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Let’s say the Euro does crack up… what’s in it for me?

What would a potential or even worst case scenario look like for the PIIGS?

There is no shortage of people willing to speculate on whether or not the Euro will survive or the fates of various indebted member countries, but surprisingly little talk of what a break up or default would look like. Adjectives like “bad” and “ugly” do not provide much material for contingency planners. How vulnerable would you be if it happened?

There are lots of options

Beware whenever anyone tells you something is impossible. Be doubly so when politicians say something is unthinkable and not up for discussion. When politicians tell you they are not talking about something, they are usually talking about little else.

There has been plenty of speculation about one or more countries leaving the Euro, ranging from the heavily indebted countries to the main engine, Germany. Unfortunately, the speculation has ended there.

What would a default look like?

The question is a good one and there are plenty of examples. Argentina, for example, defaults about as often as their neighbors Brazil win the World Cup. The exercise usually involves lots of negotiations and these are not usually about if the investors will lose money, but how much. Therefore, one of the first questions is to ask who lent the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) the money that they cannot pay back?

The Germans are on the hook for a lot of it, but so are lots of other people. What effect will losing lots of money have on them? Judging by how often people line up to lend money to Argentina, despite its history of not paying back, it would be tempting to say not very much. The difference here is that the amount of money seems to be much larger.

Usually the banks only lose some of their money, and the rest of it gets adjusted, just like a renegotiated mortgage. The pertinent question might be:

  • What effect would it have on you if your bank lost lots of money in these countries?
  • Will it affect your financing?
  • Will it affect your customers?

Much of this depends on those negotiations.

What if the PIIGS get kicked out of the Euro?

This is another question few people seem to want to answer. The countries would have to decide if they wanted to keep the Euro or resurrect their old currency. The practical side of this is not that difficult. New cash and coins can be printed rather quickly by specialty companies that do this sort of thing. The Third World gets their currency from these companies and they could probably manage a rush job, even if it was a big one.

The central banks could force conversions from the old currency to the new and have no doubt, it would probably be ugly, but it has been done before. Following World War Two, the new German national bank introduced a new currency overnight, erasing all bank accounts and their contents, creating new ones with 500 marks in them for everyone. There were probably harsh words, but the decision was not reversed.

What if the PIIGS left the Euro, but kept the Euro as their currency?

Confused? Don’t be. El Salvador is just one of several countries that uses US dollars as their currency. While they use US paper money and coins, El Salvador does not print US dollars, though they do issue dollar-denominated debt. Basically, their currency and exchange rates are out-sourced. Ben Bernanke does most of their central banking for them.

What will it mean for me?

This is a question worth trying to answer.

  • How would you protect cash in local bank accounts? Move it overseas? Convert it into assets?
  • How would you protect physical assets?
  • How might contracts be affected? Have you asked your legal advisors?
  • How might you labor contracts be affected?
  • How might your suppliers be affected?
  • How might your bank be affected?
  • How might your investors be affected?

Think ahead

Instead of wondering whether or not it is going to happen, try to assess how it might unfold and what the potential consequences would be. Know your exposure, identify key warning indicators, and be ready to act, if necessary. Most important of all, know your potential vulnerability.

 

 

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