management practice, GSK has undertaken planning to optimise its operations in the event of a country leaving the eurozone. This includes preparations to ensure uninterrupted flow of the funds that are needed to continue the operations of our business.”
A Vodafone spokesman says the company is looking at each market individually as events unfold. It has already cut tariffs in Spain to take account of the weak economy and constraints on consumer spending. Asked what the company would do if the eurozone broke up, the spokesman says: “We are ready to implement contingency plans if the situation were to change significantly.”
Companies are reluctant to go into detail about what they would do if faced with what analysts agree would be a financial catastrophe. But audit and risk committees, staffed by non-executive directors, are examining worst-case scenarios across Britain. “It would be remiss if they weren’t looking at things very carefully at this stage,” says one City consultant. “And that goes for any large British company with European exposure, especially if they are trading within the southern periphery.”
Diageo, whose labels include Johnnie Walker and Smirnoff, is understood to have run computer models of how the business would look if the euro imploded, although that doesn’t mean it is forecasting a meltdown. But Andrew Morgan, president of Diageo Europe, told theFinancial Times: “We have started thinking what [a break-up] might look like. If you get some much bigger change around the euro, then we are into a different situation altogether. With countries coming out of the euro, you’ve got a massive devaluation that makes imported brands very, very expensive.”
Unilever, whose brands include Ben & Jerry’s ice cream and Dove soap, is apparently well placed because it generates more than half its sales outside Europe, from emerging markets. “But obviously a breach in the euro would hardly be good news for Diageo, or anyone else,” says Graham Jones of Panmure Gordon.
Graham Leach, chief economist at the Institute of Directors, says that if “Club Med” countries came out of the euro, their national currencieswould face “a dramatic devaluation of around 40%”; put another way, profits derived by UK firms in those countries would plummet when converted to sterling.
Leach says that an added risk would be significant asset writedowns for companies with operations in countries that had left the single currency. And there would also be “the most awful problems” over the honouring of contracts that were based on payment in euros. “There is no precedent for what could happen, so forward planning is difficult, to say the least,” says Leach. He agrees that small firms could be disproportionately hit if they depend on exports to the continent, and some would inevitably go the wall.
Financial firms have been at the forefront of contingency planning in recent weeks. City interdealer broker Icap is testing its electronic trading platforms in case Greece leaves the eurozone and reintroduces the drachma. Spokesman Richard McCready said: “We have been testing our systems to allow customers to trade the drachma against the dollar and the euro. What we are doing would be a template that could be exploited if other countries also leave the euro.”
Thomson Reuters says: “Our currency dealing systems are specifically designed so that we can add and remove currencies very easily and quickly. The systems are built and tested to cope with very significant volumes.”
Hector Sants, the chief executive of the Financial Services Authority, has ordered Britain’s banks to accelerate their contingency planning and his message was reinforced on Thursday when Bank of England governor Sir Mervyn King said UK banks should brace themselves to withstand the “extraordinarily serious and threatening” economic situation.
The Bank’s financial policy committee said the eurozone crisis was the biggest threat to the UK’s banking system, and banks should build up their financial buffers to withstand that. King said the Bank itself was making “contingency plans” itself in case of a eurozone break-up, without going into details.
Bank of America Merrill Lynch says a partial break-up of monetary union, with only some countries exiting the euro, is the most probable scenario, but still thinks a break-up is a far-fetched event. But that hasn’t stopped financial institutions from hedging their bets. Barclays has slashed its debt exposure to Portugal, Italy, Ireland, Greece and Spain by 31%, from £11.6bn at the end of June to £8bn by the end of September. As well as allowing some government bonds to mature, Barclays has sold debt to willing buyers such as hedge funds.
And Prudential has taken “avoiding action” to dodge the European financial crisis with only £49m tied up in the debt of the worst-affected countries. Tidjane Thiam, the insurer’s boss, said: “We started moving out of the eurozone countries after looking at their financial balance, the sovereign debt levels and their promises to pay.”