Asian companies – Are you ready for the Eurozone meltdown?

The Greek legislative elections scheduled for 17 June 2012 could also be D-day for the future of the Euro, and with analysts forecasting the possible withdrawal of Greece from the Euro and the European Union (EU), Asian companies need to prepare for any possible repercussions.

Although turmoil in the Eurozone has been rife for several years, the rhetoric pledging unity and aid for embattled member states has been a constant ensuring theme. However, the aftermath of the stalemate in the May elections in Greece, has seen rising speculation that Greece could become the first nation to withdraw from the Euro, and also cease to become a member of the European Union (EU).

With bailouts for the Greeks stalled, and social instability mounting while they struggle to resolve their internal conflicts, such a remotely unthinkable possibility has become a distinct reality.

However, if Greece’s exit were to proceed relatively smoothly, this could also pave the way for an exodus of other States from the Euro, with Spain, Italy the first to follow. Financial markets and the global economy would be in turmoil, which would in turn heavily impact Asian companies.

Precautionary and possibly preventative action is paramount, if companies in Asia are to survive the fallout.

What would happen if Greece did exit the Euro?

Countries that withdraw from the Eurozone are required to adopt a new currency. Concurrently, they would also need to adopt and implement new laws and regulations which are aimed at facilitating their transition from the Euro to the new currency.

Greeks would be faced with higher costs to acquire foodstuff or materials for example, as their currency devalues, and they would not be able to access capital or credit. Greek customers would attempt to transfer their Euro out of the country, before the new currency is introduced, resulting in Greek banks facing a run on deposits.

Actions required by Asian companies

Companies that have dealings with Greek companies would face interruptions in supply etc., and thus it is crucial they identify and find alternative sources before it is too late.Moreover, companies must also try to evaluate and identify companies and banks which are based outside of Greece, in order to assess any possible risks which could arise from forming associations with these entities.

Companies in Asia must ensure they fully comprehend any new laws and regulations that are implemented by the withdrawing country, to enable them to weigh their impact and introduce procedures to ensure compliance, and also help them to accommodate the new currency exchange system.

A major motive for a country to withdraw from the Euro is the possibility of the exiting nation being able to competitively devalue its currency. However, this would result in massive inflation, as prices for key staple imports in Greece, including food and fuel, rise exponentially.

To offer the withdrawing country a degree of protection, it is imperative that the denomination laws which would help launch the new currency include capital controls and restrict, at least during the interim period, currency exchange.

Actions – Asian companies

Traders and companies to the withdrawing country must find out whether they would be forced to accept payments etc. in the new currency. If so, it is also paramount that they fully assess how they can utilise the new currency, if capital and currency exchange controls are indeed put into force.

Thus, trade contracts (which are typically governed by UK, French or German law in the EU) must be carefully reviewed. EU regulations require courts in EU member states to respect the laws existent in other EU member states. Therefore, the courts would likely adhere to the terms of the redenomination law, and thus allow payments to be rendered in the new currency.

However, such requirement may not be so clear cut if a country withdraws from the Eurozone and also the EU. In the face of such a complex scenario, Asian companies should commence due diligence checks on all dealings with EU member states which may withdraw from the Eurozone, and start formulating contingency plans, as failure to do so may result in dire consequences.