Direct Australian exposure to the more volatile Eurozone member countries is small, both in terms of funding by Australian financial institutions and Australian trading relationships with those countries. However, total Australian exposure to Eurozone and the indirect effect of the crisis means that Australia is not immune. Funding costs are on the rise, as the effect of volatility is felt in the international capital markets; capital and bank liquidity is being withdrawn from Australia as European investors and banks retreat to their home markets and Australia’s economy remains buoyant through the export of commodities to China and other growing Asian economies, growth which is directly influenced by any reduction in demand from Eurozone countries.
Against an backdrop of ongoing Eurozone volatility, companies are continuing to review their exposures in Europe, including the nature and extent of their Euro-related contracts, and are asking what measures they can put in place to protect their assets and limit cashflow threats.
A question that is often asked in this context is what impact a member state exiting the Eurozone would have on the payment obligations of counterparties located in that country and, in particular, whether these obligations would be redenominated from the Euro into the new national currency.
Core legal issues that would need to be considered include the law governing the contract; the courts that have jurisdiction over claims under the contract; where payment is to be made; where the goods or assets are located; and whether a supplier or lender can enforce its rights in that country. Much will depend on the particular circumstances and the specific drafting of the relevant contractual provisions. However, if arrangements are not governed by the law of the exiting country or are not subject to the jurisdiction of that country’s courts or the place of payment is outside the exiting member state, if the definition of ‘Euro’ is appropriately drafted, this should provide a degree of protection against redenomination. For borrowers based outside the Eurozone, if the need to redenominate occurs, a Euro-legacy currency may be a less obvious fall-back choice than it would be for a Eurozone borrower.
Even if the currency of the contract is not redenominated, a Eurozone exit may still give rise to other practical concerns. For example, if exchange controls are introduced restricting payments out of the country this could, depending on the circumstances, limit the ability of the counterparty to meet its payment obligations under the contract. In addition, enforcement against the counterparty would be likely to be complicated if its assets were located in the exiting member state.
As well as reviewing their exposure under existing contractual arrangements, businesses may wish to consider the terms on which they enter into new agreements or renew existing agreements, and whether any additional or revised provisions should be included to seek to limit the risks associated with a Eurozone exit.
Key questions that businesses relevant in identifying potential areas of exposure include:
- Are rights or obligations to be performed in Euros or in a member state where there is a risk of exit?
- Does a contracting party have a risk state as its main place of business or incorporation?
- Is a payment account or security account held in a risk state?
- If goods or services are involved, are they being supplied to or from a risk state?
- If bonds, notes or shares are denominated in Euros, are they issued by a risk state?
- Are contractual right guaranteed by an entity incorporated or with assets located in a risk state?
- Is security held over goods, commodities, real estate or other types of property located in a risk state?
- Do contracts have a place of payment in a risk state; a risk state governing law clause or submission to jurisdiction of courts of a risk state?
- Where contracts reference the Euro, how is it defined and, in particular, is a "currency from time to time" concept used?