There has been a great deal of speculation about the collapse of the European common currency, the Euro, should Greece withdraw from the Euro or if Spain’s banking system collapses. It is impossible to know how long or whether the Euro will last. Indeed, given the relative cost to countries like Germany, bailouts are much less expensive. But as we saw when the US Government refused to save the housing market because of the political concern about rewarding speculators, sanity does not always prevail in these matters. As a result, businesses need to prepare for the worst when it comes to their contracts.
Many contracts that require payment in Euros. But what happens if the Euro ceases to exist? One possible outcome is that one party would seek to substitute an alternative currency for the Euro, like dollars. However, the payor is likely to seek its own country’s currency since alternatives like the dollar are likely to be very expensive for foreign businesses to obtain. It is entirely predictable that a Greek company would seek to have its obligations set in the new Greek currency and that a Greek court could make that ruling. Given what has happened in places like Argentina, being paid in a new currency will not provide the seller the value it expected.
Here are five steps businesses can take to address the potential uncertainties regarding the Euro:
- For existing contracts, seek to amend the contract to add a provision that details what will be done if the Euro collapses. The certainty will be of benefit to both parties.
- Add similar “what-if-the-Euro-collapses” language to future contracts.
- Watch your Euro receivables more carefully that ever before. If you let a receivable grow, the problem will be greater if the Euro collapses.
- Consider whether new Euro contracts should be made at all.
- Require advance payment or COD if possible. Once you’ve been paid, you can always convert the currency. Your risk is in delayed payment.