Many companies bracing for possible end of euro

THEY may not admit it, but right now, financial managers in many firms are hedging their bets, and are busy trying to construct scenarios to assess just how the world might look in the event of a break up of the euro zone.

The head of Standard Chartered bank sees a growing likelihood of one or more countries leaving the eurozone, telling the Sunday Telegraph that political leaders have yet to offer a meaningful solution to the bloc’s debt crisis.

“We enter 2012 with a very difficult outlook for the euro zone . . . with an increasing possibility of countries actually leaving the euro zone,” Peter Sands, chief executive of the Asia-focused bank said.

The treasury departments of larger multinationals have been particularly busy. CRH boss Myles Lee let the cat out of the bag in this regard. Lee, however, was merely stating the obvious. Well run companies make preparations for all events. But a disappearance of the euro could create a financial cataclysm that would sweep away businesses.

This is why many believe that such an event could not be contemplated.

The view is that we run the risk of global economic armageddon that would make the thirties Great Depression look like a teddy bear’s picnic.

However, the financial markets are openly looking to a world beyond the European common currency.

ING and Nomura have just made a stab at collating the net worth of new national currencies that would emerge from the corpse of a collapsed euro.

The assumption is that the world as we know it survives but, in the initial phase, all ex-member countries suffer contractions in national output varying from 7% for Germany to 13% for Greece arising from the shock to business activity.

Under the ING/Nomura scenario, the values of the new currencies tumble against Sterling, before recovering much of their former value. Only a revived Deutschmark would be worth more than its current value in euro against sterling by 2016, though the currencies of “hard currency” countries like Austria and Finland would be near current levels.

Worst affected are the Club Med countries. The drachma would collapse to around 15p before recovering to 40p.

The Spanish peseta and Portuguese escudo would plunge to around 30p, before recovering to around 60p.

Ireland fares less badly, with the punt worth just over 50p before moving back up to 70p in 2016, still a substantial devaluation in real terms.

The reformed Franc weighs in at just 55p after the euro’s unravelling before recovering to around 77p.

Of course, the above findings are theoretical. A full scale collapse could precipitate a 20% collapse in GDP across developed countries, with a rapid transmission of the meltdown to so-called developing countries. It could amount to a financial nuclear winter.

Financial markets would surely pull back at such a prospect, as central bankers joined forces to provide the long awaited big bazooka to protect the Euro while perhaps preparing the way for a renovation — or de facto shrinkage — under controlled conditions.

The big ECB move aimed at providing around €500 billion in three-year money to the banks has raised hopes that policymakers are beginning to come to grips with the crisis, though the fall in the value of the currency to new lows in the days after Christmas has served as a reminder that the crisis is far from being under control.

The Germans remain stubbornly attached to a strategy of prolonged fiscal austerity of the type set out at the unhappy summit in early December. This has been made clear by one of Chancellor Merkel’s close advisers, Beatrice Weder di Mauro, a member of her Council of Advisers. In other words, the status quo continues to have few attractions for a debtor economy like Ireland.

Ms di Mauro pointedly refused to rule out a euro break-up, while insisting that over-indebted euro nations must submit to long-term insolvency rules.

The Germans refuse to contemplate any reflation of their economy to counteract the squeeze elsewhere.

In the current fraught environment, debt restructuring appears to be off the table, but should a break-up be triggered, restructuring — the burning of creditors — would be back with a vengeance, posing questions for the viability of the global banking system.

People would be left guessing as to which banks were safe as the interbank market went into freefall. The IMF would simply not have the capacity to launch any rescue attempt.

Right now, investors are frantically searching for safe havens. Irish professional firms have been transferring liquid assets into German banks. Much of the smart money headed for the Swiss hills a long time ago, or into gold. But the price of gold has begun to gyrate amid concerns about an asset price bubble.

2012 brings levels of uncertainty not experienced since the dark post-war years when Soviet Communism appeared on the march across Europe, but a strategy based on pure undiluted pessimism could prove self-defeating. A frantic rush into a safe haven such as gold could prove self-defeating, if a return to calm caused the price of gold to plummet back towards normal levels.

A partial euro break up, involving the departure of Ireland and weaker Club Med countries, would certainly not be the end of the world. It would result in big losses for savers and for most employees, who would not be able to bargain to maintain real wage levels while facing mass unemployment.

In essence, domestic spending and living standards would suffer another shock, but with greater prospects of a rebound, assuming that the social bonds can hold.