|As the euro-zone debt crisis deepened in recent months, at least two global banks have prepared to install back-up technology systems that would allow trading in old European currencies like the Greek drachmas, Portugese escudos and the Italian lire.
The banks, though, found themselves in something of a bind with the financial world putting on a brave front as it tried to shore up the stock of the euro and also a contingency plan to address the implications of its possible scrapping.
Technology managers at the banks got in touch with Swift, the Belgium-based consortium managing the network used in financial transactions, according to people familiar with the matter.
The banks wanted Swift’s technology support and the currency codes that would be necessary to set up the back up systems.
However, Swift declined to offer certain information for such contingency planning, that pertained to old codes and whether they would be supported on the system, according to people familiar with the matter.
That is in part due to fears that releasing the information could trigger fresh doubts and instability in the euro zone, these people said.
According to analysts, it was a relatively minor setback for banks, as they looked at all possibilities from loan agreements to the safety of their branch staff in the event of one country’s withdrawal from the euro currency.
However it served highlight the hurdles that politicians, banks and companies in Europe faced as they attempted to take action in case of a euro-zone break up even as they allayed market fears.
Meanwhile, The Financial Services Authority, the UK’s bank watchdog, in letters it dispatched to major banks in the country, has asked for updates on their level of preparedness.
The UK Foreign Office has started making contingency plans for the evacuation of UK residents from Spain and Portugal in the case of bank meltdowns in those countries, said a person familiar with the matter.
In a sign of concern over creating a panic situation, a spokesman did not elaborate beyond saying that office was always preparing for all types of scenarios.
In another sign of rising fears, several firms with operations in Greece and elsewhere in Southern Europe are said to be transferring their cash out of Greece on almost a daily basis, as against the normal two-week interval. This comes as a precautionary step against a sudden loss in value, on possible revival of currencies, a banker familiar with the companies’ transactions said.
Preparing their systems to handle codes for old European of currencies was one way banks were taking steps insulate themselves from major business disruptions if any country suddenly left the euro zone.
Banks use three letter codes-such as USD for US dollars or GBP fro the British pound, in a wide range of financial transactions, from complex investment-banking trades to the basic transfer of money. The codes have been established by the Geneva-based International Standards Organisation, and are in use by Swift, a co-operative company that formats and sends payment orders for some 10,000 firms in over 200 countries.
One question banks have been faced with but have not been able to clarify was whether codes for now-defunct currencies, such as GRD for the Greek drachma, would be valid in the current Swift system.
According to a Swift spokesman, the company was ready to take whatever actions were required to maintain normal operations, but that “it is not appropriate this time for Swift to comment on issues specifically associated with the euro zone.”
Meanwhile, analysts are pointing out that Milton Friedman, the Nobel-winning economist had predicted the collapse of the eurozone in 10 years. They say he had been proved right on almost everything he had said about the eurozone except the timing of the dissolution.
They say the reason for the collapse was the European leaders consistently missing their mark in their assessment of the root cause of the continuing crisis, which was debt.
Earlier this month, European lawmakers held the latest in a string of emergency summit meetings to address the worsening crisis. The meeting was billed by many as the last chance to save the euro. According to analysts if it was to be the standard by which the outcome was to be measured, the meeting turned out to be an abject failure.
The plan of action European officials drew up to save the euro comprised an agreement to draft a revised treaty giving central EU authorities greater control over how sovereign nations managed their budgets. The participants also agreed over EU central banks lending another €200 billion to the International Monetary Fund. The IMF would then use the money as part of the European Stability Mechanism to support the handful of countries struggling to remain solvent.
The first measure would never be ratified as an EU treaty in the face of British opposition. (See: Eurozone deal leaves Britain isolated)
Further, the alternative fiscal compact that the other EU members were attempting to create was proving legally tricky, even before it ran the gauntlet of political challenges. This would leave the €200 billion loan to the IMF as the only probable legacy of the summit meeting, which unfortunately was not enough to address the issue.