The failure of Greece to form a government following elections has led to many believing that a Greek default and exit from the Eurozone is now more likely than not. If this happens, then it is probable that other countries in difficulty, such as Portugal, Italy and Spain, will soon follow, and possibly other countries too.
If you trade with any of these countries, then you should now be putting plans into effect to protect your business and minimise your exposure.
What a Euro default will look like
The problem is that there is no provision in any EU treaty for dealing with a country abandoning the Euro. Amazingly, no one considered that this would ever happen.
If the Eurozone countries cannot agree between themselves a treaty to set out an orderly departure procedure, then the most likely procedure will be that the country leaving the Euro will enact emergency legislation to do the following:
- Change the legal currency from the Euro to a new national currency, and stop Euros from being legal tender;
- Amend contracts so that all debts and future payment obligations are changed from Euros to the new national currency at a fixed exchange rate;
- Put in place exchange controls to prevent Euros from leaving the country;
- Provide for the national central bank to convert Euros to the new national currency possibly at the fixed exchange rate.
All this is likely to be enacted without notice and the above measures will take place immediately.
The new national currency is then likely to devalue rapidly. The process of converting Euros to the new currency could well be set at a slow speed to prevent too rapid a depreciation. This will lead to liquidity problems, and the prospect of many businesses failing due to a lack of cashflow. Other businesses will fail later due to the effects of the currency depreciation making their imports more expensive.
Measures to take
So what can you do now to help protect your business from this?
- Carry out a risk assessment. If you rely on supplies from a high-risk country, look for alternative suppliers from safer countries. If you sell to a high-risk country, it’s time to revise your credit policies or credit control procedures. What would you do if payments suddenly dried up through no fault of your customers?
- Try to avoid your contracts being affected by any emergency legislation. No one knows for sure how the foreign or UK courts will deal with this but you can minimise the chances of your contracts being affected by making sure they have the following provisions:
• that the contract is governed by English law;
• that English courts have exclusive jurisdiction;
• that the place of payments is stated to be in England;
• that, if payments are to be made in Euros, Euros are defined in the contract as the single currency introduced by the EU treaties and not the national currency.
- Give yourself the chance to get out of the contract. Make sure there’s a provision in the contract that a Eurozone exit gives you the right to terminate the contract at your option.
- Get as much security as you can: negotiate guarantees from parent companies or directors (if they are outside the high-risk countries), get letters of credit and/or insist on retention of title clauses in your contracts.
- If you have Euro accounts in Eurozone countries, move them if you can to the safer countries, such as Germany or Austria, rather than leave them in the risky ones.
- Avoid paying in advance for goods and services to firms in the high-risk countries.
We can review your contracts to ensure they are set up to minimise your risk to a Euro default. Call us on 0845 003 5639 or contact us here.