--Banks plan for euro zone without Greece
--Contracts, forex trading systems and scenario planning are
top-of-mind
--Direct exposures scaled back, but large risks remain
unknown
By Christian Berthelsen, Matthias Rieker, Brett Philbin and Andrew R. Johnson
NEW YORK--U.S. banks and other financial-services companies
operating overseas are racing to retool systems and reallocate
assets to fit a radically altered euro-zone landscape that could
result from the potential exit of Greece and the reintroduction of
its former currency, the drachma.
Beyond working down exposures to Greek sovereign debt, the
efforts include scenario planning, reviewing contracts to determine
obligations in the event of Greece's exit and testing
foreign-exchange trading systems to ensure they are prepared to
trade a new currency.
Several bank officials said they began planning for this
scenario about nine months ago, when European solvency concerns
once again began mounting. Many analysts said they have elevated
expectations that Greece will leave the euro zone after national
elections Sunday, which serve as a proxy on whether the country
will continue down the austerity path prescribed by lenders.
Banks have been working to reduce direct and secondary exposure
to Greece and other shaky euro-zone nations for some time. The
large U.S. banks have trimmed those direct exposures--in terms of
loans, trading inventory, hedges and other positions--to less than
10% of banks' core capital, according to JMP Securities. Still,
significant unknowns remain about the possible direct and indirect
ramifications of a Greek exit.
"While data provided by the [major banks] would lead one to
conclude that EU exposures are manageable, we believe it would be
naive to think losses would be limited to these disclosed amounts,"
JMP said in a note. "We doubt the impacts of domino effects and
counter-party failures are captured in scenarios where banking or
economic systems melt down."
The banks are generally loathe to publicly discuss their
planning efforts, so some bank officials agreed to speak only in
general terms and on the condition their banks not be
identified.
Banks have likely started combing through their loan portfolio
to detect customers with exposure to Greece, and talk to their
largest borrowers about their worries, said Kathryn Dick, a
managing director with financial services consulting firm
Promontory Financial Group.
"We have seen scenarios like this," she said, noting the
precautions made on concerns about computers handling the year 2000
transition. "What banks did was to go through their portfolio and
look at those customers who were most vulnerable, and stress-test
the borrower."
In the past few weeks, Morgan Stanley (MS) executives and
operations personnel have been running planning tasks they call
table-top exercises, in preparation for a potential Greek exit, a
person familiar with the matter said. In those exercises, which are
similar to stress tests, the firm's contingency team has run
through its collateral obligations and exposure to Greece, and has
initiated systems testing, including currency redenomination and
conversion, in order to minimize the possible impact, these people
said.
Meanwhile, J.P. Morgan (JPM) has created a European "command
center" to plan for various scenarios, Chief Executive James Dimon
has said. The command center isn't actually a physical location but
rather a working group of managers drawn from risk, legal,
technology, rates, market infrastructure and others tasked with
addressing all implications for a Greek exit, according to a person
familiar with the planning.
Because a clear outcome of the grinding euro-zone crisis is hard
to pinpoint, many banks have been undertaking preparations for a
variety of different scenarios, including a quick Greek exit, a
prolonged withdrawal and none at all. In a recent note, Goldman
Sachs (GS) said its baseline outlook was for Greece to "muddle
through," in which the newly elected Greek government doesn't
affirmatively choose to exit the euro but also refuses to implement
the previously-agreed austerity program.
"This would likely put a stop to payments [from the country's
lenders], but would not constitute Greek exclusion from the euro
area if Greek banks maintain access to ECB facilities," Goldman
said.
A major consideration among banks is which country's laws govern
their contracts, as well as specifications on currency
denomination, acceptable forms of collateral and the definition of
terms such as default. At least two major banks are reviewing
whether their contracts could be enforced under English law, which
is more predictable and business-friendly; one of them is trying to
move contract renewals in Greece into the British jurisdiction,
said one global bank executive.
Still, the plan isn't foolproof; the Greek government could
decide not to honor such foreign contracts, the banker said. "Not
all of these things are as clear as they might seem," he added.
Many banks said they are working with their trading platforms to
prepare for the reintroduction of a separate Greek currency. One
bank is deciding whether to create a new currency code for Greece
or use the old one from the pre-euro drachma days. The bank is also
assuming that the time between the announcement of Greece's exit
and the implementation of a new currency could be as little as 20
days, and that Greece will likely impose foreign-exchange control
measures.
Another bank said it has set up dummy currencies in its trading
platform and executed trades to ensure it will work if and when
Greek adopts a stand-alone currency.
Western Union Co. (WU), which operates money-transfer networks
for consumers and businesses, has been fielding questions from
clients on Greece.
"The default at this point is to stick with euro-denominated
contracts and to simply be aware that there's a possibility that
this changes," said Karl Schamotta, senior market strategist for
business solutions at Western Union. "You have had companies that
have suggested double-invoicing at the point where you have two
prices available. We have not seen companies go too far down that
path just yet. It does not seem to be a primary area of concern at
this point."
Write to Christian Berthelsen at
christian.berthelsen@dowjones.com