Guest Contributor: Subbiah Subramanian, Head of Instrument Engineering, Eagle Investment Systems
After weeks of suspense, Greece reached an agreement with the creditors to restructure its debt. Some groups within the global financial market such as the ISDA called it a default, as this restructuring resulted in financial losses for creditors. This triggered a credit event in the CDS markets on Greek debt. The larger question remains: is this restructuring one step closer towards a stronger Greece, or is it preparation for a transition out of the Euro? Last week’s restructuring still leaves about two thirds of Greece’s sovereign debt on its books. Furthermore, Greece is one of a few countries in the Euro zone experiencing a fiscal crisis. We have yet to see the true financial picture of substantially larger economies like Spain.
Today’s market consensus is that when one or more countries abandon the Euro currency, the event will be sudden and there will be no lead time to implement currency redenomination. For financial institutions, the prudent course of action is to be prepared on two fronts:
- From an exposure and risk management standpoint, firms need to understand how their investments are exposed to countries in the Euro Zone. This item falls mostly on investment professionals.
- From an operational perspective, firms need to know how to execute the redenomination of an instrument currency from EUR to a country specific currency. This is best tackled by operational and IT groups in the organization.
There are several steps companies can take now to prepare.
- Set up a task force of individuals from key areas of the business like trading, accounting and performance & risk with pre-assigned roles and responsibilities. This task force should have representation from business, operations and IT departments.
- Take a full inventory of Euro denominated positions to establish the level of exposure and identify where you need to focus.
- Collect details on the issuing authority for securities to best understand the likely monetary legal jurisdiction – is it a municipal authority, the federal government, the European Union, etc.? This will help determine if a security will redenominate out of the Euro to a new currency.
- Examine closely any funds based in Europe that might see the need to convert into a redenominated currency and consider the legacy issues of these positions.
- As a matter of urgency they should speak to their auditing firms to know the tax implications of redenomination if the law considers it to be more than a mechanical change.
- Be in touch with data vendors to understand their plans. It is key to be in sync with how market data is going to reflect currency redenomination.
This is not over, so stay tuned for more!
If you would like to hear more from Eagle Investment Systems, attend the 5th Annual Performance Conference presented by FTF and Olmstead Associates in New York City on March 21st.