Banking on the euro.

Given any thought to the euro yet? It may be time to start considering the impact of the conversion on your banking and cash management activities.

In the past few years, much debate has centered on which European countries will become part of the European Monetary Union and whether the euro will be launched on time. But a recent survey found 80 percent of European financial and economic officials believe the EMU and euro will begin on schedule, on January 1, 1999, and this growing confidence is evident in the accelerating pace at which banks and larger multinationals are making preparations.

If your company has European operations or investments, the conversion to the euro will surely have some impact on your banking activities. Because the European governments are still formulating their policies, many banks have not finalized the services they will offer customers to enable them to take advantage of the euro. But clearly, the switch will not only reduce the need for hedging but also eliminate currency spreads in transferring excess liquidity from one European currency to another, reduce treasury settlements by 15 percent to 20 percent and decrease foreign-exchange transfer fees. Banks may continue to charge fees for international transactions even if they are in euros - for example, when transferring euros from Spain to Germany. But these costs may shrink as banks develop more efficient international payment systems.

Centralized liquidity is likely to be another important benefit of the euro, allowing a company to consolidate cash positions in different countries into a single net cash position. This will bring numerous other opportunities: reduced funding costs, improved investment returns and greater efficiencies for cross-border manufacturing and sales, especially in areas such as invoicing customers, receivables matching, credit control and paying employees and suppliers.

Also, centralized liquidity will eliminate the expense of an inflated treasury float and of monitoring national currency balances by allowing for an immediate set-off of debits and credits. In fact, when banks begin electronically consolidating transactions into a single net cash position in euros, they will be performing essentially the same function as netting centers.

VIVE LA DIFFERENCE?

Unfortunately, the euro will not match the dollar in ease of settlement. In the United States, of course, banks settle with one another using an automated clearing house system (ACH) or Fedwire. Each European country, by contrast, uses its own automated clearing system to handle electronic payments and settlements with other banks. The German ACH system, for instance, does not interface with the French ACH system. So even with a common currency, the ability to settle and concentrate euros across borders is limited by the inability of these national ACH clearing systems to interact.

To bridge this gap, the European central banks are developing a system known as Target, which will allow the transfer of funds between various national clearing systems for high-value payments. It will also be a real-time gross settlement system, that is, an electronic system with finality on credit to the account (equivalent to a high-value Fedwire system). Target provides real-time information on an account position and on receipts and payments. It requires minimal systems development on the part of banks, since it uses existing clearing systems. On the other hand, the cost per transaction is expected to be high, since the system must be self-financing.

An alternative system is the ECU Bankers Association (EBA) clearing system, a private net settlement system created for the ECU that will be converted to handle the euro. EBA is similar to the Clearing House Interbank Payments System (Chips) and is likely to have a lower transaction cost per item than Target, although the pricing has not yet been agreed upon. Also, it is a privately owned clearing system, so it may be more commercially sensitive than Target.

However, EBA will need to handle a volume approximately 100 times greater than its current volume, so the system may have its limitations. Also, the system is operated on an end-of-day net settlement basis (finality is not guaranteed until the end of the day), vs. Target's realtime gross settlement.

Certain banks will have the network infrastructure and technology to bridge the gaps in these national clearing systems, so you might consider using a single bank to concentrate your euro account positions. Beware of banks that require dual accounts - one in euros and one in the national currency in each country of business. They may not be able to offer the same conversion efficiencies.

During the transition period, all banks will accept transactions in euros and in national EMU currencies. Therefore, your transactions could be reported in national currencies or in euros, with details of other currencies referenced for each transaction. The reporting method you use will, of course, depend on whether you account in euros or national currencies, but either way, your bank's reporting capabilities should be flexible enough to accommodate your accounting systems.

RELATED ARTICLE: Siemens' Switch to the Euro

To many American companies, the advent of the euro is just a distant event on the horizon. But to Siemens Corp., the euro is already here. Back in 1995, Siemens began to anticipate the consequences of the European Monetary Union and to prepare for the implementation of the euro. Harry Zike, controller of Siemens and chairman of FEI's Committee on Corporate Controllership, reports that Siemens will offer its European customers the option to settle accounts either in euros or the national currency, starting January 1, 1999. And on October 1, 1999 (only nine months into the three-year transition phase), Siemens will begin processing internally all its European accounts exclusively in euros.

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Siemens also was off to an early start in analyzing the widespread effects of the euro on its European operations, says Zike. For example, the finance department is already evaluating the potential impact on capital markets and payment transactions, while tax and legal experts are investigating the implications for existing contracts. Siemens' groups and divisions are anticipating the effects on competition, pricing and purchasing as they develop products and services for new markets that will evolve with the euro.

While the conversion will cost the company money, Siemens expects to offset that cost with savings in other areas, especially lower hedging and transaction costs and better financing conditions, Zike reports.

RELATED ARTICLE: The Conversion Timeline

May 1998 - The EMU will officially select its member nations. Austria, France, Germany, and the Benelux nations (Belgium, Netherlands and Luxembourg) are considered probable, and Finland, Ireland, Italy, Portugal, and Spain are also strong possibilities. But it only takes a few key countries to meet the criteria to require the rest of the world to begin accommodating the new monetary unit.

January 1999 - The EMU will begin its three-year transition period. During this time, monetary activities in EMU nations will be regulated by a "no compulsion/no prohibition" clause, which simply means that businesses, banks, and other economic entities must accommodate both the euro and the national currency (at the choice of the remitter) to settle accounts.

July 1, 2002 - If all goes as planned, the national currency in each EMU country will cease circulation and fade into history.

Mr. Simon Shephard is sales manager for Europe, Middle East and Africa financial institutions in Bank of America's Global Payment Services Division. He is based in London and can be reached at 011 44 181 313 2182.