Conversion to euro just around corner: Businesses must take steps to prepare

The Austrian schilling; Belgian, French and Luxembourg francs; Finland’s markke and Germany’s mark; the Italian lira, Spanish peseta, Greek drachma, Irish punt, Netherlands gilder and Portuguese escudo — say farewell to these “legacy” currencies and say hello to the euro, especially if you’re a U.S. company doing business abroad.

Soon, a fundamental change will occur in the way business is conducted in Europe, and the legacy currencies of the 12 “euro zone” nations will disappear. Now is the time for U.S. companies to prepare for these changes.

For example, as of July, all foreign checks that would previously have been issued in the 12 legacy currencies should be issued in euros. Euro settlement instructions should be confirmed to avoid payment delays. On Jan. 1, 2002, all bank accounts in the 12 legacy currencies will convert to euros. After that date the Society for Worldwide Financial Telecommunications (SWIFT), the primary communications channel for international transactions, will reject wires sent in the legacy currencies. Companies that are not prepared for the transition may encounter delays and additional costs in reconciliation of payments to and from European trading partners.

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Exchange rates of the legacy currencies have been fixed permanently to the euro, and the value of the euro will fluctuate against non-euro currencies in the same way the value of the U.S. dollar fluctuates against other currencies. Legacy banknotes will remain in circulation for a brief period and then will be removed.

Foreign exchange specialists at your financial services company should be able to help your company prepare for the challenges presented by the transition, providing information about hedging and other strategies to neutralize foreign exchange risk.

European countries are clarifying details of how they will process outdated legacy currency items received after Dec. 31, 2001. However, it appears certain that checks in the legacy currencies ultimately will be sent to the originating institution for payment processing. This will add time and expense to the process.

One detail that has yet to be clarified is how a bank in one country will handle a check in euros that is drawn on a bank from another country. For example, a euro check that is drawn on a German bank but presented in Italy may be sent back to the German bank for collection rather than be cashed immediately. To avoid some of these complications, your financial services provider may maintain euro accounts in several countries.

In the United States, most companies will need to update their information systems and operations. Corporations must update their accounting systems to reflect the new currency and its exchange rate with the 12 legacy currencies. And U.S. companies that continue to bill in legacy currency until Dec. 31 must be able to issue invoices that reflect the amount in euros as well as the legacy currency.

To avoid delays in processing, U.S. companies should communicate with their European customers and suppliers well in advance of January 2002 to determine the preferred method of billing and payment.

A U.S. company may be tempted to wire U.S. dollars for all transactions. However, there are many points along the delivery trail at which the dollars could be converted to euros, and the actual euro amount that makes its way to the account of the receiving European company might not be known. This could result in over- or underpayment, requiring costly and time-consuming reconciliation.

And U.S. companies can’t avoid the euro issue simply by continuing to send invoices in legacy denominations. After Jan. 1, if a U.S. company sends an invoice in outdated legacy currency, the payment will come back in euros or dollars, and the U.S. company must have systems in place that will allow it to accept this form of payment.

Further, reconciliation issues may result. For example, if a U.S. company is anticipating payment in German marks and instead receives payment in euros, not only will the German mark receivable position be out of balance, but the euro account will need to be rebalanced as well.

If the anticipated foreign currency receivable was hedged, a gain or loss may be realized when the hedge is unwound, further complicating the transaction.

These are just a few examples of the challenges that businesses may face during the transition to the euro, and they illustrate the importance of being prepared.

The euro will provide benefits as well as challenges. For example, treasury management groups will be able to manage the currency risk of the 12-country euro zone with one currency. This will provide an opportunity for more efficient hedging strategies. Companies also will benefit from a more competitive pricing structure as a result of the unified currency.

The changeover to the euro has been called one of the most significant non-military transitions the world has ever seen. By starting now and working with a team of experienced professionals, you can keep your company on a steady monetary course through this challenging period.

Countdown:

* July: Foreign checks previously issued in legacy currency now should be issued in euros. Euro settlement instructions should be confirmed to avoid payment delays.

* October: Foreign wires previously issued in legacy currency should be issued in euros.

* Jan. 1, 2002: Bank accounts in legacy currencies will be converted to euro accounts. SWIFT will begin rejecting legacy currency wires.

* Feb. 28, 2002: After this date, checks in legacy currencies may have to be sent for collection. Joe Silva is vice president of Wells Fargo Foreign Exchange in Colorado. Wells Fargo Foreign Exchange specializes in foreign currency wire transfers and bank drafts, and foreign exchange derivative instruments and hedging strategies for businesses with $1 million or more in annual foreign currency requirements. He can be reached at (303) 293-5405.