Show Report: ACT Conference 2013 - Day 1 Dominated by SEPA and Eurozone Crisis
The UK corporate community and its citizens seem to be increasingly sceptical as to whether the country’s membership of the European Union (EU) is producing real benefits, or simply increasing bureaucracy, regulation and cost. British Prime Minister David Cameron has had to respond to the prevailing mood, and the rise of the UK Independence Party (UKIP) which campaigns for an EU exit, by promising a referendum in 2017 on the UK’s continued membership if he is returned to office in two years’ time.
It was therefore an interesting choice for the Association of Corporate Treasurers (ACT) to invite a member of the European Central Bank (ECB) as its opening keynote speaker for its annual conference in Liverpool, UK, this year. Ignazio Angeloni, the ECB’s director general for financial stability, remarked that even the possibility of the UK turning its back on Europe reflects the on-going crisis of international integration over the five years since the 2008 financial crisis. This was not a new phenomenon as progress towards greater integration had stalled before in times of economic stress, such as the end of the Gold Standard in the Twenties and the Great Depression of the Thirties.
The ECB was an institution at the forefront of greater integration, said Angeloni, but “institutions tend to retreat into localisation when economic times are hard”. The EU was currently in the vanguard of a three-speed global economy, in which emerging and developing regions still enjoyed good annual gross domestic product (GDP) growth, typically 5% or 6%, the US was in recovery mode but picking up speed, while much of the eurozone was still mired either in sluggish growth or recession.
However, while the eurozone continues to face major challenges in the years ahead in reducing unemployment, which has spiralled to frightening levels in EU member countries such as Spain where over half of its youth are unemployed, Angeloni said that the ECB had achieved much since last summer in reducing the region’s financial stresses. This had begun with ECB chief Mario Draghi’s speech last July in which he pledged that the bank would do “whatever it takes” to support the single European currency, the euro, and its subsequent commitment to actively intervene via the Outright Monetary Transaction (OMT) programme. Markets have proved resilient and tensions had eased in the months since, aided by the commitment towards a single banking union, which coincidentally has spooked the British.
The ECB representative ended his ACT conference presentation by stressing that the UK had gained both politically and economically from its membership of the EU, however, and that these gains “should be preserved”. A show of hands from delegates as to whether the gap between the UK and the rest of Europe was widening showed opinion evenly divided among the audience of treasurers and consultants.
Cyprus and the Continued Eurozone Crisis: Tricky Questions
A convincing opening presentation from Angeloni was partly undermined by two very strategic questions from the audience floor. Referring to the hindsight theme linking the conference sessions on day one, he was asked whether the recent bailout of Cyprus could have been better handled. On this controversial issue the ECB is still “in purdah” at the moment, he said, so he was unable to comment.
Another delegate asked whether plans by 11 EU member states to push ahead with a Financial Transactions Tax (FTT) tallied with a wish for greater integration, especially as the UK and Sweden are opposing it so vehemently. This question was also directed at the next speaker, Janet Henry, chief European economist for HSBC and the bank’s self-described “chief crystal ball-gazer”. Not surprisingly, she was critical of the proposed ‘Tobin-style’ tax which, if introduced, she said would be “devastating for financial liquidity in a number of [financial] instruments and damaging to the general economic backdrop across Europe”.
However, Henry said that it was hard to see how the FTT could be imposed in its current form, given that Italy was now asking serious questions on how the tax would be applied to government bonds.
She agreed that the ECB could provide a useful backstop in restoring stability to the eurozone, but could not resolve the region’s problems alone “without politicians delivering on its behalf”. The debt crisis was not yet over as there were still unresolved issues between debtors and creditors that the ECB backstop was unable to address.
Henry added that the crisis in Cyprus had been mishandled. The bailout was the fifth in the eurozone after Greece, Ireland, Portugal and Spain, but the first to ‘bail-in’ uninsured bank deposit holders, effectively taking ordinary citizens savings, as well as senior bank bondholders. More ominously, the island had been forced to impose credit controls. Not surprisingly, Cypriots believed that the cost of remaining in the euro was greater than anyone imagined. Support for continued membership had fallen to 46%, reigniting investors’ fears that the eurozone might be about to lose a member.
There was now a risk that contagion could return if deposit holders in other countries feared that their governments would have to swallow similar medicine in return for a bailout. Ireland, Malta and Luxembourg are other small countries with disproportionately large banking systems, although investor concerns currently centred on Slovenia as the next epicentre of the crisis. There was also the possibility that an unanticipated political development, or overwhelming public resistance in a country – such as Greece – attempting to impose austerity measures could trigger the next chapter of volatility.
Fortunately, Henry was also able to give some recent examples of better news in the eurozone, such as the extension on the maturity dates on a number of loans and the granting of more time to large stricken countries, such as Spain, to meet its deficit reduction targets. Also encouraging was the ability of countries such as Ireland to regain access to the bond markets and begin to purge its debt.
A further hopeful sign was that global central banks showed no sign of tightening policy in the near term, which would help the exports of European companies whose wage pressures are very restrained. The ECB expects a eurozone inflation rate of just 1.3% in 2014 and even that low figure could be reduced in 2015. “Any growth in Europe over the next couple of years will be export-led,” said Henry. “While the strong euro is not helpful, global demand is the main factor.”
SEPA Case Study From BAT Treasury
With the introduction of the single euro payments area (SEPA) now only nine months away, it was not surprising that a Bank of America Merrill Lynch (BofA Merrill)-led session at the 2013 ACT conference attracted a full house as the compliance deadline nears.
A SEPA preparations case study was presented by Tatiana Nikitina, cash and banking analyst for British American Tobacco (BAT). The world’s second largest tobacco group by market share, BAT has 200 brands in 180 markets worldwide such as Lucky Strike, Kent, Dunhill and Pall Mall.
BAT’s treasury is centralised in London and the group uses four regional shared service centres (SSCs) and a dealing room in London. End of day zero balancing is also carried out in London and BAT has a total of 22 main core banks.
Nikitina said that the group first turned its attention to SEPA last July, initially regarding preparation as a straightforward project for the 16 eurozone countries in which it operates. Very quickly however, the scope was extended to include 12 non-eurozone countries, new eurozone members Latvia and Lithuania, and also Réunion island. The project subsequently got underway last November with the target of achieving full SEPA compliance for BAT by the end of September 2013 – well ahead of the 1 February 2014 migration end date.
The project has encountered a number of challenges along the way. For example, BAT outsources its payroll operations in 15 out of 17 eurozone countries and discovered that many agencies and software providers are not yet ready for SEPA themselves. Nikitina had a number of recommendations for other companies now undertaking a SEPA compliance project:
BAT had been rewarded with an error rate of only 2.31% during the conversion process – much better than expected – the highest error rates experienced in Cyprus, the Czech Republic, Estonia, Finland, Malta, Slovenia and Sweden.
Paul Taylor, head of regional sales, GTS Europe, the Middle East and Africa (EMEA) at BofA Merrill, who reported an “amazing acceleration of interest” in SEPA from the bank’s clients in recent months, also had three key observations on SEPA projects:
If all this appears daunting – and a separate Q&A session at the conference reveals that many companies report conflicting messages from their banks on what they need to do to achieve SEPA compliance – there is hope that the effort and expense will ultimately prove worthwhile. One delegate confirmed that Finnish corporates, which completed their SEPA credit transfer (SCT) compliance back in 2011, are now “reaping real benefits”.