ADVENTURES IN EUROLAND
CFOs in Asia stand to benefit from a single currency in Europe – if they take the right line up the hill.
By Angela Mackay

"The most important event since the Chinese invented paper money." – Etienne Reuter, EC representative in Hong Kong

"A complete non-event. I'm not thinking about it at all." – the CFO of a large Indonesian company

On January 20, eleven European countries, accounting for more than 290 million people, 20 per cent of world GDP, and 20 percent of world trade, will unite their currencies into a single, fixed rate, monetary unit. Within hours, scores of European companies will begin using this one currency, the Euro, for electronic settlement for all bills and payments. Gradually, over a period of months, then years, the Euro will become the currency of choice for most European corporates. By July, 2002, the notes and coins of each country - notes and coins that have been in use, in some cases, for centuries - will become worthless. At that point, the Euro becomes the only money on the continent.

Dramatic stuff. But in Asia, other more pressing concerns have kept most CFOs from taking notice of this remarkable currency converging. As one Hong Kong-based CFO, who asked not to be named, said: "I'm having enough to do with all the year 2000 issues. The Euro is a sideshow."

Some sideshow. In a survey conducted by Deutsche Bank AG, two-thirds of the bank's largest institutional clients in Europe, North America and Asia said the Euro will ultimately rival the dollar as the global issuance currency of choice.

Nevertheless, officials at the European Community (EC) have been fighting an uphill battle trying to raise awareness of the Euro in Asia. In November, Jacques Santer made the first visit to China by an EC president in 13 years. That trip came on the heels of Santer's visit to Hong Kong, the first ever by the EC head of state. Other than a minor commitment from China to shift some of its reserves into the Euro, neither visit stirred up much excitement.

Even some of Santer's Brussels-based EC colleagues don't seem all that worked up about the Euro's impact on Asia. Among the reams of information published by the commission on the new currency, an explanatory note written in February states: "The Euro is unlikely to play a major role in the Asian area where the US dollar is dominant. The Euro's internationalization prospects therefore remain limited there."

Weber Lee, the Singapore-based treasury manager at Dupont (Asia Pacific), a subsidiary of the US conglomerate, agrees. "Transferring billings from US dollars to the Euro would be a very tough sale for Asian businesses," he says. "Most of our materials sourced in Europe are invoiced in US dollars and I don't think that will change for a long time, if at all, after the introduction of the Euro."

Everybody into the Pool

Not all of Lee's counterparts see it that way. Indeed, a number of finance managers in Asia say they've hit upon several reasons to cheer the arrival of the Euro. CFOs at companies that conduct trade in Europe are, of course, delighted at the prospect of dealing with fewer currencies. Fewer currencies means less foreign exchange risk, and, in general, less worries for finance directors. The Euro should also lead to reduced bank charges, always welcome news. But mostly, Asian CFOs say that a single European currency means they will finally have a single pool of European funds to tap into. And a damned big pool, at that. By most estimates, Europe's currency convergence will lead to the creation of a US$9 trillion well-spring of debt and equity capital.

Jimmy Lau, treasurer of Hong Kong's Mass Transit Railway Corporation (MTRC), is one finance manager in Asia who has already envisioned this enormous reservoir of funds - and likes what he sees. "We are excited about a new market which the introduction of the Euro should open for us," says Lau. "We expect the Euro to create a very liquid market for borrowers." Lau's excitement is not all that surprising. The MTR operates one of the more ambitious - and more capital-consuming - mass transit systems in the region. The corporation recently put together a new borrowing program to raise close to US$8 billion. That funding will help the MTR expand its network and retire some expensive debt (The MTR's current borrowings stand at US$1.23 billion). "In the past, there have been plenty of currency plays by European investors," Lau points out. "But now they will be looking for duration plays and credit plays."

That's not all. Lau believes monetary union will encourage Europeans to become more adventurous in their investment habits. "Many European investors have been very inward looking and not too receptive to foreign names," the MTR treasurer explains. "Previously, most investors were looking at short-term opportunities of up to five years. In the future, they are likely to accept a longer exposure and play at the longer end of the yield curve."

That would suit Vernon Moore just fine. Moore, deputy managing director of CITIC Pacific, China's biggest publicly-listed conglomerate, says Asian corporates are up against it when they try to borrow longer-term money from European lenders. "For us, the most important issue is whether the introduction of the Euro means Europe will develop a liquid, long-term, debt market available to non-European borrowers," he says. The CITIC Pacific head of finance says he would dearly love to see the blossoming of a long-term European debt market for Asian borrowers, with bond tenors ranging from ten to 20 years.

You can't blame him. Citic Pacific's has nearly US$3 billion in group debt - and most of that is unsecured, short-term paper. Moore says he would like to get to know European creditors better. Buying an introduction won't be easy, though. Until now, lenders in Europe have mostly concentrated on borrowers in Europe. Indeed, Moore says the continent offers few opportunities for Asian borrowers beyond five years. "European investors tend to focus on big European household names, such as Philips or Axa," he points out. "We did issue a short term floating rate note in Europe some years ago, but in the past there has been little follow-through."

Getting to Know Them

It doesn't take a genius to figure out why lenders in Europe have been reluctant to shower money on Asia's borrowers. Over the past five years, few finance managers at Asian companies have made any real effort to build relationships with creditors on the continent. And lenders tend to give money to company's they know. What's more, aggressive European investment banks arrived on the scene in Asia in the mid-l990's, peddling cheap, short-term money to less highly rated companies. Many of those companies have since sustained huge losses as a result of the financial meltdown in the region. The epidemic of defaults and loan restructuring now spreading across the region has done considerable damage to the reputation of all Asian corporates - even the most highly rated borrowers. Edward Young, managing director at Moody's Asia-Pacific, an arm of the US-based ratings agency, says, Euro or not, Europeans are going to need a much higher level of comfort before they start lending to Asian comanies again. "European investors will return when they think a recovery is underway in Asia," he explains. "But they will be very selective about whom they lend to."

Initially, Young believes lenders will only have an appetite for the bluest of blue chips and government-backed borrowers, particularly utilities. "Asian borrowers will have to work much harder to get to know the Europeans," he notes. "They will have to make a lot more information available and generally raise their levels of disclosure." Borrowers like the MTRC's Lau know the score. "The Asian market crisis has made investors wary of Asian names," Lau concedes. "Many regional borrowers - even high quality ones - may decide to wait until stability and confidence return before they try to tap the market."

The Euro may make such tapping easier. It's simpler drawing money from one large pool of funds rather than a dozen or so smaller ones. In fact, Lau says, with the Euro now pulling into the station, the MTRC is looking into wooing potential European investors. That's a big switch. "So far, we have been more active in developing relationships with US investors and have not made any road shows in Europe during recent years," Lau acknowledges. The MTRC's loan portfolio offers ample evidence of past neglect. Europe accounts for just a few hundred million US dollars -- a small slice of the MTRC's overall borrowings.

The MTRC is not alone. According to the Bank of International Settlements, Asian country debt denominated in EU currencies barely tops US$70 billion. That's a paltry 9.6 per cent of outstanding sovereign borrowings. Over 46 percent of Asian sovereign debt is denominated in US dollars, 33 percent in Japanese yen. Some Euro experts say the arrival of the single, and stable, European currency will likely have some Asian sovereigns coming out with Euro-denominated issues - especially if the yen remains unsteady.

At CITIC Pacific, Moore is still looking for some long term European investors. In the interim, he says he's been making some minor technical adjustments to accommodate the Euro, such as adapting computer programs and adding the Euro symbol to keyboards. Other changes will be necessary, though, and Moore says some of those could be costly. But the CITIC Pacific deputy managing editor isn't complaining. "There are certainly technical aspects related to the Euro's introduction that have to be addressed," he says. "But they are minor compared with the prospect of a new, deep debt market for Asian borrowers."

For finance managers in Asia, the Euro could turn out to be slightly more than a mere sideshow.