Since FiREapps published The Perfect Currency Storm whitepaper last fall, the situation in the eurozone hasn’t improved, it just fell out of the headlines.
Now it’s back.
And once again, many multinational corporations have been surprised by the currency storm’s impact. Like during hurricane season, when everyone’s trying to figure out how to deal with aftermath of one storm (Venezuela’s devaluation of the bolivar), another comes barreling down (euro slide prompted by the crisis in Cyprus).
Here I’ll explain five things you need to know about what’s going on in Cyprus, how it intensifies currency volatility in the eurozone and beyond, and what you can do about it.
1. The euro storm still rages, and Cyprus is emblematic of deeper issues in the EU. On March 25, the European Union, International Monetary Fund, European Central Bank, and Cypriot leaders agreed on a €10 billion bailout on the condition that Cyprus would close Cyprus Popular Bank and restructure the Bank of Cyprus. Deposits of up to €100,000 are insured, but those with larger sums in the banks may end up losing some of their deposits – about 40 percent, according to estimates by Cypriot officials.
The banking crisis in Cyprus has brought to the fore the deep fracture in the eurozone. Because of the combination of deep tensions between creditor and debtor nations and systemic instability that remains in Italy and Spain (which means that more bailouts could be on the table), the euro could still break up. The odds are low that it will happen in 2013, but relatively high that some country(ies) will exit or the monetary union will breakup altogether in the next three to five years.
2. Euro volatility is back. No matter how the situation in Cyprus gets resolved, it has and will continue to create tremendous euro volatility. On March 28, the euro closed at €1.28 against the dollar, down 6.4 percent from its six-month high, set on February 4. Deutsche Bank has forecasted that the euro will fall to 1.20, and I’ve seen predications that it will fall as low as 1.10. All this volatility over a banking crisis in the smallest economy in the eurozone (at $25 billion, Cyprus’s annual GDP is 90 times smaller than Italy’s and 60 times smaller than Spain’s). Imagine what would happen to the euro if still-present systemic instability in Spain and Italy come to the fore again.
3. Euro volatility could set off earnings warnings. Because the euro is the biggest currency exposure for most U.S.-based multinationals, if the euro hits 1.25, it will set off earnings warnings this next earnings season. The warning would be justified; when the euro falls relative to the U.S. dollar, it can have significant impact on multinationals doing any kind of business in euros – significantly negative impact if not managed appropriately (dollar up, revenue down).
4. Managing currency exposure without an institutionalized system is like whack-a-mole – while you were trying to figure out Venezuela, here comes Europe again. The difficulty in managing currency risk is that risk arises from so many different currencies (most multinationals have hundreds of currency pairs). While companies, for example, were figuring out what to do about devaluation in Venezuela and capital controls there, the euro storm was resurging, and now corporates have turned their attention to Europe. Tomorrow, it will be another currency in another region.
In addition, volatility is created by other countries responding to the euro slide. Japan, for example, has worked very hard over the last four months to depreciate the yen; the euro’s fall makes that job more difficult, and Japan’s leaders will have to be even more aggressive to continue devaluation. In Switzerland, where policymakers have intervened in order to keep the country from becoming a safe haven for investors fleeing the euro, the central bank will also have to get more aggressive to maintain the relative value of the Swiss franc. Winning whack-a-mole is impossible for multinationals with hundreds of currency pairs in a world moving as fast as ours does.
5. There is a solution. To avoid surprises, corporate treasurers need to watch the weather in every country they do business in. You can do that by proactively managing your currency risk across all of your currency pairs. Fortunately, there is a cloud-based technology solution that facilitates management of currency risk across your entire portfolio of currencies, and gives real-time, actionable information about where your exposures are – so you can manage the impact from Cyprus and all of the other currency storms to come at the push of a button.