Given current uncertainty it is important for investment managers and financial institutions to anticipate the impact of a eurozone event, such as the exit of a country from the euro.
European financial markets have experienced volatility based on concerns regarding rising government debt levels, credit rating downgrades and possible defaults on or restructuring of government debt of various countries, most notably Greece and now possibly Spain where Spanish Bond yields are touching a high watermark of 7%. This turmoil has fed speculation that one or more EU Member States in the euro might choose or be forced to return to a national currency, also raising questions about whether the euro can survive as a single currency following a departure of one or more countries from the currency mechanism.
It potentially affects shareholder behaviour (increase in redemptions) and the valuation of underlying euro denominated assets. In particular where there is an accounting period end: interim or final discussions may need to take place with the Fund’s auditors about contingency provisioning.
Managing this risk includes short and medium term steps to reduce risk or exposure, as well as the action needed on the occurrence of an actual eurozone exit. They should now implement financial strategies to offset potential downside to the underlying portfolio and operational steps needed in response to such an outcome.
The above problems coupled with the implementation of new regulatory initiatives e.g. bank capital adequacy rules in response to the financial crisis of 2007-8 may, however, create opportunities for buyers and sellers of financial enterprises.
Tony Stitt Associates would be happy to advise on these issues including what managers of private funds should do to ensure they can react to a eurozone crisis with maximum flexibility while complying with applicable regulatory requirements.