Treasury Today Country Profiles in association with Citi
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June 2009

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Editorial

Trust, but verify

In a recent survey of 290 corporate treasurers by EuroFinance Conferences, 65% of respondents stated that their trust in bankers had declined since the onset of the financial crisis. At a time when markets remain turbulent, companies are understandably less inclined to place their confidence in another party.

After all, to trust is to rely on another party’s capabilities. As illustrated by the trust game that involves falling backwards in the belief that someone else will catch you, there is always a risk that such trust will be misplaced.

In the current market we have seen banks themselves fall, and they have not always been caught before they hit the ground. It is only natural that corporates should be wary and seek greater assurances than before.

One new product that has emerged as a result of this sentiment is the forward start facility, a means by which corporates can give up favourable pricing on credit facilities achieved before the crisis in exchange for the guarantee that the facility will be renewed in a couple of years’ time, regardless of how the market may have developed in the meantime. We look at this product in more detail in this month’s Corporate Finance article.

It is not only treasurers who are reluctant to trust the banks. Following the collapse of Lehman Brothers, sales of household safes rocketed as consumers withdrew funds and kept them at home, rather than trusting the banks with them. Meanwhile, the banks themselves stopped lending to each other.

However, the entire financial system is itself founded on trust. Physical cash is no longer made of gold; paper notes represent a promise to pay a sum of money, rather than being intrinsically worth that sum of money. If no one trusts in the banking system, recovery will be impossible.

Henry Lewis Stimson, the US statesman, once said, “The only way to make a man trustworthy is to trust him.” However, Ronald Reagan’s view on the subject was rather more cautious: “Trust, but verify.”

In the current market, it would be foolish to trust any third party blindly – but it will be difficult to move forward if we do not trust at all.