The Euro, Operations, and Currency Changes

Back in 2012, there was real concern that Greece might leave the euro. Sound familiar? Given the current climate in Eurozone countries, I thought it would be worth revisiting a blog post that looked at the potential operational impact to investment managers who deal with foreign exchange. The following is a revised excerpt from the original blog post dated November 14, 2012:

It should go without saying that there is no way to be certain how to handle an event when the event in question is not even certain. However, by employing a sort of "thought exercise," it is possible to explore what might happen and then determine whether or not systems and procedures are in place to handle such an event. For this exercise, I will use a scenario that assumes Greece has decided to leave the euro.

Before anything else can happen, Greece must first create a new currency; let's call it the "new drachma." (In fact, the data purveyor, Bloomberg, had gone so far as to test a new currency code in their systems, "XGD," to represent a post-euro drachma.[1] For convenience, I will use that code here.) Once the currency has been created, a market must then be established for it in order to determine how much others are willing to pay for the currency, that is, to establish its exchange rates. It is likely that the new drachma, XGD, would be tied to the euro for a period of time before letting it float. It has been estimated that it would take a minimum of four weeks for a new currency to be established.[2] From an operational perspective, once the currency is available and exchange rates established, it could then be added to a portfolio accounting system as any new currency would, with data support likely coming from a third party pricing vendor.

Following the path of this thought exercise, with XGD established and exchange rate data flowing, the remaining question is how individual securities themselves would transition from the euro to the new drachma. A logical approach might be a wholesale retiring of the affected EUR securities, then converting them to new securities priced in XGD. From a bourse's perspective, such as the Athens Exchange, this becomes an issue of scale – how long would it take to establish new security identifiers, conversion dates and ratios, etc. From a portfolio accounting perspective, the logistics would be the same as with any other security conversion.

Admittedly this has been a simplified look at logistics, but what does this exercise show? From an operations perspective, the biggest issue likely to be encountered should a country leave the euro would be one of data – the processes to handle security changes is already be in place and familiar.

[1] http://blogs.wsj.com/eurocrisis/2012/06/01/bloomberg-tests-post-euro-greek-drachma-code/

[2] http://www.aljazeera.com/indepth/opinion/2012/05/2012510154748106118.html