In the unwanted event of apocalypse now in Europe

Charles Orton-Jones looks at ways of hedging against the worst possible scenario in crisis-torn European money markets


British exporters are terrified of a Europocalypse. Greece is on the brink of bankruptcy. Spain and Italy are not too far behind. Nobody, not even the governors of the European Central Bank, can predict what will happen. We might see a sovereign default or two. Banks may go bust. Nations may leave the euro. In one grim scenario, the euro itself becomes unstable, devaluing wildly.

Fear of the eurozone crisis is already having a measurable impact on British firms. A study of 1,000 small and medium-sized business by invoice finance specialist Bibby Financial Services reveals one in five firms is too concerned about the crisis to even think about doing business internationally. A third say the crisis is having a negative impact on their day-to-day performance.

British exports dipped 20 per cent from March to April this year, way above the normal seasonal change. So what can British exporters do to reduce exposure?

Currency hedging is attractive. Alastair Archbold, senior foreign exchange trader at Foremost Currency Group, points out it would already have paid dividends. “An exporter who expects an income of €250,000 in the first six months of this year could have fixed the rate in January at 1.20, allowing accurate budgeting for the year, and only lodged a small deposit in order to do so,” he says. “Due to the weakening euro, this strategy would have already saved the client £15,000.”

Fear of the eurozone crisis is already having a measurable impact on British firms

As the crisis unfolds the cost of hedging is increasing. Arnab Dutt, a director of Market Harborough-based polyurethane manufacturer Texane, warns that finding a good foreign exchange deal is not easy. “Presently the banks will offer you a plethora of complex hedging products as insurance. But these products will now have eye-watering premiums. It may be better to approach professional FX dealers instead,” says Mr Dutt.

“Either way in this environment, expect this insurance to be expensive.” He advises: “If the bank or FX broker fails to make you clearly understand how the product works and what are the potential downsides – leave.”

If the crisis is really bad, a client may go bust. This is why credit insurance is valuable. If a creditor can’t pay, the policy will cover the shortfall. The trick is to double-check you are getting the cover you need. Garbhan Shanks, partner at law firm Addleshaw Goddard, says: “Exporters should carefully consider the cover a policy delivers and the claims history of the insurers themselves. In the aftermath of the 2008 global financial meltdown, numerous insurance buyers inexplicably found themselves without confirmed cover at precisely the time when they needed it the most.”

Factoring provides similar cover, though in a different way. Invoices are passed on to a third party for immediate cash payment. The factoring firm chases the debt. Most have branches or affiliates across Europe, run by teams of multilingual export credit controllers, meaning they are well placed to enforce payment. The “non-recourse” variant of factoring means your firm is not liable even if the debt is not paid by the creditor.

Letters of credit provide the highest level of certainty. The buyer’s bank issues a letter guaranteeing payment. The letter will usually be sent via the Swift inter-bank financial messaging service. A version, known as a Bank Payment Obligation, was launched in 2010. This automates and speeds up the payment guarantee process.

Naturally, if the meltdown is severe enough, these measures may fall short. Philip Herbert, partner at law firm Hamlins, says that many contracts include a clause to cover unexpected chaos. “If the export agreement includes a force-majeure clause, there is the possibility that the buyer could seek to assert it is no longer bound by the contract terms.” In some storms, there is no safe haven.