Cyprus capital controls besiege corporate treasurers
The taboo-breaking imposition of capital controls in Cyprus confirms the broad array of new challenges corporate treasurers face. Euromoney discusses euro contingency plans with key bankers amid fears of corporate deposit outflows.
The recent developments in Cyprus have served as an abrupt reminder that the eurozone sovereign debt crisis could cast a shadow over global markets for years to come. The events taking place on the island during the past few weeks have been nothing if not extraordinary. Having initially proposed taxing all deposits to fulfil the conditions of its €10 billion bailout, the Cyprus government has now settled on taxing deposits over €100,000 by converting a percentage – which could be as much as 60% – into bank shares.
While those closely monitoring the eurozone crisis have had Cyprus on the radar for some time, few could have predicted that the conditions of a bailout would include a deposit tax.
Media attention has largely focused on the dramatic decision to tax retail deposits – but the levy on deposits is expected to impact balances held by corporations, as well as those of individual savers.
For corporate treasurers in Cyprus and in Europe, the latest instalment of the eurozone crisis has therefore raised a number of questions and concerns.
Many of the treasurers of multinational companies with operations in Cyprus will have minimized their deposits within the country. The practice of sweeping cash into treasury centres has been used by corporations for years, and many have stepped up this practice during the past 12 months.
In February 2012, Andrew Witty, chief executive of GlaxoSmithKline, publicly stated that the company no longer leaves any cash in most European countries, instead choosing to sweep cash to UK banks on a daily basis.
Many other companies have similar procedures in place – and will therefore have reduced the impact of the deposit tax on their corporate cash.
However, no company operating in Cyprus will have been immune from the events of the past two weeks. With banks closed for a two-week period while the terms of the bailout were being agreed, payments have been disrupted, including payroll, benefits and supplier payments.
As well as the disruption to domestic payments, companies due to make payments into Cyprus have faced the dilemma of whether to send money into the country without knowing what will happen to it.
Hemant Gada, head of channel and enterprise services EMEA at Citi Transaction Services, explains that although the bank does not have a physical presence in Cyprus, it does make payments into the country on behalf of its clients.
He says that during the first 10 days of the crisis, while the Cypriot banks were closed, corporate clients were focused on trying to obtain information and on what was going to happen once the banking system opened again.
“The other impact was that clients still needed to make payments into Cyprus during that period – taxes were due, and salary and benefit payments needed to be made,” says Gada.
“Citi had to work with its clients to hold their payments on client requests or seek confirmation that the payments should be made.”
Likewise, for incoming payments from Cyprus, the bank had to seek additional confirmation that all new regulations were followed by Cypriot banks before crediting customers’ accounts.
Beyond the immediate disruptions experienced within Cyprus, the longer-term effects of the Cyprus situation on corporate cash management behaviour remain to be seen.
While the small size of Cyprus means the impact of the tax is relatively contained, a precedent has been set and companies will be concerned that similar conditions will be imposed in future bailouts within Europe.
Companies continue to hold high levels of cash that have been stockpiled during the past five years, most commonly in bank deposits – but it now appears their cash might be at risk of future levies or haircuts.
Michiel Ranke, head of global product development i-LIM and FX at RBS
Nevertheless, Michiel Ranke, head of global product development i-LIM and FX at RBS, does not believe there will be a flurry of companies moving their cash out of bank deposits after the events in Cyprus. He says this latest development rather confirms the importance of the actions that corporate treasurers have already taken during the past couple of years.
“This is a wake-up call and is prompting companies to think carefully about their counterparty risk – but corporates have moved away from the idea of a global bank and have been avoiding putting all of their eggs in one basket for some time,” he says.
“They have already taken actions such as moving their cash into alternative vehicles or countries in line with their investment policies.”
For the many companies that have developed euro contingency plans during the past 12 months, the Cyprus crisis underlines why such measures continue to be necessary.
Carole Berndt, head of global transaction services, EMEA at Bank of America Merrill Lynch, outlines six steps that the bank recommends for treasurers in the event of a change in circumstances in the eurozone:
Hold and maintain a complete list of your euro bank accounts. Rationalize these where possible;
Know your account balances as well as all payments and receipts due;
Sweep funds often, and concentrate to your financial centre wherever possible;
Develop scenarios including business impact and possible mitigations. For example, the redirection of crucial payments through alternative euro accounts;
Plan for or establish a command centre to enable rapid decision-making as events unfold;
Ensure your banking providers have current contact details for your organization, including outside-of-business-hours information.