Money managers are making preparations for the unlikely - and once unthinkable - event that efforts to make a more fiscally unified Europe fail and the single-currency area is dismantled in whole or in part.
In addition to steps already taken to lower European investment risks, managers are analyzing operational exposures and thinking through all of the ways a breakup of the euro might affect their entire businesses.
“I'm not sure people are anticipating a total or even partial breakup, but there's the recognition that this is no longer an academic question,” said Martin W. Cornish, partner at law firm K&L Gates LLP, London.
Indeed, a complete dissolution of the 17-member eurozone would be catastrophic for markets worldwide. Plummeting returns could slash manager revenues in half, said Amin Rajan, CEO of the Center for Research in Enterprise and Technology in Europe, known as CREATE Research, Tunbridge Wells, England.
“That basically means the profit margin is wiped out,” he said, adding managers would need to make “massive” staff layoffs to stay afloat.
But a full or even partial breakup of the monetary union also would have immediate effects on managers doing business within the eurozone, challenging the money management industry's ability to value assets correctly, to manage counterparty risks, to communicate with clients and to handle myriad other operational matters.
“The hope is that (contingency planning) becomes a needless exercise. But you can't necessarily hope for something not to happen” and wait to be affected by it when it does, said Geoffrey H. Bobroff, president of money manager consultant Bobroff Consulting Inc., East Greenwich, R.I.
A euro breakup is “an issue everyone is thinking about,” said Manuel Arrive, London-based senior director at Fitch Ratings Ltd. However, “in practical terms, there is not much you can prepare for” because there are so many possible outcomes, most of which rely on political decisions, he added.
“At the moment, clients are just trying to make sure they understand the legal issues and concepts,” Mr. Cornish said. “It's fair to say most haven't made changes (to their contracts pertaining to European investments). It's more about choosing your counterparties carefully and getting” collateral like U.S. Treasuries that wouldn't be directly affected by a breakup.