by Stephen McPhie, CA
Partner, RSD Solutions Inc.
Recent talk had been of Germany, France and other relatively strong Eurozone countries withdrawing from the Euro. This talk has now turned to the possibility of weak countries like Greece, Portugal and others withdrawing from the Euro. If that happened, their new domestic currencies would surely immediately depreciate massively. However, they would still have unsustainable debt levels denominated in Euros. At the same time, the Euro would quite possibly strengthen thus exacerbating the problem. This would necessitate an immediate requirement to restructure and debt holders would need to take significant write-downs on the debt. Actually, the underlying economies do not support existing levels of debt and current actions are really only delaying the inevitable. Sooner or later, recognition of loss of underlying value must happen.
Many of these debt holders are banks in Germany, France, etc. German taxpayers, and hence the German government, are very strongly opposed to bailing out the weak Euro countries. However, eventually they may effectively have to do so to some extent if their banks need bailing out. Weak countries exiting the Euro would precipitate immediate action. However, markets are pushing for early action in any event with bond yields for weak countries going through the roof.
All this has the potential to cause great volatility in foreign exchange rates and that volatility will likely go way beyond the Euro. That will affect any business transacting in foreign currencies. It will affect other businesses with significant indirect foreign sourced inputs, e.g. through their suppliers sourcing foreign components, and all consumers.
Any business not assessing their FX exposures and formulating risk management strategies to deal with such exposures is taking a big gamble. It may be that, for any individual business, the risk is within tolerable limits. However, wouldn’t you feel more comfortable if you came to such conclusion from a proper assessment rather than just having a gut feel that this must be the case. Guts can be very sensitive to a little bad food input.
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