Treasury Today Country Profiles in association with Citi

Your surprising lifeline for euro-denominated trade contracts

If the Eurozone crisis has taught us anything, it is that politics and economics make for an unhappy couple. The arguments, broken promises and failed summit meetings seem more often to resemble a failed marriage than genuine efforts to save the global economy. The inability of European leaders to meet market demands has created a vacuum of uncertainty in which the crisis is deteriorating further.

As a result, the single currency area – say the scaremongers – could face its first default this year: Greece. Only this week, Angela Merkel, the German chancellor, called for the need to hasten the restructuring of Greek government debt. There remain serious concerns that, in light of the slow pace of negotiations, the second tranche of Athens’ bailout package may not be activated in time before the country is due to pay bondholders.

This brings immediate due diligence responsibilities for corporates trading on the European continent. If Greece defaults and exits the Eurozone, what does this mean for a supplier to Greek businesses? Will receipts from Greece remain in euros or will they be redenominated into a far weaker new drachma? Also, how would the periphery country’s exit impact businesses with Greek suppliers?

In order to answer these questions, corporates have to take account of several key issues, says Deborah Zandstra, a partner at the legal firm Clifford Chance. Speaking at a round-table discussion with the Centre for the Study of Financial Innovation, an independent think-tank based in London, earlier this week, Zandstra said the status of a euro-denominated financial contract depends on the following legal concepts:

  • The jurisdiction under which the contract was signed.

  • The governing law that the contract is ascribed to.

  • The exact definition of the currency outlined in the contract.

  • And, of course, the place of payment.

While the latter three are important, legal jurisdiction is central to this question. Say, for example, that Greece defaults on its debt and, on an EU-approved multilateral basis, opts to leave the Eurozone (let’s put aside the legal complications surrounding such a move). The Greek government invokes Lex Monetae, a legal principle declaring the state exercises sovereignty over its currency. Greece then changes its monetary unit to the new drachma.

Does this mean that the original Greek euros owed to your company will now, in real terms, be devalued to new drachma? The answer depends on whether your euro-denominated contract belongs to local law (ie Greece) or foreign law. If the jurisdiction of your contract lies within in Greece – then your business will be hit by devalued receipts. This is because the principle of Lex Monetae has a far greater sway over contracts that lie within the jurisdiction of the state that imposes it.

But if the jurisdiction of your contract is situated in say Britain, your business should be on far safer ground. It is likely that British courts will recognise the Lex Monetae principle – not on behalf of Greece, but on behalf of the member states remaining in the Eurozone. The Greek declaration of monetary sovereignty does not stem beyond its own borders. It is important to note that the above example refers to a multilateral-based Greek exit. Should Greece exit the EU on a unilateral basis, British courts can refuse to recognise the redenomination as it goes against the principles of the EU. Your contracts with Greek counterparties therefore remain euro-denominated.

The above cases are, of course, simplified examples of what is an extremely complex legal topic. Nevertheless, certain lessons can be taken from them. The first step for corporates to take – if they done so already haven’t – is to conduct a detailed overview of their existing contracts. A clearer picture of your counterparty exposure will emerge as a result. Secondly, legal advice should be sought as soon as possible to find out your options. Any potential safeguards that corporates can put in place should be done so now rather than later, even if that means calling in the dreaded lawyers.

Businesses need to become more astute. Last November, for example, the German tourist firm Tui sent new contracts to Greek hotels stipulating that, should Greece exit the Eurozone, future payables will be denominated in the new currency. This, in effect, would reduce the real burden of payment for the German tour company. That the move caused consternation with the Greek Tourism Organisation is not surprising. What is surprising is that there aren’t more companies at least attempting this manoeuvre.

After all, while the Eurozone crisis continues to deteriorate, that doesn’t necessarily mean the same fate awaits your trade contracts.

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