Corporate treasurers wake up to depositor tax risk post-Cyprus
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Corporate treasurers wake up to depositor tax risk post-Cyprus

As the dust begins to settle from the Cyprus bail-in, corporate treasurers are asking whether a similar deposit tax could be implemented elsewhere in Europe, and mulling their options as perceived counterparty risk rises in the periphery.

Jeroen Dijsselbloem, Eurogroup president

It has been some time since treasurers believed unreservedly in the security of their bank deposits. However, the reality of the Cyprus deposit tax, which is being imposed to secure a bailout from the EU and the IMF, has underlined the importance of monitoring and managing bank counterparty risk, especially since Jeroen Dijsselbloem, Dutch finance minister and Eurogroup president, initially suggested Cyprus could be seen as a template for future restructurings in the eurozone. While the Cyprus deposit tax caught many by surprise, the move was not entirely unexpected, says Marianna Polykrati, group treasurer of Vivartia.

“It was actually something that we were expecting to happen last year in Greece,” she says. “In the last month there were a lot of rumours that something like this would happen in Cyprus.”

As one of Greece’s leading food companies, Vivartia has been keenly focused on the eurozone crisis and, in particular, the possibility that Greece would drop out of the euro.

In 2012, the company put in place an extensive range of contingency measures which included finding alternative sources for paying employees in case of a bank run to running back-up electricity generators in case of power failures.

While these measures were not called upon during the recent developments in Cyprus, Polykrati feels that the company was well positioned to cope with the closure of the banks in Cyprus and the subsequent deposit levy.

The company sold 90% of its participation in a Cypriot dairy unit in December 2011 after concerns about the possibility of a crisis. As a result, Vivartia no longer holds any cash in Cyprus.

Meanwhile, cash holdings are diversified between a number of different bank accounts within Greece to minimize counterparty risk – and if there was a scale-up of the crisis, the company was prepared to move cash into its London accounts if necessary.

For some companies, the recent events in Cyprus might prompt a review of counterparty risk measures – but for Vivartia, the latest developments will not substantially change the way the company addresses this area.

“We will stick to the same plan we already have,” says Polykrati. “Cyprus has taught us the lesson that there are no sacred grounds anymore and that anything can happen – but Cyprus had a lot of cash deposits, which meant that the deposit tax had a substantial impact.”

Marianna Polykrati, group treasurer of Vivartia

In Greece, Polykrati says she does not expect a similar deposit tax anytime soon – firstly because Greece does not have the same level of bank deposits after the severe austerity measures that have been implemented in the past two years, and secondly because the Greek banking system is in the process of being recapitalized. Nevertheless, she believes that what happened in Cyprus could happen in another country, such as Spain or Portugal. In fact, she says: “The risk could happen anywhere there is available cash – probably with the exception of England, which has a very strong central bank, or in Germany.”

Indeed, attention this week has turned to Slovenia after the OECD’s warning that the country could face a “severe banking crisis” and that the banking sector’s bad debts might be greater than the previous estimate of €7 billion.

Inevitably there has been speculation that a Cyprus-style deposit levy could follow.

Alenka Bratusek, Slovenia’s prime minister, has denied that the country will need a bailout, while José Barroso, president of the European Commission, has said the situation in Slovenia is “completely different” to that in Cyprus, and that comparisons between the two are “abusive”.

Whether or not other bail-ins are likely to follow elsewhere in Europe, concerns about future deposit levies might prompt treasurers to reconsider how they use bank deposits.

Polykrati points out that Vivartia does not have a large amount of surplus cash, but suggests that “companies that have a lot of excess cash really should be thinking about counterparty risk of the banks right now”.

The events in Cyprus could certainly prompt companies to look more closely at their bank deposits.

Jennifer Gillespie, head of money markets at Legal & General Investment Management, says she is advising clients that efficient cash management is more important than ever.

“If companies leave more cash than is guaranteed in a particular account – for example, if they have more than £85,000 in a UK bank account – they have to understand the risk that anything over that sum could be hit.”

One option is to spread cash between different accounts so that no account holds cash over the guaranteed level – a strategy that many companies have adopted in recent years.

Another is to move cash into a different investment vehicle. Aside from bank deposits, corporate treasurers have traditionally favoured AAA-rated money market funds as a destination for short-term surplus cash – which, unlike bank deposits, would not be subject to a levy such as the one imposed in Cyprus.

However, money market funds are facing their own difficulties in the form of regulatory uncertainties.

Since 2008, when the US-based Reserve Primary Fund broke the buck – in other words, the value of its shares dropped below $1 – pressure has been growing on both sides of the Atlantic for money market funds to move from a constant net asset value (CNAV) model to a variable NAV model.

Rather than keeping the share price at $1 (or £1 or €1), VNAV funds allow the price of a share to fluctuate. Regulators believe a VNAV model would be less likely to result in a run on money market funds – a notion that is rejected by proponents of CNAV funds.

However, the prospect of an enforced move to VNAV is looking likely, and in February the European Systemic Risk Board called for all money market funds to switch to the VNAV model.

In light of these uncertainties, a sudden shift from bank deposits into money market funds appears unlikely. However, in the wake of the Cyprus bail-in, treasurers will be looking more closely than ever at their bank deposits and asking whether any further action is needed to keep their cash secure.

Warren Buffett once said the first rule of investment is “never lose money” – but in a climate where large corporate deposits can be raided with little or no warning, this might be easier said than done.

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