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Uncertain about whether a common European currency will ever exist, banks have vacillated about paying the price to prepare for it. By Paul Gibson
The smart money is no longer quite as certain as it once was about European economic and monetary union and the creation of a common currency, the euro. And that has left global custodians thoroughly perplexed. With unemployment rising in Germany and widening spreads between German interest rates and those of Spain, Italy and Sweden, observers have grown increasingly skeptical about whether this unprecedented monetary undertaking will fly.
"This [interest rate divergence] says to me that financial markets are having doubts about whether the EMU will go ahead on time. Chances of a postponement have increased from one in four to one in three," notes David Lascelles, co-director of the Centre for the Study of Financial Innovation, a London-based think tank sponsored by the U.K banking industry. Adds Jeffrey Larsen, Chase Manhattan Corp.'s head of international capital markets: "Six months ago people were saying this will never happen. Then all of a sudden everyone was a believer. Now I come back from a fourday vacation, and everyone is talking about EMU not happening."
This uncertainty about EMU affects everyone who should be making preparations for the brave new world, and that includes global custodians. "The problem is, what do you do?" says Wayne Kitkat, managing director of Lloyds Bank Securities Services in London. His answer: "In custody we are making the assumption that the U.K. will not be in [EMU] on January 1, 1999. We're doing the minimum necessary to prepare ourselves for clients in the likely participant countries."
Lloyds isn't alone in going slow (Institutional Investor, April 1996). In a poll of European bankers and securities executives last year, Gemini Consulting found almost 80 percent said they had not started preparations or were just beginning to get organized for EMU. Another 12 percent said changes were in progress. That left barely one executive in 12 reporting that their organizations were prepared for the euro's initial impact.
For months now consultants have advised clients that firms unable to provide services involving the euro risk customer dissatisfaction and significant loss of market share. Reduce or delay technology spending and customers can...