By Neil Ainger, Editor-in-chief, gtnews
The final day of the gtnews Forum for Global Corporate Treasury, sponsored by Bank of America Merrill Lynch (BofA Merrill), got underway on 25 May with presentations on the status of the European banking system, the internationalisation of the renminbi (RMB), and a world economic overview from the chief economist of BofA Merrill, Mickey Levy.
One of the first presentations of the second day at the Amstel Intercontinental Hotel in Amsterdam, the Netherlands, was from the managing director of the IBOS Association, Bob Lyddon, who told it to the audience of corporate treasurers straight when he detailed the large, unsustainable exposures that certain banks and countries have in Europe at the moment. In an informative but downbeat presentation, Lyddon showed how the Long-term Refinancing Operation (LTRO) carried out by the European Central Bank (ECB) is just postponing the inevitable reckoning that many institutions still have to face following the crash of 2008 and how treasurers should prepare for even tighter credit supply, which will be exacerbated by regulations such as the Basel III capital adequacy rules.
Lyddon also showed how the non-bailout mechanisms that are keeping the European banking system going, such as the European Investment Bank (EIB), the ECB itself via its LTROs and the Target 2 balances system are all kicking the can down the road, until the day when assets and liabilities need to be totalled up.
“For instance, the European Financial Stability Fund [EFSF] nominally has €750bn against it but can actually only lend €440bn due to an ‘over guarantee mechanism’ – would you as a treasurer do that?” asked Lyddon. “I doubt it. The ECB itself states it has €2.1 trillion of assets but actually that is the European central banks’ money, who own the ECB, not the other way around. The EIB has published capital of €232bn but only €12bn has actually been paid in by EU members.”
The point being that there is a lot of smoke and mirrors in the European banking system at the moment, from the banks themselves right up to the central banks and governments themselves, warned Lyddon, and treasurers are understandably being wary. As he said: “There are more liabilities than there are assets.”
The next session looked at the internationalisation of the renminbi (RMB). John Greenwood, chief economist at Invesco, outlined how the Chinese are slowly opening the door to the liberalisation of RMB and what these moves might mean for global trade and businesses in the future. “I must warn you though that in my opinion it will be years, if not decades, until China fully liberalises the RMB,” he said. “Some moves have been made but it’s at a glacial pace and financial markets need to be more liberalised first. There is also no way that RMB can challenge the US dollar as the world’s reserve currency yet.”
Hong Kong will naturally entrench its position as a centre for RMB trading and funding, said Greenwood, and the rising gross domestic product (GDP) and trade of China will continue to act as drivers for the rise of the renminbi but the third driver, government policy, is lagging way behind.
There are nine conditions needed to establish an international reserve currency said Greenwood in one of his slides, and only five are currently met by China:
- Unit of account.
- Medium of exchange.
- Store of value.
- Economic size.
- Creditor status.
The “problem areas” are a developed financial system; network effects, which equate to first mover advantage and take a long time to dissipate, meaning the US dollar will be pre-eminent for a long time yet; the lack of availability of RMB outside the domestic economy and full convertibility. The problem of trapped cash in China, therefore, and how to get it out will remain with treasurers for some time to come it seems.
World Economic View
The final plenary of the gtnews Forum for Global Corporate Treasury was given by Bank of America Merrill Lynch’s (BofA Merrill) chief economist , Mickey Levy, who provided a world economic view of the trends shaping the planet at the moment. He stressed that “the economic environment is the business environment”, and warned treasurers that “whatever baseline you are using at the moment, put a very wide band of uncertainty around it, including economic growth figures and predictions from governments. We are living in uncertain times and you need to be prepared for it.”
BofA Merill’s Levy’s main points were:
- The US economy is definitely improving but it’ll be slow growth and the country still has inherent problems with high unemployment in certain sections of society. Household debt as a percentage of disposable income is still above 100%, and the share of capital filtering down to lower levels of society is creating social unrest.
- China’s growth is slowing, which will impact global trade and significant trade imbalances still remain.
- European problems stem from countries living beyond their means for decades and decades.
- Greece is beyond saving. “The hurdles facing it are too large to overcome,” he said. “It is insolvent and policymakers rescue efforts are just throwing good money after bad.” European policymakers should also stop being so reactive and become more proactive, he added.
- Italy, Portugal and Spain are not the same as Greece, and each country should be treated differently according to its particular challenges and problems.
- The current recession in Europe is only aggravating the situation and makes needed reforms to the labour market, competitiveness and so forth harder to achieve. “The government structure in Europe doesn’t help either,” he added, “as it’s designed to muddle through and isn’t up to meeting challenges during difficult times.” This leads to a credibility gap for policymakers that needs to be resolved.
“All these points will impact business and will therefore impact you,” stressed Levy, before going on to reiterate that these are the reasons why treasurers need to put a big band of uncertainty around their assumptions and baselines.
The chair of the gtnews Forum, Peter van Rood, corporate director of treasury at AkzoNobel, then thanked everyone for coming to the two day event, including the Awards on the evening of 24 May, and for participating fully in the discussions. “I opened the Forum by emphasising its networking, educational and knowledge sharing capabilities, particularly in regard to the topical issue of systemic risk right now and feel that all of these key points have been addressed here in Amsterdam. Thank you for coming and I hope you have enjoyed meeting your peers and colleagues.”
“The topics at the Forum were very relevant to what’s happening in the treasury world right now and the calibre of the speakers is very high with knowledgeable hosts, treasurers, economists and other participants,” said Alan Chitty, treasury controller at SABMiller. “It’s a combination that makes for a good conference.”
Bart Hendriks, group treasurer at Delek Europe, which runs the retail store operation for major oil companies in certain European countries, was impressed with one of the first workshops at the gtnews Forum 2012 at 10.30am on 24 May, entitled ‘Is Your Company Ready for SEPA’, which he called an “eye opener”. “We’ve got 15,000 paper-based business-to-business (B2B) mandates that we will need to change. That will be a big SEPA challenge for us.”
Commenting on the same session, Mark Herman, cash manager at Eastman, based in the Netherlands, said: “SEPA is a technology challenge for me as I need to move towards the XML ISO 20022 messaging standard from an old format. Our IT department is just now looking at this now,” he added. “This represents the firing gun for our SEPA project.”
According to Mustafa Kilic, head of regional treasury and group risk and insurance manager at Indesit, the topical opening plenary of the gtnews Forum, given by Conception Alonso at the ECB, was what interested him most as he is responsible for risk in his corporation, and is understandably convinced that economic and financial risk is what is worrying most treasurers at the moment. “My only concern was that the speech referenced an historical model at points, which may not be relevant for the next problem and challenges ahead,” he said. “More generally when it comes to eurozone crisis, as opposed to the presentation, I worry that there is no unified fiscal policy across the eurozone and maintaining the single currency without this could prove to be impossible.”
Moving on to the second day, Daniela Sibille, director of corporate treasury for Europe, Middle East and Africa (EMEA) at SunGard, said she loved the session on the internationalisation of the RMB. “There was lots of detail and the outlook on the future development of the RMB was particularly interesting, as John Greenwood from Invesco emphasised it will take years for the renminbi to become a reserve currency. He is not as bullish as many others you hear on this topic, which is an interesting corrective.”
“It’s been a really really good event with lots of informative and positive contributions,” commented Tone Merte Hansen, senior corporate treasurer at Telenor, before heading out into the sunshine in Amsterdam to enjoy the bright blue skies and beautiful canals of the Dutch city before heading back to her corporation to ponder on the lessons learnt and the experiences shared at the gtnews Forum.
“What I really liked about the Forum was the unique, personal touch that it has,” commented Peter Van Rood, corporate director of treasury at AkzoNobel. “It is not too big, so allows for in-depth discussions in an informal, knowledgeable environment. The content rich programme and ability to talk with fellow treasurers in a relaxed environment is what makes it special. It is precisely this informality and active discussion element that we were aiming to achieve when developing the programme.”