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TREASURY – Something to look forward to: a great new euro-stick to beat your bank with.

Is there really anything new to be said about Emu? Corporate treasurers certainly hope so as they await more positive assurances from the banks that, from 1999, pan-European cash management will provide all the cost savings and efficiencies in practice, that the euro offers in theory.

By itself, the advent of the single currency solves none of the historical problems of slow transmission and unwieldy pooling arrangements that continental European and UK corporates have had to suffer, but it should be a catalyst for change. Greater transparency, one of the few universally accepted arguments for the single currency, applies particularly to these services and it will expose the banks that do not measure up to the best in the class. Is it too cynical to suggest that their vested interest in the status quo is resulting in some foot-dragging?

In Britain, banks might have been forgiven for their lack of preparation by comparison with their continental competitors, at least until recently. This resulted from Britain’s ambivalent attitude towards Emu. But the Chancellor’s October 1997 statement, while not removing uncertainty about eventual membership, at least put a much needed impetus behind Britain’s preparations. And some think it went further and gave a strong signal that Britain would join in the medium term.

Treasurers are looking for two fundamental improvements: Euro-wide pooling of cash balances; and low-cost, same-day, cross-border payments. Over half the respondents in a recent Price Waterhouse survey said that the potential savings on cash transmission costs, and the lower interest charge that should result from improved pooling and lower or eliminated national float balances, were highly significant. And so some of the questions the treasurer is asking his bank are: will you make it easy for me to make cross-border payments in either existing currencies or euros, depending what my trading partner wants? Will I be able to make net settlements across the Continent in euros rather than a pot-pourri of national currencies?

True pooling of cash balances means the ability to offset euro credit balances in one country against euro debit balances in another, thereby saving multiple transfers from different accounts into a central pool. At present, this isn’t even possible within some EU countries, let alone across borders. From 1 January 1999, it will be possible to make payments across borders at low cost and on the same day if they are at the wholesale, interbank level. This will be done via Target, which links the Real Time Gross Settlement (RTGS) systems of each country. But will this be available to the banks’ customers? To be so, the electronic interfaces between customers and banks will have to change. Although several mainland European and American banks are investing heavily in their own pan-European systems (in the absence of an EU standard), much more work remains to be done both by many of the banks and by their customers for the latter to reap the benefits.

The large multinationals with sophisticated treasury departments are in a better position to bludgeon their banks into providing these payment services, partly because of the large size of the average payment. But what about the small and medium-sized enterprises that should also be expecting to see some benefits?

In a Europe with a single currency and the opportunities this offers, there seems little doubt that traditional bank relationships will be lost and won as corporates look at alternatives. There will be an acceleration of the trend for the big, international banks to compete in the euro area with the result that the profitability of many of the smaller domestic banks will shrink. Such banks will either develop niche skills or become members of alliances to gain access to a wider customer base. A number will simply disappear through acquisition or liquidation; some of the numerous Italian banks seem likely to be early casualties. The first priority for a bank is to maintain a close dialogue with its customers to find out their requirements in the run-up to 1999. Treasurers are entitled to expect – but would be wise not to assume – that their banks will be ready. After all, the larger customers and suppliers of a corporate may be putting pressure on it to respond to their changing needs, settling accounts in euros, for example, even before the introduction of notes and coins in 2002. Although the Maastricht Treaty contains a “no compulsion, no prohibition” clause during stage 3, some think that there will be a “cascade effect” resulting in the use of the euro even in countries such as Britain that have opted to stay out of the first wave; commercial pressures and practices are more important in determining the acceptance of a currency than the legalities.

Of course, one of the key advantages of the single currency should be the elimination of exchange rate risk between those currencies which join Emu. Many corporates, particularly the relatively defenceless SMEs, should benefit from the elimination of the uncertainties, as well as the frictional costs, which exist at present. But while Britain remains outside Emu, the euro will be yet another foreign currency for them to manage. Furthermore, if, as seems likely, the euro is used widely within Britain in the meantime, some businesses, including SMEs, which currently do not experience exchange rate risk will do so because of the cascade effect mentioned above.

Treasury organisations are going to change. There will be fewer currency transactions, although dollar and yen volatility may increase as investment moves into the euro zone. It is likely that European treasuries will become more centralised to take advantage of the cash management opportunities, to manage their capital structures and to strengthen their negotiation positions with the banks.

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