Just when it seemed the crisis facing the euro had seemed solved, pressure has been building up on Ireland in the past few days. Spreads over comparable German government securities have now reached more than 6% since October, twice the crisis level of May. Even though the country’s debt management agency is sitting on a comfortable €20 billion cash pile, the volatility has not been smoothed by rumours and denials of urgent negotiations between Dublin, Brussels, Frankfurt and, most recently, London and Washington. It now seems likely that a solution involving “tens of billions of euros” will be produced, according to the country’s central bank, but still denied by its political leaders.
This is not just a problem for the Eurozone countries which back the European Financial Stability Fund, but also for the other EU member states – including the biggest of the non-euro countries, the United Kingdom, which could be in line for a contribution of up to €10 billion. British Chancellor George Osborne has also hinted that there could be a bilateral arrangement, not least because the Republic is the UK’s fifth largest trading partner. There is also speculation that the IMF will have to play a part along the lines of the co-ordinated approach with the European Commission and the European Central Bank already adopted to meet the Greek crisis.
There may be more trouble ahead for the euro and the siren voices have been predicting the downfall of the single European currency long before it was even introduced. But what’s going on in Dublin will have more significant political and wider economic impact than a real effect on corporate treasurers. Daily life goes on and so do practicalities.
Sovereign crises used to be currency crises but the peculiar status of the euro means that treasurers face a range of challenges to protect their current and fixed asset liabilities. The fixed components should be fairly easy to deal with in the short term because buildings, plants and machinery are real things with real value. But accounting for them on the balance sheet, and protecting their reported values, will require both business realism and a view on how to account for hedging. New accounting standard IFRS 9 is still in drafting stage but nobody expects that sovereign default will be in there. “Recognition and derecognition” sound even more abstruse when it comes to an OECD country.
For current assets (accounts receivables and cash), treasurers should be aware of the range of options and their costs. These range from the broadest and bluntest instruments, such as Credit Default Swaps, to credit insurance for the precise protection of receivables. For cash, the attractions of cash liquidity funds over bank deposits are obvious in terms of credit quality (independently rated by external agencies) and diversification.