The Eurozone crisis continues to dominate the headlines. The bailouts of Greece, Ireland and Portugal, together with the downgrade to the credit rating of certain Eurozone countries, have led to growing speculation that one or more member states may leave the Euro. JAMES BRYCE, of international law firm Eversheds, looks at the key risks the crisis poses to North East businesses, and the practical steps companies can take to protect their position
The North East and international trade
Despite the economic downturn, the North East continues to do a significant amount of international trade. The most recent North East Business Barometer indicated 30.2% of the region’s businesses export overseas. As such, a substantial proportion of the region’s businesses are directly exposed to the eurozone crisis. If your company trades in Europe, you should review the risks and prepare contingency plans as early as possible.
If your business trades in an “at risk” eurozone country, your first step should be to clarify the contract currency in which you will be paid. Ideally, this will be in sterling, in which case the payment arrangements should not change. However if the contract provides for payment in euros, then, post any exit, there is scope for a dispute as to whether payments should be made in (a) in euros or (b) the replacement currency of the country concerned. In practice, this will depend on the precise wording of the contract. This is a significant issue. Economists predict that the value of replacement sovereign currencies may fall by up to 50%. Accordingly, if you are forced to receive future payments in, for example, drachma or pesetas, your return will be significantly lower than the amount you originally budgeted.
Any revision to any contract will require agreement by your counterparty. As such, changes will be a matter for negotiation. Nonetheless, ideally you should consider tightening up the currency definitions and also providing that the exit of any member state from the euro will not affect pricing and payment obligations under the contract. It may also be wise to consider negotiating in clauses specifying a mechanism for converting existing obligations into a replacement currency if that is a more realistic option.
A eurozone break-up would paralyse the exiting country’s economy. Using the commonly quoted example of Greece, economists at UBS estimate that a Greek exit could reduce Greek GDP by 40-50%. If your business trades with perceived “at risk” eurozone countries, the implications of an exit of any such country could significantly affect local demand, having a consequential and detrimental effect on your customers ability to continue to trade profitably and meet their obligations to you.
Credit exposure to any one customer or region may become an increasingly significant risk factor for exporting businesses. However, this can be mitigated by seeking additional collateral such as an effective parent company guarantee; the use of letters of credit or other guaranteed payment mechanisms, and by ensuring that title to your goods does not pass until payment obligations have been met in full.
Supply chain risks
Equally, if your business is reliant on importing goods from countries based in the eurozone, the crisis may pose a supply chain risk to you. Your European suppliers may not be able to purchase their own raw materials or trade profitably given the potential for collapse in local demand. Therefore, companies might consider avoiding or managing pre-payments to suppliers more closely and also keeping in very regular contact. In addition, companies might consider sourcing alternative supplies to enable business continuity in the event of supplier default.
If you employ workers in a member state that ultimately leaves the eurozone, those employees may demand to be paid in euros rather than the local currency in order to maintain their original income. Clearly this could have an impact on the costs of those employees, and consequently on your local overheads. Conversely, refusing to meet their demands risks losing key employees which could be disruptive. It is worthwhile reviewing the implications of a potential change in currency on your local staff and considering the possibility of employing temporary staff to cover any immediate issues.
If your company trades in Europe, the impact of a eurozone breakup on your business could be both acute and wide ranging. This is not a "wait and see" issue, and there are practical steps that you can take to minimise the damage should the worst happen. It is therefore essential that establish where your business is vulnerable and make appropriate contingency plans now. Nonetheless, this article can not and does not purport to be legal advice. As circumstances will vary from case to case, one should consider each situation on its merits and take appropriate professional advice.
Eversheds is the only full service international law firm in the North East. It is one of the largest full service law firms in the world with 34 offices in 20 different European jurisdictions and many more worldwide. Eversheds is ideally placed to assist companies seeking to manage their risk when trading internationally. If you require any further information please contact Charles Reynard (charlesreynard@ eversheds.com) or James Bryce (james firstname.lastname@example.org) or your usual Eversheds contact.
James Bryce is principal associate at Eversheds