Direct Australian exposure to the more volatile Eurozone member
countries is small, both in terms of funding by Australian
financial institutions and Australian trading relationships with
those countries. However, total Australian exposure to Eurozone and
the indirect effect of the crisis means that Australia is not
immune. Funding costs are on the rise, as the effect of volatility
is felt in the international capital markets; capital and bank
liquidity is being withdrawn from Australia as European investors
and banks retreat to their home markets and Australia's economy
remains buoyant through the export of commodities to China and
other growing Asian economies, growth which is directly influenced
by any reduction in demand from Eurozone countries.
Against an backdrop of ongoing Eurozone volatility, companies
are continuing to review their exposures in Europe, including the
nature and extent of their Euro-related contracts, and are asking
what measures they can put in place to protect their assets and
limit cashflow threats.
A question that is often asked in this context is what impact a
member state exiting the Eurozone would have on the payment
obligations of counterparties located in that country and, in
particular, whether these obligations would be redenominated from
the Euro into the new national currency.
Core legal issues that would need to be considered include the
law governing the contract; the courts that have jurisdiction over
claims under the contract; where payment is to be made; where the
goods or assets are located; and whether a supplier or lender can
enforce its rights in that country. Much will depend on the
particular circumstances and the specific drafting of the relevant
contractual provisions. However, if arrangements are not governed
by the law of the exiting country or are not subject to the
jurisdiction of that country's courts or the place of payment
is outside the exiting member state, if the definition of
'Euro' is appropriately drafted, this should provide a
degree of protection against redenomination. For borrowers based
outside the Eurozone, if the need to redenominate occurs, a
Euro-legacy currency may be a less obvious fall-back choice than it
would be for a Eurozone borrower.
Even if the currency of the contract is not redenominated, a
Eurozone exit may still give rise to other practical concerns. For
example, if exchange controls are introduced restricting payments
out of the country this could, depending on the circumstances,
limit the ability of the counterparty to meet its payment
obligations under the contract. In addition, enforcement against
the counterparty would be likely to be complicated if its assets
were located in the exiting member state.
As well as reviewing their exposure under existing contractual
arrangements, businesses may wish to consider the terms on which
they enter into new agreements or renew existing agreements, and
whether any additional or revised provisions should be included to
seek to limit the risks associated with a Eurozone exit.
Key questions that businesses relevant in identifying potential
areas of exposure include:
Are rights or obligations to be performed in Euros or in a
member state where there is a risk of exit?
Does a contracting party have a risk state as its main place of
business or incorporation?
Is a payment account or security account held in a risk
If goods or services are involved, are they being supplied to
or from a risk state?
If bonds, notes or shares are denominated in Euros, are they
issued by a risk state?
Are contractual right guaranteed by an entity incorporated or
with assets located in a risk state?
Is security held over goods, commodities, real estate or other
types of property located in a risk state?
Do contracts have a place of payment in a risk state; a risk
state governing law clause or submission to jurisdiction of courts
of a risk state?
Where contracts reference the Euro, how is it defined and, in
particular, is a "currency from time to time" concept
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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