https://www.nytimes.com/2011/11/26/business/global/banks-fear-breakup-of-the-euro-zone.html?nl=todaysheadlines&emc=tha25&pagewanted=all
Very interesting things happening in the eurozone.... This one's for
Keith.
Banks Build Contingency for Breakup of the Euro
Robert Schlesinger/European Pressphoto Agency
Chancellor Angela Merkel of Germany and the nation's finance minister,
Wolfgang Schäuble.
By LIZ ALDERMAN
Published: November 25, 2011
PARIS — For the growing chorus of observers who fear that a breakup of
the euro zone might be at hand, Chancellor Angela Merkel of Germany
has a pointed rebuke: It’s never going to happen.
But some banks are no longer so sure, especially as the sovereign debt
crisis threatened to ensnare Germany itself this week, when investors
began to question the nation’s stature as Europe’s main pillar of
stability.
On Friday, Standard & Poor’s downgraded Belgium’s credit standing to
AA from AA+, saying it might not be able to cut its towering debt load
any time soon. Ratings agencies this week cautioned that France could
lose its AAA rating if the crisis grew. On Thursday, agencies lowered
the ratings of Portugal and Hungary to junk.
While European leaders still say there is no need to draw up a Plan B,
some of the world’s biggest banks, and their supervisors, are doing
just that.
“We cannot be, and are not, complacent on this front,” Andrew Bailey,
a regulator at Britain’s Financial Services Authority, said this week.
“We must not ignore the prospect of a disorderly departure of some
countries from the euro zone,” he said.
Banks including Merrill Lynch, Barclays Capital and Nomura issued a
cascade of reports this week examining the likelihood of a breakup of
the euro zone. “The euro zone financial crisis has entered a far more
dangerous phase,” analysts at Nomura wrote on Friday. Unless the
European Central Bank steps in to help where politicians have failed,
“a euro breakup now appears probable rather than possible,” the bank
said.
Major British financial institutions, like the Royal Bank of Scotland,
are drawing up contingency plans in case the unthinkable veers toward
reality, bank supervisors said Thursday. United States regulators have
been pushing American banks like Citigroup and others to reduce their
exposure to the euro zone. In Asia, authorities in Hong Kong have
stepped up their monitoring of the international exposure of foreign
and local banks in light of the European crisis.
But banks in big euro zone countries that have only recently been
infected by the crisis do not seem to be nearly as flustered.
Banks in France and Italy in particular are not creating backup plans,
bankers say, for the simple reason that they have concluded it is
impossible for the euro to break up. Although banks like BNP Paribas,
Société Générale, UniCredit and others recently dumped tens of
billions of euros worth of European sovereign debt, the thinking is
that there is little reason to do more.
“While in the United States there is clearly a view that Europe can
break up, here, we believe Europe must remain as it is,” said one
French banker, summing up the thinking at French banks. “So no one is
saying, ‘We need a fallback,’ ” said the banker, who was not
authorized to speak publicly.
When Intesa Sanpaolo, Italy’s second-largest bank, evaluated different
situations in preparation for its 2011-13 strategic plan last March,
none were based on the possible breakup of the euro, and “even though
the situation has evolved, we haven’t revised our scenario to take
that into consideration,” said Andrea Beltratti, chairman of the
bank’s management board.
Mr. Beltratti said that banks would be the first bellwether of trouble
in the case of growing jitters about the euro, and that Intesa
Sanpaolo had been “very careful” from the point of view of liquidity
and capital. In late spring, the bank raised its capital by five
billion euros, one of the largest increases in Europe.
Mr. Beltratti said that Italy, like the European Union, could adopt a
series of policy measures that could keep the breakup of the euro at
bay. “I certainly felt more confident a few months ago, but still feel
optimistic,” he said.
European leaders this week said they were more determined than ever to
keep the single currency alive — especially with major elections
looming in France next year and in Germany in 2013. If anything, Mrs.
Merkel said she would redouble her efforts to push the union toward
greater fiscal and political unity.
That task is seen as slightly easier now that the crisis has evicted
weak leaders from troubled euro zone countries like Italy and Spain.
But it remained an uphill battle as Mrs. Merkel continued this week to
oppose the creation of bonds that would be backed by the euro zone.
Politically, even the idea of a breakaway Greece is increasingly
considered anathema. Despite expectations that Greece — and the banks
that lent to it — may receive European taxpayer bailouts for up to
nine years, officials fear its exit could open a Pandora’s box of
horrors, such as a second Lehman-like event, or even the exit of other
countries from the euro union.
Europe’s common currency union was formed more than a decade ago and
now includes 17 European Union members, creating a powerful economic
bloc aimed at cementing stability on the Continent. It ushered in
years of prosperity for its members, especially Germany, as interest
rates declined and money flooded into the union — until the Lehman
Brothers bankruptcy sent global credit markets into chaos three years
ago and the financial crisis took on new life with the near-default of
Greece last year. The creation of the euro zone meant countless
interlocking contracts and assets among the countries, but no
mechanism for a country to leave the union.
But as the crisis leaps to Europe’s wealthier north, banks have been
increasing their preparedness for any outcome. For instance, while it
would certainly be legally, financially and politically complicated
for Greece to quit the euro zone, some banks are nonetheless tallying
how euros would be converted to drachmas, how contracts would be
executed and whether the event would cause credit markets to seize up
worldwide.
The Royal Bank of Scotland is one of many banks testing its capacity
to deal with a euro breakup. “We do lots of stress-test analyses of
what happens if the euro breaks apart or if certain things happen,
countries expelled from the euro,” said Bruce van Saun, RBS’s group
finance director. But, he added: “I don’t want to make it more
dramatic than it is.”
Certain businesses are taking similar precautions. The giant German
tourism operator TUI recently caused a stir in Greece when it sent
letters to Greek hoteliers demanding that contracts be renegotiated in
drachmas to protect against losses if Greece were to exit the euro.
TUI took the action just days after Mrs. Merkel and President Nicolas
Sarkozy of France acknowledged at a meeting earlier this month of G-20
leaders in Cannes, France, that Greece could well leave the monetary
union. On Thursday, Greece’s central bank warned that if the country
failed to improve its finances quickly, the question would become
“whether the country is to remain within the euro area.”
In a survey published Wednesday of nearly 1,000 of its clients,
Barclays Capital said nearly half expected at least one country to
leave the euro zone; 35 percent expect the breakup to be limited to
Greece, and one in 20 expect all countries on Europe’s periphery to
exit next year.
Some banks are now looking well beyond just one country. On Friday,
Merrill Lynch became the latest to issue a report exploring what would
happen if countries were to exit the euro and revert to their old
currencies. If Spain, Italy, Portugal and France were to start
printing their old money again today, their currencies would most
likely weaken against the dollar, reflecting the relative weakness of
their economies, Merrill Lynch calculated.
Currencies in the stronger economies of Germany, the Netherlands and
Ireland would probably rise against the dollar, according to the
analysis.
In Asia, banks and regulators view the situation with growing alarm.
Norman Chan, the chief executive of the Hong Kong Monetary Authority,
said on Wednesday that regulators had stepped up their surveillance of
banks’ exposure to Europe.
Regulators have been working with bank managers on stress tests to
determine how the banks’ financial stability might be affected by an
increasingly severe financial dislocation in Europe, said a Hong Kong
banker who insisted on anonymity.
The main danger of a euro breakup, said Stephen Jen, managing partner
at SLJ Macro Partners in London, is “redenomination risk,” the
unpredictable effect that a euro breakup would have on financial
assets as newly created currencies sought their own levels in the
market and the value of contracts drawn up in euros came into question.
Most people hope that will not happen. “Remember when Lehman went
bankrupt — nobody could anticipate what happened next,” said the
French banker who was not authorized to speak publicly. “That was a
company, not a country. If a country leaves the euro — multiply the
Lehman effect by 10,” he said.
Keith Bradsher contributed reporting from Hong Kong, Julia Werdigier
from London, David Jolly from Paris and Elisabetta Povoledo from Rome. _______________________________________________
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