Euro Contingency Planning: Why It Is Necessary Now, What It Should Cover And How We Can Help

Author:Ms Jacqui Hatfield, Georgia M. Quenby, Scott P.F. Cameron and Panos Katsambas
Profession:Reed Smith

If you have not yet carried out Euro Contingency Planning, we recommend that you do so now.

Why now? Despite the market perceiving the results of last Sunday's Greek elections as a positive development, uncertainty regarding the future of the euro, the eurozone and the EU itself remain in abundance. The various scenarios for the future of the euro, ranging from a single member state leaving the eurozone to the full deconstruction of the euro, make it imperative for companies to take action now. The companies that will weather the coming storm the best will inevitably be those who have proactively considered the various scenarios and implemented plans to mitigate the risks associated with each scenario.

How can we help? Reed Smith established a Eurozone Response Group in Q3 of 2011, offering a wealth of experience to clients seeking to understand the current situation in Europe and to work out defensive and other strategies in the uncertain environment in which we currently find ourselves. We can help by working with you to ensure that your exposure to risks such as a eurozone member exit, a deconstruction of the euro, a sovereign default or a banking crisis is assessed and mitigated to the extent possible.

What should your Euro Contingency Plan address? Set out below are the key risks which your Euro Contingency Plan should address.

Redenomination risk

Where payments, collateral, or security are denominated in euros under a contract, euro payment obligations may be redenominated into the new (and most probably heavily devalued) currency. This redenomination risk is most acute where a contract is governed by the laws of the member state leaving the euro (an "Exiting Member State"), the contract is performed in that Exiting Member State, and the euro is defined by reference to the currency of the member state. Redenomination risk should be considered when entering into any new contracts with companies located in eurozone countries, especially the southern European countries experiencing the most difficulties with sovereign debt issues.

Enforcement risk

If your contracts are governed by the laws of an Exiting Member State and/or security or collateral is in an Exiting Member State, even if you secure a judgment from a court that is entitled to require payment in euros under the applicable local law, a local court may decline to enforce the judgment of a foreign court on public policy grounds. We recommend England as a governing law and...

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