The failure of the recent election in Greece to produce a
workable government and the rise to prominence of Syriza, a left
wing party which campaigned on an anti-austerity message, has led a
renewed focus on Greece's future and that of the Euro
itself.
The next round of voting in Greece on 17 June carries great
significance. In an attempt to counter the rise of anti-austerity
sentiment, the election is being billed in some quarters as a vote
on the Euro. At the same time, Eurozone officials are talking up
the seriousness of the consequences for Greece if it goes back on
the agreements which underpin the provision of bailout funds by the
so-called 'troika' of the ECB, EU and IMF.
This is not empty rhetoric. Without the bailout funds from the
troika, Greece will quickly run out of money. The government would
default on its remaining sovereign debt and public sector workers
would not be paid. A run on the banks would be very likely. In
those circumstances, Greece would almost certainly have to exit the
Euro via a 'disorderly' default.
A Greek exit would take the Eurozone (and the wider global economy)
into uncharted territory. Seen from one perspective, the exit of
Greece (widely perceived as the most troubled member of the Euro)
combined with decisive action by European institutions to prevent
contagion amongst other countries could draw the sting from the
crisis. However, just as real a prospect is that once Greece leaves
the Euro, speculation will increase about which will be the next
country to go.
The recent downgrading of 16 of Spain's banks is a stark
reminder that the next casualty of the crisis could be one of
Europe's larger economies. There is a growing chorus of concern
about the health of Bankia and the wider Spanish banking system,
with open speculation about whether Spain - struggling (like
Ireland) with the aftermath of a property bubble and high
unemployment - will be the next country to need a bailout. It is
possible that the Euro might survive the exit of Greece; if Spain
goes it will surely strike a fatal blow.
While all businesses could potentially be affected by continued
crisis in the Eurozone, insurers arguably occupy a unique position.
Volatility in the financial markets and economic recession could
lead to an increase in claims (not only in the FI market but more
widely) while simultaneously hitting investment returns.
Additionally, insurers are parties to a multitude of contracts
(policies) containing payment obligations. Issues will arise where
the financial obligations under those policies are connected to a
country which exits the Euro. To cite an obvious example, in what
currency will claims be paid to a Greek insured if Greece exits the
Euro and re-introduces the Drachma? Notably, Lloyd's has
recently announced that it is preparing for such an eventuality. If
the Euro ceases to exist completely then the task of determining
what currency will be used for any payment obligations previously
denominated in Euros will be complex. Not only will legal issues
arise (such as over which law and jurisdiction govern the contract
and any dispute over payment), but economic and political factors
(such as the relative strength of any new currencies and possible
civil disruption in countries exiting the Euro) could influence the
approach taken by parties to any affected contracts. Forum shopping
(where parties seek to start proceedings in the courts of a country
perceived as the most favourable to its position) could be an issue
should significant disputes arise; on the other side of the coin,
parties to a dispute will need to consider how a judgment (for
example, for payment in Euros) will be enforced in a country
exiting the Euro.
These potential contractual issues are addressed in more detail in
the
CMS publication Eurofit: How to get in shape to deal with Eurozone
risks.
The FI insurance team at CMS has been looking at these issues, and
discussing them with clients, since the early days of the Eurozone
crisis. With the pan-European CMS footprint, we are uniquely
positioned to assist you in preparing for, and dealing with, the
very real risks presented by the current crisis in the
Eurozone.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 31/05/2012.