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Managing the euro Back  
The issue is what should treasury managers do about diversifying risk given the greater than expected volatility - downside - of the euro. Finance asked Derek Keogh, a Corporate Treasury Manager in Anglo Irish Bank.
No-one predicted the euro would fall by as much as it has in the last few months. In your view, have businesses in Ireland begun to diversify currency risk now by business measures beyond treasury and currency management techniques? If so, what are they doing?

We have seen an increase in the number of companies acquiring operations overseas, partly to expand their operations but also to create a hedge for foreign currency exposures. We are aware of a number of companies actively researching selling to and sourcing from the Central & Eastern European bloc, with support from Irish government agencies, in an effort to spread currency risk. However, some of our customers have mentioned that the increased cost issues associated with selling into non-English speaking territories inhibit the companies moving away from the UK & US to a large extent.

Has the large decline in the euro against sterling and the dollar influenced the affordability of financial currency hedging techniques? Will it change pricing assumptions even if the euro recovers to dollar parity?

The volatility of the euro has not affected the pricing of differential-based treasury products, such as forward contracts etc. In the past, the relatively small size of the Irish Punt Money Markets led to wider spread costs between lending and borrowing rates, as well as buying and selling rates. It was difficult to hedge foreign exchange risks beyond 18 months unless the amount was in excess of IR?5m. The introduction of the euro has provided Irish banks with increased liquidity, which has reduced the cost of derivatives and long dated hedging for their customers, even taking the increased volatility of the euro into account. However, Irish Corporates continue to be reluctant to use derivatives, preferring to hedge using the forward market.

Even if the Euro recovers, has the attitude of treasury managers in Ireland towards the volatility of the Euro been altered for the long term (years rather than months)? Are corporate treasurers feeling badly burnt, and how long a period of recovery and lower volatility would it take for them to recover?

Due to the lack of debate before the introduction of the euro, many corporate treasurers, and bankers, felt that there would be increased stability in the foreign exchange markets, and that it would be a stronger currency than the Irish Punt. Many of our customers have indicated that they would be unlikely to hedge forward beyond their current financial year for all their exposures, as it may lead to competitive disadvantage, which indicates a nervousness of “being burnt again.” Few exporters would have taken full advantage of the weak euro over the last year for this reason. Few importers would have forward cover remaining to buy Sterling or US Dollars at pre-euro exchange rates, so there is a need to source from euro-based suppliers to relieve price pressures. The weakness of the euro has certainly had a major impact on the sourcing decisions of Irish importers. Treasurers with consistent hedging policies of covering a proportion of their known exposures will be satisfied that they have no significant opportunity losses over the last 6 months.

Has the euro’s fall changed the view of your bank and your treasury customers of what are going to be the main treasury techniques and policies over a 2-3 year horizon?

Not really. The arrival of the euro has resulted in many corporates having more time to focus of their Sterling & US Dollar currency risks. We continue to provide our customers with updates on the foreign exchange markets on a daily basis. We have the range of structured tailor made products, backed with our market views, to ensure that our customers are aware of all the strategies available to them. Interest rate hedging will be, as ever, an important part of the treasury policy of any corporate in the next 2-3 years given the recent increases in the cost of funds. We are offering structured deposit products to assist treasurers make the optimum use of their cash surpluses while not being locked-in should rates rise further.

Is anyone in Ireland banking on Britain joining the euro within five years? Should anyone?

I think many commentators expect Britain to join the euro during this decade. Regardless of how the euro performs over the coming 2-5 years, Irish corporates should plan for Britain joining the euro. While there is growing pessimism among the UK population that the euro should be positive for their economy, a vote in favour of joining cannot be ruled out. Interest rate differentials could easily narrow over the next 2 years if the European economy started to grow rapidly as a result of the competitiveness offered by a weak euro at present. However, it is unlikely that the UK could join at current exchange rate levels against the euro, so the performance of the euro over the next two to three years will be key to answering this question.

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