Friday, 28 September 2012

What would be the impact on an event if the country in which it was held left the Euro during the tenancy or close to it?


Whether or not you believe in the whole European project and the Euro, we have reached a point where there must be at least an even bet that one of the Eurozone countries will leave the Euro in the next 12 months.  The question, therefore, is not why or whether it will happen, but how to prepare for such an eventuality.

 

Responsible event companies plan and train to deal with ‘major incidents’.  Many focus on the topical risks such as fire or a bomb threat.  Companies with more advanced risk management programs include a wide range of possible scenarios such as political and civil unrest or serious disruptions to travel infrastructure such as occurred when flights were suspended over much of Europe after the Eyjafjallajoekull volcano erupted in Iceland.  Are we, however, missing one of the most obvious scenarios?  What would be the impact on an event if the country in which it was held left the Euro during the tenancy or close to it?

 

The problem is that, for many, the whole EU project is an emotive issue which tends to cloud our judgement.  There is no place, however, for emotive subjectivity when it comes to risk analysis. To add to the confusion, if you put any two economic experts in the room, each will argue convincingly a completely contradictory position and this is especially true with matters concerning Europe.  Yet through all the clamour one clear message is emerging.  Whether or not you believe in the whole European project and the Euro, we have reached a point where there must be at least an even bet that one of the Eurozone countries will leave the Euro in the next 12 months. 

 

I have no particular claim to economic competence so these views are based on the output from what I regard as the more serious and objective comment from the Economist and other similar journals1.  In particular Roger Bootle has produced a paper ‘Leaving the Euro:  A practical guide’ that gives an insight as to how it might occur2.

 

The Warning Signs

 

The one thing that is certain is that if it does occur, everyone will say that they knew it was going to happen.  It will be less easy to explain why it was not planned for.  Most economists seem to agree that the ‘Armageddon scenario’ is a country ‘crashing out’ in a disorderly default.  However if a country signals its intention, it would very likely precipitate the disorderly default that would be caused by the markets’ reaction to the news.  An exit therefore would need to be planned in secret.  In essence we can expect no early warning.  Some expect that it would still be necessary to impose capital controls in advance to ensure that if the news leaked out, it did not cause a run on the banks and a flight of capital from the country.  This might provide an indication that a country was preparing for an exit.  Event companies should consider whether capital controls would have an impact particularly with regard to moving freight across an international border.

 

The Timing

 

Managing an exit during normal trading would be impossible.  The ideal scenario would be to make the announcement on a Friday after trading preferably before a bank holiday.  This at least gives us a clue as to when it might happen.  Easter is a good bet.  Using this prediction it does at least give us some guide regarding the potential vulnerability of events particularly those that open on a Monday or a day after a bank holiday.

 

If there were no convenient bank holiday, the country could announce one which opens the prospect of the additional problem of an event finding itself trying to open on an unplanned bank holiday in the middle of its tenancy.

 

The Transition

 

The next working day, trading would begin in the new currency probably at 1:1 parity but with expectations of falls of between 30% and 50% in the new currency depending on the currency in question. 

 

On the bank holiday days cash points would be closed.  There would be no new currency in notes and coin form.  We have, however, moved a long way towards a cashless society and planners would rely on the fact that many transactions could take place electronically.  It would also be probable that the Euro in note and coin form would be allowed for small transactions at the new market rate much as it is accepted in Switzerland alongside the Swiss Franc. 

 

This raises some practical issues.  It is very likely that cash would quickly be in short supply.  This is more likely to be a nuisance rather than a serious problem and organising teams can easily mitigate this risk by ensuring that everyone has a healthy supply of Euros and perhaps an emergency fund held centrally.

 

The Reaction

 

Here we are in uncharted territory and one certainty is that this would create a great deal of uncertainty.  Exhibitors and visitors would be pushing the organiser or venue for information regarding the viability of the event or travel to it, and the practical issues such as the lack of currency in note or coin form.  Communicating with key stakeholders and visitors would be vital in regaining the initiative.

 

One of the chief concerns of exhibitors and visitors would be personal security.  There would almost certainly be significant civil unrest with colourful media images of riot and disorder in the country and the destination city particularly if it were a capital city.  This may well be exacerbated by high profile calls for industrial action and the resignation of the government.

 

Many of the businesses, exhibitors or visitors may anticipate financial difficulties or take a view that the venue would be unsafe or very poorly attended and opt to pull out.

 

Every event relies heavily on hourly paid workers for a range of tasks such as forklifting.  Faced with industrial and civil unrest, transport problems or a more emotive desire to remain with the family, many may stay away from work creating operational problems due to labour shortages.

 

The Legal Question

 

Some event companies are already opting for business transactions expressed in US dollars in anticipation of this kind of issue.  An event may well be faced with cancellation and this would raise the issue of cancellation insurance.  Some policies are written to expressly exclude cancellation due to variations in the rate of exchange, rate of interest or stability of any currency.  It is certainly worth checking the position with insurers.  More seriously could contracts agreed in Euros be settled in the new devalued currency? 

 

How to Prepare

 

The breakup of a monetary union is not without precedent, e.g. following the breakup of Czechoslovakia in 1993 but in most cases the political and economic contexts are not comparable so researching previous examples will not necessarily help.  The first step is to accept that it could happen and is at the higher end of the risk scale based on probability and potential consequence.

 

Whilst the context may be unprecedented the likely consequences in operational terms, such as disruption to infrastructure are not.  Companies with well-practiced major incident handling processes will find that they are well prepared because the following principles will still apply:

 

·         Monitor the risk and identify the tipping point when it becomes a major incident for the company

·         Respond quickly and simultaneously at strategic and operational level

·         Ensure well-timed and effective communication with key stakeholders

·         Monitor developments and cross-reference sources of information to sort fact from inaccurate speculation.

 

Event teams should look at simple practical issues such as an emergency fund of additional currency.  In addition, other key parties such as contractors or host venues should affirm that they have plans in place to cope with such an eventuality.  Setting up a hosting scheme for exhibitors and visitors at the airport with a help desk may help to allay the fears of those concerned about travel to the host country.

 

The Euro ‘crisis’ has run for over 2 years and we have become used to the high drama of political brinkmanship and summits where financial chaos is imminent and then narrowly avoided until the next peak in the crisis arises.  It is up to professional event companies to ignore the hype and objectively assess and prepare for this entirely foreseeable risk.

 

Notes

 

1.    Economist – August 2012 ‘Breaking up the euro area’

2.    Capital Economics – ‘Leaving the Euro: A practical guide’  Roger Bootle

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