What could Grexit mean for the global corporate treasurer?

February 11, 2015
Tim Wheatcroft
Greek Drachma

The recent elections of the left-wing anti-austerity party Syriza in Greece put the possibility of Grexit firmly back on the table. Greek Prime Minister Alexis Tsipras’ suggestion that its creditors take a “haircut” and forgive a significant portion of the country’s enormous debt have been met with almost universal hostility among the business community and throughout the EU.

Even though discussions between Greece and its creditors are ongoing, the possibility of a Greek default on its debt, and its subsequent departure from the euro, cannot be discounted.

Should Grexit become a reality, it will obviously cause turmoil for any organization that has operations not just in Greece but across the EU. As a corporate treasurer, here are some issues that you should consider:

Should Greece be forced to exit the Eurozone, the new currency (let’s call it the new drachma, or N₯ for the sake of argument) will likely see a significant and prolonged fall in value due an overall lack of confidence in the currency. Greek banks would likely have difficulty themselves making loans due to their own lack of liquidity, and the central bank will have difficulty maintaining its position as a backstop, as its own lack of creditworthiness would make the issuing of sovereign debt an expensive process (S&P recently downgraded Greece’s debt rating). Where credit is available, interest rates would be high. The combined impact of all this would be a significant amount of volatility within the entire finance structure.

The most critical (and obvious) process to put in place would be to minimize the cash balance in Greece by moving these euros into an in-house bank or non-Greek company via an intercompany loan structure (of course, treasuries should already be doing this). Also, existing euro hedges that incorporate Greek exposures should be reviewed and adjusted to exclude Greek components.

Once N₯ is established, companies would certainly be wise to minimize their holdings in the new currency, which would likely be extremely volatile for months at the least. While an effective hedging program would certainly help mitigate against this volatility, the N₯ will be expensive immediately upon a potential exit. This coupled with illiquidity in the market will mean high spreads leading to expensive hedging costs. This would increase pressure on treasury teams to accurately project cash flows, as the cost of missing on forecasts would be significant.

As a second measure, if the company is performing SCT and SDD payments into and out of Greece, new payment processes could need to be established, as quitting the euro might well lead to an exit from the Single European Payment Area (SEPA) as well.

However, the impacts of Grexit would be felt far beyond exposure to Greece itself. The prospects for the EU as a financial union would be questioned, given the many other austerity hotspots (such as Spain, Portugal, Italy and Ireland) that could see Greece’s action as a trigger to demand concessions or similarly threaten departure.

Although Grexit would certainly cause a huge amount of turmoil for the European economy, along with every organization that does business in Greece and the eurozone, with the right processes in place, it can be managed effectively. However, a more fundamental issue for many international organizations would be whether doing business in Greece is worth the risk that it poses, and what the knock-on impact could be for operating the other weak Eurozone economies facing similar pressures.