If Greece Exits...
India's trade with Greece is miniscule. Nor do any leading Indian companies have a substantial exposure...atleast none that is publicly known of!
Why am I headed to Greece on this show? Because in recent weeks the possibility of a Greece exit from the euro-zone is staring us more squarely in the face.
You've heard economists and bankers talk about Europe's potential Lehman moment...or not. We decided to get you a lawyer's perspective on the risks global corporations face if Greece were to exit the euro-zone.
To discuss that with me I have Ian Johnson, Partner, Slaughter and May.
Doshi: Let me start with that very first basic question- you worked on this, how do you assess the risks that face global corporations, across the world, if Greece were to exit the euro-zone?
Johnson: Besides the obvious risks that relate to just having contractual arrangements or deposits in Greece but the potential impact could be much more widespread than that –an exit from Greece could imply countries like Portugal as well. So in terms of global businesses, they may have subsidiaries in Greece, they may have joint venture arrangements in Greece but even if they don’t because it is not just a sovereign debt crisis that is taking place in Europe, it is much more complicated and interlinked with the EU banking sector. All of that means that it is not a straightforward as just looking at exposure to Greece.
Doshi: Let me take what you have said and apply it to India. Now India’s trade with Greece is miniscule, its exports are less than half a percent of its total exports, Greece accounts for about 0.02% of India’s total imports. So clearly the trade relationship is not at any threat if Greece were to exit from the euro-zone. The impact would be almost negligible on India. But it is an interconnected world and Indian companies could potentially have partners that have Greece exposure. They could bank with banks that have Greece exposure or maybe impacted by Greece exit. So what would you identify as some of the key risks that Indian companies face as opposed to global corporations if Greece were to exit the euro-zone?
Johnson: Such a global organization would need to be focused on what is likely to happen in terms of treasury arrangements. So all global organizations have hedging arrangements, they have loan arrangements, they may have investments. It could have effect on counterparties when you don’t expect it, whether they be banks or rather corporates that you deal with, that you have trading relationships with India and therefore the indirect exposure is very difficult to quantify unlike with Lehman and it is only when the event happens that it can be clear what the extent of those indirect consequences are.
Doshi: Are you telling me and if I was to illustrate that part of your answer that the biggest risks Indian companies face or if they had a relationship with the European bank- that had a substantial exposure to Greece- which is unlikely to be the case because from what I hear most European banks, at least the leading ones, have written down a substantial portion of their Greek sovereign debt holdings or have written down let us say their exposure to Greek businesses or to Greek banks themselves- so if that is going to be the key risk, then it is not a substantial risk from the India point of view, is it?
Johnson: Greece has been rumbling along for sometime and you are quite right that a number of EU banks and global banks and corporates have adopted a much more cautious approach to Greece over time. But what banks and corporates are now factoring in is trying to work out what the interconnectedness of these different relationships, which of course is very difficult but we have seen this part of contingency planning corporates looking at other higher risk jurisdictions as well such as Portugal and Spain have been reported in the press of having problems. So it is the potential domino fact.
Doshi: That is a fair point that an Indian company may have an indirect relationship with a Greek company if one of its clients has an exposure in some fashion or could be affected in a substantive way by a Greece exit. What is it that you are advocating your clients do, for instance I know that offline you were telling me that many companies that you deal with, you are suggesting that they dig deeper into their banking relationships and even query their banks what their exposure to Greece is or what their exposure to troubled peripheral countries is and therefore what the likely impact could be if there were to be an exit? Is that the best mitigation process?
Johnson: It is a legitimate question to ask yourself if you are a corporate treasurer of a large global group to think where are my pressure points, which banks do I deal with, how are they going to be equipped to deal with the problem if it escalates and so therefore thinking is part of your sort of phase-I consideration about the structure of your group- whether you do have a presence in high risk jurisdictions and even if you don’t, how are the counterparties that you are more concerned about and thinking about, whether you want to be asking questions of your relationship banks, whether you want to be looking at the documentation.
I mean the problem we found following Lehman is that it took time for people to find the legal documentation just within a big organization and even when it was found, quite often than not, it wasn't as people expected and a lot of these financial contracts is the documentation and custody agreements done in standard form and people haven’t paid much attention to what is commonly referred to as boiler-plate type provisions like governing law and jurisdiction and whether there is a definition of euro and all of these types of provisions become much more relevant if there is a risk of redenomination because of an exit of euro.
So you are looking in terms of assessing redenomination risk but the fact is that connect you to the high risk jurisdiction but aside from that as part of good practice treasury management - you should be thinking about where your deposits are, where do you have investments, where do you have arrangements with money market funds or other investments in Europe, which could have an impact if the exit of Greece were to occur or rather euro-zone countries were called into question.
Doshi: What I do know is that many Indian companies do have euro-denominated loans- what happens if the currency has to reset because of an exit. I cannot imagine, it would be a huge reset because Greece makes up for less than 3% of the euro-zone's gross domestic product (GDP) combined but nonetheless the currency might have to reset for that exit. How do you work through that if you have a euro denominated loan or euro denominated receivables or any such financial exposure that is denominated in the euro?
Johnson: If you have financial exposure denominated in euro, then the starting point for that financial contract is still look whether it does have a connection to the exiting country and in particular to focus on whether the governing law and jurisdiction clauses are associated with that high risk jurisdiction. If they are not, then you have a definition of euro and that is reasonably clear. Certainly the English of course attach a lot of weight to what the intention of the parties, where at the time they entered into the contract so that is a positive but it is worth looking at other things and attention has been drawn to things like place of payment and performance. So if you do have a loan where payments have to be made and the performance of contract is made within the high risk jurisdiction, then again that is something to bear in mind and consider and examine more closely. But the first phase is to get this overview of what your exposures are and to drill down on material contracts that may have more pressure points.
Similarly if you are thinking about transactions that were in the euro-zone, you would obviously- in an acquisition context- pay more attention to due diligence, to think about whether target groups have plans in place to deal with this, how their exposures and treasury arrangements and banking and financing arrangements may be impacted from a shock event. So these are all legitimate questions for Indian companies to be thinking about if they are thinking about investments in the euro and of course if you have funding lines with banks that have European branches or subsidiaries, thinking about how those banks would deal with those subsidiaries in times of a shock event and whether those jurisdictions in which they operate are well equipped through banking legislations to help deal with these banks if needed.