Research & Thoughts

Euro Zone to Euro None

How would you cope if it all fell apart?

Could you meet the demands of customers, regulators, shareholders and politicians? Being well prepared means putting strategy in place, backed by tactical ability, to withstand individual departures from the Eurozone, or even complete breakup. We offer scenario planning and practical steps to help financial institutions deal with the “ultimate Big Bang”.

Setting the Scene (not a prediction but a possibility we have to plan for)
The news we all dread finally breaks. What happens next? It’s confirmed. Greece will exit the Eurozone. Does it matter? Greece represents 2% of the EU’s economy. We move on? Not quite. Italy and Spain are now facing the door marked ‘exit’. And that is a real problem. Why? Because they rank among the top 10 GDP countries in the world. If they go, we likely don’t just lose a currency member. We lose the currency.

Reasons to be Fearful
Picture the scene: EU members neither rescue Greece, nor do they ratify a Eurobond. Commentators paint a threatening picture: Spain and Italy waver in the face of soaring financing costs. They give every indication of moving up the line to the exit. Fear is spreading. There is a run on bank runs. Analysts predict that the centre cannot hold. The financial fallout will pull Europe apart, spinning the region into deep recession.

How will events resolve?
There are two likely scenarios: either the South leaves the party; or the whole party goes south.

No more Euro. So what happens now?

  • Legacy currency floats suffer massive devaluation.
  • Confusion abounds over exactly which contracts will be subject to currency conversions bound under lex monetae international principles.
  • Banks in re-denominating countries remain closed for a ‘recovery period’. All accounts are likely frozen until they can be redenominated.
  • Draconian capital controls (including pegged FX rates, frozen transfer systems, closed borders, closed banks) are instituted.
  • Civil unrest is very probable, bringing security risks for international banking and financial services institutions. (Disaster recovery, staffing contingency, and staff safety plans will have to be activated.)
  • The ‘recovery period’ gives banks a few days at most to implement their ‘turnkey’ plans and prepare for the Monday morning bank runs.

Will we go from Eurozone to Twilight Zone? (And which institutions will be most impacted?)
Potential impact will be related to the profile of institution affected. For local retail banks the impact would likely be low, with the main requirement being review of ability to undertake payments to a country leaving the Zone. (Assuming relevant central bank bodies can provide the interim-mechanisms and procedures that enable seamless transition to ensure flow of liquidities.)

The prospect is very different for a universal bank incorporating capital markets and corporate banking business. For any pan-European Universal Bank with a multi-country branch network, large scale Euro-disruption is a high impact issue and requires deeper analysis to ensure readiness for such an event. It all starts with a thorough understanding of the institutions’ individual exposure driven by their unique business model, product and client base.