Plenty of risk officers and strategy directors must be dreading the order from the boardroom: “We need a full report on the impact of eurozone break-up – and how we will deal with it – by tomorrow’s emergency meeting.”
Wednesday’s FT analysis of how, if at all, businesses are preparing for disintegration of the currency area is fascinating. But the comments seem to me to alternate between despair (“There is no blueprint for anything. You do discuss certain scenarios with customers, but it is like poking around in the fog”) and complacency (“Treasurers in multinationals remain generally positive about their ability to weather the systemic fallout from any European exit”).
I’m aware of the need for contingency plans and crisis simulation exercises and at the same time sceptical of their usefulness. The eurozone is, after all, in the middle of a crisis. If it ends chaotically, the best-laid plans of businesses will unravel faster than you can say “European Financial Stability Facility”.
Banks are said to be “war-gaming” possible outcomes. Well, good luck with that. Gathering dust on my bookshelf is Stress Testing the System, the Council on Foreign Relations’ report on a January 2000 exercise by a group of mainly US policymakers to “simulate the global consequences of the next financial crisis”. Needless to say, the think-tank’s premise was off target. The simulation correctly assumed an equity market bubble (not a very radical assumption at that point in the dotcom boom) but it presumed a level of US impregnability since cruelly exposed.
In preparing the war-game, it also left out what it described as “creative plot elements” for fear those taking part would have “ridiculed them or dropped everything to dig into them”. They included the potential failure of one of the world’s biggest banks and “a plot line centred around the Osama bin Laden organisation” and future terrorist attacks on the US. What look, with hindsight, like useful conclusions – “the regulatory system is fragmented”, “more and more [financial institutions] are deemed to be ‘too big to fail’” – were plainly ignored.
