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Why Treasurers Need a 'Plan B'

Commented about the downgrade of two of France’s large banks and the current pressure on active cash and investment management policy. Published on Treasury Today on September 2011 issue.

Recent market instability has ensured that those managing money – whether directly or as a third party – are active in earning their salaries, as they sweat over the correct decisions to make for the funds of a corporate. Following the downgrade of two of France’s large banks, is the pressure for active cash and investment management only set to increase?

Previously criticised for its relaxed approach during the Lehman Brothers crisis, Moody’s is the first of the Western rating agencies to downgrade the French banks. Though S&P and Fitch have maintained their existing ratings on Société Generale and Credit Agricole, the banks’ exposure to Greek debt has had a negative impact on market confidence. So, how is this anxiety impacting investment decisions?

Andrew Widdows, Senior Portfolio Manager at RBS Asset Management tells Treasury Today that while ratings are important to consider in targeted investment compositions, where liquidity and price stability are priorities, a better understanding of what the rating of a specific sovereign, agency or bank actually means is required.

“One cannot be presumptuous and assume all ratings within the same band are equal; they are clearly not – as evidenced by yields, CDS levels, liquidity and other softer market observables,” Widdows insists.

While he reveals that RBS has not reduced its French exposure to zero, Widdows admits that the bank’s exposure to France had been considerably reduced – even before the ratings downgrade – to favour certain issuers, and he also acknowledges the increased focus on headline risk.

From a treasury-specific point of view, “The downgrade is not large enough to directly affect all active cash management activities yet,” says Mustafa Kilic, Regional Treasury and Group Insurance Manager at Indesit, but he notes that the, “French banks were quite active in the asset-backed securities market and I think this downgrade will slow down the pace of this activity over the next 6-12 months.”

As such, the impact of the French downgrades appears to feature as a minor irritant, as opposed to a real disaster, in the working lives of those looking after someone else’s money – be it the company’s or be it a client’s.

However, with Moody's warning that both French banks could have their ratings downgraded by a further notch as it evaluates, "The implications of the persistent fragility in the bank financing markets," the attention on headline risk could be heightened with market confidence further undermined.

Treasurers would therefore be well advised to review their investment policies and limit their exposures through diversification and stringent risk management to prepare for this potential eventuality.

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