The Euro zone meltdown


When Novo Nordisk’s chief financial officer met marketing colleagues last Friday the conversation moved far beyond the usual discussion of sales and performance. Jesper Brandgaard asked a simple, far-reaching question: how would the firm set prices for two pivotal new insulin products if the euro collapsed?
The Danish firm, the world’s biggest maker of insulin for the treatment of diabetes, sits outside the euro zone but sells into it. It’s a question that is being echoed – in various forms – in the boardrooms of banks, brokerages, trading houses, law firms and the world’s leading manufacturers.
“It’s hard to make detailed plans but we need to think through how our pricing strategy would fare if there were suddenly a dismantling of the euro,” Brandgaard told Reuters. “How do we avoid falling into a trap? This is the first time I’ve asked such a question. It’s a topic that is increasingly on the radar.”
In the case of the products in question – Degludec and DegludecPlus, two ultra-long-acting insulins – Novo Nordisk has time on its side. The new drugs are still working their way through the regulatory approval process and probably will not reach the market until late 2012.
Planning for a breakdown of Europe’s 17-nation single currency is not easy. Like many business leaders, Brandgaard views a break-up of the euro as possible though not yet probable — but the odds are increasing. In a Nov 23 Reuters poll 14 out of 20 economists said the single currency would not survive in its current form – and companies are starting to plan for a worst case scenario.
Their trepidation is best summed up by Martin Sorrell, the head of the world’s biggest advertising agency WPP. “The complexity fills everybody with such appalling fear and is so complicated that the last thing in the world you want to happen is that,” Sorrell told Reuters on Monday. “But the honest answer is that, like everybody else, you try and contingency plan for any break-up of the euro zone.”
Drawing on interviews with company officials, bankers and lawyers in Europe, the United States and Asia and companies’ regulatory filings, Reuters has pieced together a picture of patchy preparedness for the possible demise of the 12-year-old euro currency, an event that would be unparalleled in recent history.
“These days, it’s a part of almost every risk management conversation that comes up,” said a senior player in London’s insurance market, speaking like many in this story on condition of anonymity because of the sensitivity to their business.
Some of the most active contingency planning is happening in European countries outside the euro zone that have strong trading links with the currency bloc – Denmark and Britain being leading examples. Of the 33 companies with the biggest exposures to the euro zone in sales terms, five are British, according to Thomson Reuters data. Health care, energy and consumer goods are among the most exposed industries.
A number of British firms, including the world’s biggest caterer Compass Group, have said they have discussed or put in place contingency plans to deal with a euro collapse but most are reluctant to give details.
“Most business people have given up waiting for the political Godots. You just can’t run your business on the basis that something will turn up, so you have to plan on the basis that it doesn’t turn up. So you think about what legally and contractually it is going to mean. You also say ‘I’m going to run my balance sheet as conservatively as possible’,” WPP’s Sorrell said.

Banks, brokers and exchanges are in the front line. ICAP, the world’s top broker for foreign exchange and government bonds, said on Monday it has tested its trading system to handle the collapse of the euro zone and re-emergence of national currencies.
It is not alone in carrying out ‘war games’. A senior banker at a large investment bank said he had a team of 20 people globally running all kinds of scenarios all the time. That team was now spending a lot of its time on the possible break-up of the euro. They had simulated a weekend crisis by running through the different stages of Friday night, Saturday and Sunday in one full working day. In addition, they had looked whether they would have enough people (and the right ones) available and made sure they knew where to reach them.
“It’s my job to assume the worst. You can test all kinds of benign scenarios, but if something really bad – let’s say a sudden overnight default of Italy – were to happen and we hadn’t tested that, I wouldn’t be doing my job properly. If that latter scenario were to occur, things would look very ugly indeed. There simply wouldn’t be enough time to sort out all the various trading positions and look at all the paperwork,” the banker said.
In his estimation, a return to the drachma in euro zone minnow Greece was the least of his concerns. He likened Greece to bankrupt U.S. broker-dealer MF Global – annoying but not a real issue – and Italy to Lehman, whose collapse marked the start of the 2008 financial crisis.
Britain’s regulator, the Financial Services Authority, has told Britain’s banks to draw up contingency plans in case there is a disorderly break-up of the euro zone or exit of some countries. “We cannot be, and are not, complacent on this front,” Andrew Bailey, deputy head of the FSA’s Prudential Business Unit, said on November 24.
U.S. firms are testing their systems too. A.M. Best Co, the main ratings agency for the insurance industry, said on November 22 it is doing additional stress testing on insurers given deteriorating conditions in Europe. The agency, which just conducted a similar review two months ago, said it is looking at underwriters’ exposures on a case-by-case basis to see if any have additional risk from the weakening euro zone.

For non-financial firms, a key focus of efforts for firms worried about a euro collapse is in trying to safeguard their cash. Corporate balance sheets currently are very strong with upwards of $1 trillion net sitting on them, a reflection of companies’ reluctance to invest in adding capacity or in buying other firms.
The chief executive of a European company with annual revenues of more than $10 billion a year told Reuters during a recent visit to London that his board had discussed how to handle a euro zone collapse but that it had proved a very short meeting. Other than ensuring their cash deposits were in the safest possible banks and relying on the broad international nature of their business, executives quickly concluded there was little more they could do.
Siemens finance chief Joe Kaeser said in a November 10 media call on the group’s quarterly results that a considerable proportion but less than half of its 12 billion euros in liquidity had been parked with the ECB. About a year ago, Siemens — a maker of fast trains and gas turbines — acquired a banking license to be able to deal directly with the ECB.
BMW said on Monday its approach to handling excess liquidity had not changed and that it continued to use a number of international commercial banks as well as the ECB’s deposit facility. Daimler said it used surplus cash mainly internally. Volkswagen did not immediately respond to calls seeking comment. Similar caution emanated from companies in other industry sectors.
Simon Henry, chief financial officer of oil company Royal Dutch Shell, said as a consequence of Europe’s debt crisis it was taking extra care in investing its $20 billion cash pile. “It’s with secure counterparties and its short term,” Henry said.
Drugs firm AstraZeneca told Reuters it was carefully monitoring its exposure to the banking sector in light of the debt crisis and had increased its holdings of U.S. government Treasury bills.
The chairman of another company in Britain’s FTSE 100 index of leading firms said the shortage of AAA rated banks was complicating life. British firms don’t have access to the ECB because Britain is outside the euro zone.