International Treasurer

The Journal of Global Treasury and Financial Risk Management

September 24, 2001 http://www.intltreasurer.com
Commentary
Combaning Global
Vulnerability
By joseph Neu
Global companies must now step back and assess
the vulnerabilities and resilience of their global
presence. Treasury should be part of this assess-
ment.
The terrorist attacks on New York and
Washington September 11, while on the one
hand prompting thoughts of engagement and
retaliation, will also spur thoughts of retrench-
ment and scaling back from commitments
abroad. This domestic-oriented thinking belies
the fact that recent attacks show that terrorism
can hit at home as well as overseas. For global
multinationals retrenchment-however tempt-
ing-is not really possible, much less desirable.
See for example the story at right, listing compa-
continued on page 3
September 11 Remembered
Our deepest sympathy to all who have been
touched by the recent attacks. The World Trade
Center was not the only target on September 11 ,
but it is the one that has impacted us most visibly.
We want to thank everyone who expressed their
concern for our well-being. While our offices are
near the site of the World Trade Center attack, we
were able to evacuate safely.
Although we were unable to return to our offices
in lower Manhattan for the week following the
tragedy, our inconvenience pales in comparison to
the many others who lost their lives, their loved
ones, close friends or colleagues. Our thoughts and
prayers are with you.
In the wake of this, a small blessing in the birth of
a son to our Editorial Director Nilly Essaides on
September 12. A sign that life continues no matter
what.
We would also like to express our deep admira-
tion for everyone involved in the rescue and recov-
ery effort. Your tireless effort has been inspiring.
To all who now engage in the battles before us-
we stand with you.
Risk management
Who's Afraid of
A Weaker Dollar?
By Ed Rombach
How will a weaker US dollar affect the earnings
and stock prices of US multinationals? If the pain
inflicted by the strong dollar is any indication, a
weaker greenback should help lift lukewarm cor-
porate earnings.
[Editor's Note: This article was written prior to
the events of September 11 . It lends a pre-attack
perspective to the environment faced in their
wake.]
The dollar's mostly steady rise (over 40 percent)
since 1995 (until earlier this year) has translated
into lower US MNC earnings, particularly for
companies with large overseas sales.
An analysis of the effects of currency fluctua-
tions on corporate earnings and market capital-
ization during 2000 by Bank of America reveals
a clear linkage between a robust dollar and
weaker earnings (see box on page 8). The reason
is simple: The strong dollar reduces the value of
overseas' revenues.
While the rationale for the currency's rise may
be undecided, what's clear is that since the Bush
administration took over, the backdrop for the
currency's value has changed (slower economy,
less rhetoric, smaller budget surplus) . More
recently, so has its value.
Turning the corner
The dollar fell 16 percent against the euro post
elections and into early this year. "More recent-
ly, after putting in a low of the year near $0.8350
in early july, the euro has appreciated nearly 10
percent against the dollar," noted economist
Marc Chandler, with HSBC last month.
"We may be witnessing the beginning of the
end of this six-year run," predicts Steven jen, an
economist with Morgan Stanley. "It is time for us
to contemplate the potential triggers, the speed,
and the implications of a correction in the USD."
First, Mr. )en notes, Morgan Stanley's valuation
continued on page 8
Combaning Global
Vulnerability
By j oseph Neu
Treasury should do its
part to assess the vu 1-
nerabilities and
resilience of their firm's
global presence.
page 7
Who's Afraid of
A Weaker Dollar?
By Ed Rombach
A weaker dollar may
have been good news
for US multinationals.
page 7
Suspend International
US Tax Code?
By j oseph Neu
Should the US Treasury
consider emergency tax
measures to help US
multinationals abroad?
page2
Anticipated Exposures
New hedging parame-
ters for a bleak foreign
earnings outlook; The
SEC responds but FASB
does not and more.
page4
Effective In-House
Fixes
By Christopher Kemp
Spreadsheet alternatives
to in-house FAS 133
solutions.
page 6
Leveraging Tax Rate
Volatility
By Ed Rombach
Can exposure to
changing tax rates be
managed like financial
market risk?
page 10
Global Retrenchment, continued from page 7
nies who derive the better part of their sales
from abroad. More than just earnings being at
risk, however, multinationals must consider
how increasing integration of their businesses
globall y, supply chains and project teams, call s
their abili ty to produce goods and services into
question when communi cation/ distribution
lines are severed. Not to mention f inancing
lines: Treasury must note how even US equity
markets can be closed for almost a week.
Strengthening resiliency
The flip side of this vulnerability is the tremen-
dous resi li ency that has been demonstrated by
these attacks. Even firms that lost their head-
quarters and a majority of their people in the
coll apse of the World Trade Center, were able
to continue, somehow, to conduct vital busi-
ness. In part, this was due to thei r global pres-
ence, distributed networks and the nature of
key personnel making decisions from abroad.
Seen in this context, we think that one of the
lessons from September 11 is the benefit of
decentralized business model s in miti gating
business discontinuity risk; particularly, when
the option of havi ng a self-sustai ning central -
ized model is all but impossibl e in the context
of today's global economy.
Lessons for treasury. The benefits of decen-
tralization is something for treasurers to con-
sider when they again weigh the degree to
whi ch they seek to focus core treasury activi-
ties in one place. Yes, information technology
makes this easier, but it also enables "do-it-
from-anywhere" appli cations. The latter enable
more viable disaster recovery plans.
One outcome of the September 11 attacks
should be an accelerated deployment of dis-
tributed treasury applications that can function
over global networks with redundant connec-
tivity (public internet, private networks, both
wired and wireless) .
Treasury mi ght envision, for example, mir-
rored repositories of treasury data and appli ca-
tions served from myriad locations around the
wor ld. Tradi ng platforms, electron ic
exchanges, and treasury vendors should be
playing up these kind of capabilities. The cen-
tralized, stand-alone treasury workstation
model , already dying, is now dead.
Since the tools are next to useless without the
human intelli gence to work them, staff skill ed
International Treasurer I September 24, 2001
Treasury Management
in performing core treasury activities might be
simil arly dispersed. A practical measure for
firms that intentionall y rotate staff in and out of
treasury would be to keep such people in the
loop on new treasury systems, policies and
activit ies so that they could step in during a cri-
sis scenario.
Without being too alarmist about this, dis-
persed treasury operations should also consid-
er maintaining access to certain alternate
sources of funding or alternate channels to pri-
mary sources of fi nancing to help guarantee
contingency liquidity. This puts even more
pressure on treasurers to successfully manage
bank (and credit agency) relationships.
Thankfull y, the global financial system is less
easily shut down than non-f inancial distribu-
tion channels, but there should be some
thought given to ' what-ifs' before the unthink-
able happens. September 11 has redefined
unthinkable.
Supporting global demand
Given September 11 's impact on an already
bl eak foreign earnings outlook, it is important
not to forget that providing liquidity to the
financial system is not just the job for central
bankers. Corporate treasurers should do all
they can to provide liquidi ty to their enter-
prise's own f inancial system, ensuring affiliates
have enough cash on hand (perhaps literall y
cash) to cope with necessary business transi -
tions and even evacuations from certain parts
of the world.
Looking beyond the crisi s or even war foot-
ing that may be required in certain cases, treas-
urers must also work with business lines to
again reconsider terms on vendor financing to
vital credits and building longer term demand
via the acquisition of assets with recycled for-
eign earnings. For many corporates in the US,
the initi al focus may be on revitalized share
buybacks to support the stock price, but stake-
holders and customers cannot be forgotten
completely.
Who knows whi ch economy may be the first
to break out of what now looks to be a certain
global recession. If it were simpl y that, the urge
to build capacity and acquire assets overseas
would be assured. However, there is too much
uncertainty to know it is best to pull back to
home markets, even if we face prospects of sus-
tained, war- like confli ct. To prevail, we must
nurture (and not just hope for) recovery. -
Corporate treasurers should
do all they can to provide
liquidity to their enterprise's
own financial system,
ensuring affiliates have
enough cash on hand
(perhaps literally cash) to
cope with necessary business
transitions and even
evacuations from certain
parts of the world.
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